According to the Memorandum of Economic and Financial Policies, Pakistani authorities committed to reduce recurrent and capital spending by Rs 15 billion each unless stronger federal revenue performance warrants otherwise. The staff report notes that the authorities have agreed to implement corrective measures to attain the 2015-16 revenue and deficit targets. Additional budgetary spending as a result of the reclassification of some "non plan loans" (amounting to 0.1 percent of GDP) will be made through re-allocation of existing capital expenditure plans, including at the provincial level.
On the revenue front, the authorities have also started the consultative process to eliminate tax concessions and exemptions amounting to 0.3 percent of GDP on an annualised basis and are committed to implementing this measure by February 2016 (or as part of the 2016-17 budget if the end December revenue target is met), the staff report notes.
Pakistan needs substantial fiscal space for growth-enhancing priority spending on infrastructure, education, healthcare, and targeted social assistance. But the current level of tax collection is too low to provide this space, and mobilising additional revenue with focus on widening the tax net will be critical to address the country's pressing development and social needs. Despite increasing by one percent of GDP since 2012-13 to 11 percent of GDP in 2014-15, tax revenue remains well below the level observed in comparator developing countries and Pakistan's estimated potential of over 22 percent of GDP.
At 11 percent of GDP, tax revenue remains much too low to allow for sustained increases in infrastructure investment and social spending, which are needed to underpin Pakistan's development. The authorities' commitment to raise this ratio to 14.5 percent in the medium term is thus highly pertinent. To improve fairness of the tax system and mitigate economic distortions, this goal should be achieved mainly by widening the tax net. Specific priorities include continued removal of GST and customs duty concessions and exemptions, improving taxpayer compliance, and encouraging better tax collection at the provincial level by rebalancing of the existing fiscal federalism system and reducing fragmentation in tax administration. Alongside, upgrading of the debt and public finance management frameworks should continue to further reduce fiscal risks, the IMF report added.
The number of active personal income tax (PIT) filers is still significantly below the estimated 5.7 million potential taxpayers and the number of corporate filers is less than one percent of all commercial and industrial electricity users. To increase the number of active taxpayers, the authorities have introduced a variety of measures that are yielding some results. With this, the number of PIT filers has increased by more than 200,000 over the last two years. Nevertheless, at around 970,000 as of end-November, the number of active PIT filers is still significantly below the estimated 5.7 million potential taxpayers.
IMF staff encouraged swift implementation of the newly adopted risk based Audit Policy to identify non-compliance. Further measures to assess compliance risks', improve access to taxpayers' financial information, and pursuing a stepped-up agenda to improve governance in tax administration was supported by the Fund and the authorities' work on legislation against "benami" transactions (SB), which will help reduce tax evasion, was welcomed. By end-January 2016, Pakistani authorities will prepare and submit to the National Assembly draft legislation against "benami" transactions, in which assets are held by or transferred to a person, but have been provided for, or paid by, another person (SB).
The report notes that Pakistani authorities were successful in reducing the cost of tax concessions and exemptions from 1.9 percent of GDP in 2013-14 to 1.5 percent in 2014-15 and strictly limiting the authorisation of administrative tax concessions and exemptions through Statutory Regulatory Orders (SROs) to be temporary and only applicable in a number of exceptional circumstances. It was agreed that continued removal of SROs will be needed to widen the tax base and increase even-handedness and fairness of the tax system.
Adopting amendments to the AML Act to include serious tax crimes and implementing measures targeting the laundering of proceeds of tax crimes will also allow better detection and deterrence of tax evasion. Compliance can also be encouraged by swift handling of tax refunds: the authorities plan to continue reducing the backlog of general sales tax (GST) refund claims to a level consistent with a three-month flow (or about Rs 20 billion) from Rs 87 billion in September 2015. Pakistani authorities managed to lower the amount of outstanding GST refund claims from the peak of PRs 113.2 billion in November 2014 to PRs 86.5 billion by end-September 2015.
Pakistani tax authorities will continue to strengthen the culture of taxation by aggressively pursuing tax evaders, avoiding tax amnesty schemes, and adopting a programme of comprehensive reform of the tax institutions. The authorities will further improve its enforcement efforts on non-filers who have the potential to contribute at least the average tax paid by currently registered taxpayers and especially large corporations and high wealth individuals. Supported by IMF technical assistance (TA), they are exploring further options for modernisation of GST and other taxes, the report said.