Budget, tax targets & IMF  

Dr. Ikramul Haq

Budget for fiscal year 2021-22 is in the making amidst difficult times when the all sectors of economy need tax incentives for survival in the wake of Covid-19 endemic, especially after the third and deadly wave that is now receding. Projections about GDP growth at the end of the current year are positive (may be crossing 4.5%) proving the International Monetary Fund (IMF), World Bank, State Bank of Pakistan and many others wrong. All were presenting a gloomy picture.

The Federal Board of Revenue (FBR) in the eleven months of the current fiscal year has performed impressively. It achieved historic milestone by collecting Rs. 4.17 trillion for the first time since 1947. The FBR is optimistic to achieve the revised target of Rs. 4.71 trillion for the current fiscal year. For meeting the original target of Rs. 4.96 trillion fixed at the time of budget announcement, FBR must collect unlikely Rs. 790 billion in June 2021. So, fiscal deficit and further borrowing with higher debt servicing are inevitable.       

The appointment by Premier Imran Khan on April 16, 2021, his fourth Finance Minister, Shaukat Fayaz Ahmed Tarin,whoheld the same portfolio from 2008 to 2010 under Zardari rule, so far proving rewarding. Since taking oath of office on April 17, 2021, he made it clear that for meeting IMF’s conditionality on tax targets of FBR, no new taxes or increase in rates of existing ones would take place. He made it clear before the Standing Committee of the National Assembly on May 26, 2021. The very next day, Special Assistant to Prime Minister on Revenue and Finance, Dr Waqar Masood, told the same committee: “We are trying that less than Rs. 500 billion worth of additional taxes should be imposed, including recently introduced corporate income tax measures [of Rs81 billion]”. He admitted the forthcoming budget would be presented “in the light of an understanding” with the IMF.

Before the release of tranche of US$ 500 million by the IMF on March 24, 2021, the coalition government of PTI agreed to make amendments in the Income Tax Ordinance, 2001 to withdraw tax exemptions or curtail them through tax credit involving complicated procedure and unreasonable conditions. Resultantly, the President of Pakistan, in exercise of the powers under Article 89(1) of the Constitution promulgated Ordinance VII of 2021 on March 22, 2021, with immediate effect. The notification says that this Ordinance “shall be called the Tax Laws (Second Amendment) Ordinance, 2021”. It was termed unconstitutional by Opposition and many experts also said this is Money Bill that could not be presented in the manner the PTI Government did (see details in IMF-imposed ordinance and IT exports, TNS, [Political Economy] The News, April 11, 2021). This will now be made part of Finance Bill 2021, which will be presented along with budget, likely to be announced on June 11, 2021.

According to a report, Shaukat Tarin said: “My first priority would be achieving higher and sustainable growth and increasing Rs. one trillion tax revenue into the FBR’s collection in the next year”. This means the government will fix tax collection target of Rs. 5.8 trillion against the IMF’s demand of Rs. 5.963 trillion. Shaukat Tarin said that the government “will go close to IMF’s demand”. When asked how FBR would achieve increase of one trillion in the next budget having nominal growth of just 12.8 percent. Shaukat Tarin  responded that there would be no new taxes in the budget or increase in the existing taxes. He said that there would be nominal growth of 13 percent including GDP growth of 5 percent and inflation target of 8 percent in 2021-22 and further 7 percent growth in FBR’s collection would be made through broadening of tax base with the help of technology. Prior to becoming Finance Minister, he said: “If the Federal Board of Revenue (FBR) does not increase its revenue to 15%, then the country will run out of money to spend. The FBR will have to bring revenue to 20% in 5-7 years […] otherwise the country will not be able to achieve an economic growth rate of 7-8%”.  

It is yet not clear who will prevail, Shaukat Tarin or Dr Waqar Masood in determining how the tax target of FBR, as agreed with IMF, will be met. Finance Minister says no new tax or any raise in tax rates but Adviser to Prime Minister claims there will be new taxes of Rs. 500 billion. New taxes will hurt the masses and businesses. Both, however, agree that number of exemptions in all federal tax codes will be withdrawn. The  IMF’s Country Report No. 2021/073 makes it clear that the tax burden will increase. It will hurt salaried and fixed income groups. The cost of consumer goods will also go up due to withdrawal of sales tax exemptions. The target of petroleum levy will be around Rs. 607 billion against this year’s target of Rs. 450 billion. The IMF report projects the higher collection on the basis of higher petroleum product prices—a sure recipe for cost-push inflation and growth slayer.

Contrary to the IMF’s prescriptions of higher taxes and costly energy leading to slowing of growth and further unemployment, business community is demanding massive tax reductions in coming budget so that they can survive and retain employees in difficult times. IMF agenda is diametrically opposite of vision of Prime Minister and Shaukat Tarin to adopt economic policies aimed at sustainable growth and looking after millions underprivileged. Since taking charge, Shaukat Tarin has been saying that his top most priority is sustainable growth and prosperity for all. Taxes will increase with growth and not by imposing high taxes. Will Shaukat Tarin be able to convince IMF on this? The chances are bleak, but only the coming budget will reveal who prevails!    

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The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE)