Pakistan pushes ahead with tax reform

Revised general sales tax still unpopular, but the nation's major creditors are demanding that austerity measures be swiftly enacted.

ISLAMABAD // Pakistan's government yesterday decided to press ahead with tax reforms that would boost flagging revenues but could fuel double-digit inflation.

The centrepiece of the tax reforms is a 15 per cent "reformed general sales tax" - a key demand of the IMF and the US, Pakistan's biggest creditors.

They have repeatedly urged Pakistan to broaden its tax revenues that, at 8.9 per cent of gross domestic product, are among the poorest in the world.

The government's decision followed negotiations in Islamabad last week with the IMF, which has withheld disbursals from a US$11.33 billion (Dh41.61bn) emergency loan programme because the Pakistani government has consistently failed to meet economic targets.

Funding worth $3.5bn has been withheld since July, when the government withdrew from parliament a bill that would have introduced the tax at a rate of 17 per cent.

The bill had looked destined to be rejected by parliament after most political parties, including coalition partners of the ruling Pakistan People's Party, vociferously opposed it.

The bill was also opposed by provincial governments, which feared the tax would divert some of their revenues to the federal government.

The finance minister, Abdul-Hafeez Sheikh, told journalists a revised bill, drafted in consultation with the provincial governments, would be presented to the federal parliament and provincial assemblies for approval in a matter of days.

Mindful of the unpopularity of the proposed tax, the government will not apply it to food staples.

"The burden of this tax will not fall on the poor," Mr Sheikh said.

It has also exempted small retailers with annual revenue of less than 7.5 million rupees (Dh323,000) from the tax, which primarily targets wholesalers.

Ahmed Waqar, Pakistan's chief tax collector, said the tax would force businesses to document their transactions and pay taxes on income that they had previously evaded. "This is not a new tax, but it would certainly reduce tax evasion," he said.

The government decision comes ahead of a conference of its creditors, known collectively as the Friends of Democratic Pakistan, in Islamabad next week.

During the conference, the government is expected to formally unveil a revised austerity programme, agreed to with the IMF last week.

The IMF agreed to relax some of the targets because of the devastation caused in July and August by massive floods across much of Pakistan, but only after assurances that the tax and other austerity measures would be quickly enacted.

The cabinet yesterday approved a bill introducing a short-term 10 per cent tax on incomes of more than 300,000 rupees per year, to help offset expenditure on relief supplies and compensation to the estimated 20 million people affected by the floods.

The government plans to apply the tax for six months from January, in addition to the existing income tax. It has committed to repaying any money borrowed from the central bank within 90 days.

The government also agreed to withdraw remaining subsidies on electricity supply, and committed to raising tariffs by two per cent a month until the end of the financial year in June 2011.

The removal of subsidies is essential to attract investment in power generation. At best, Pakistan can meet only about two-thirds of peak power demand, but in practice output is lower because cash-strapped state utilities are often unable to pay private power producers and oil refineries.

In addition to committing to tax reforms and the removal of power subsidies, the government also agreed to freeze expenditure at the levels set in the previous financial year, APP, a Pakistani news agency, reported.

Citing unnamed officials at the ministry of finance, it said the only exceptions would be debt repayments and spending on military operations against Taliban militants.

Economic growth of 2.8 to 3 per cent was targeted, while the government would seek to restrain inflation to 13.5 per cent, the officials said.

Inflation had fallen below 10 per cent late last year, but has since risen steadily.

Volatile consumer price inflation reached a 17-month high in September of 15.7 per cent, the federal bureau of statistics said last week.