The Fund staff level report on Article-IV Consultation with Pakistan stated revenue mobilisation should be the main driver underpinning medium-term fiscal consolidation. Pakistan's tax-to-GDP ratio has remained low by international comparison, and mobilising additional tax revenues can support fiscal consolidation and generate resources to step up priority infrastructure and social spending.
Staff stressed that options include further reducing tax concessions and exemptions, raising petroleum taxes and withholding taxes, and strengthening collection of provincial taxes on services, property, and agricultural income. Strengthening tax administration by improving the FBR's access to third-party information, enhancing tax audits, building a centralised electronic fiscal cadastre, and reducing the stock of outstanding tax refund claims will also be important. In this context, the financial transactions withholding tax for non-filers has been helping to address tax evasion, and the FBR's new Anti-Money Laundering (AML) unit will also support efforts to combat tax evasion and recover their illicit proceeds, it said.
The report said that the budget 2017-18 envisages marked increases in tax and non-tax revenue, a large expansion in development spending, and contained growth in current spending. The authorities expected the budget revenue target to be reached on the back of strong tax administration efforts. Staff advised that significant additional tax policy and administrative measures of around 11/2 percent of GDP may be needed to achieve the FY 2017/18 revenue objective, especially if this fiscal year's revenue turns out lower than expected by the authorities and in line with staff's expectations. Staff highlighted that measures could include further reducing tax expenditures (estimated at 1.3 percent of GDP in FY 2016/17), gradually raising petroleum taxes, further strengthening the system of withholding taxes for non-filers, and improving provincial tax collection in agriculture, property, and services. These measures should be complemented by continued strong administrative efforts to improve tax compliance.
The report said that the transfer of a significant share of federal tax revenues to the provinces - decided in 2009 with the 7th National Finance Commission Award -was not well-aligned with the devolution of expenditure responsibilities. This resulted in an unbalanced fiscal position across different levels of government, reduced incentives to mobilise revenues, a fragmented fiscal system, and reduced overall efficiency of public expenditure.
The Staff advised both federal and provincial authorities to better align revenue and expenditure responsibilities consistent with the constitutional framework. The Staff highlighted a number of policy options including: fully implementing expenditure responsibilities by provinces or establishing burden-sharing arrangements for joint tasks; establishing a fiscal council or similar body to set broad federal and provincial fiscal targets; setting up a jointly funded contingency fund for large unexpected shocks; instituting a national tax commission or co-ordination committee to facilitate vertical and horizontal co-ordination of tax policy and administration; strengthening public finance management frameworks; and increasing incentives to mobilise provincial tax revenues. The authorities broadly agreed on the need for improvement while noting that the range of politically feasible reforms may be limited and require extensive consultations with the provinces.
It said that the FBR created a new investigative AML unit following the designation of tax crimes as predicate offenses to money laundering, and the Financial Monitoring Unit (FMU) established an integrated data center to enhance its analysis and dissemination of financial intelligence. Ensuring the effective supervision of reporting requirements, strengthening the exchange of financial intelligence with the FMU, and enhancing the capacities of law enforcement agencies (including FBR's new AML unit) to conduct financial investigations would support detecting and investigating proceeds of tax crimes and corruption. The Staff welcomed the finalisation of the national risk assessment and progress in addressing ML/TF risks, and recommended to continue ensuring the effective implementation of the UNSCR resolutions to counter terror-financing. The authorities indicated that, in line with the findings of the OECD 2016 report, they are also committed to ensuring entity transparency and timely exchange of information on tax matters, and to addressing remaining shortcomings, such as ensuring availability of ownership information, and limiting delays in responding to requests for information, the report added.
Copyright Business Recorder, 2017