Govt pledges PSDP cuts, other reforms amid IMF criticism

• Lender warns Pakistan on SIFC, Sovereign Wealth Fund
• Govt promises to adjust gas, power tariffs, expand tax net to agriculture, retail sectors
• Plans to privatise four power sector entities this year

ISLAMABAD: Amid criticism from the IMF over the Special Investment Facilitation Council and Sovereign Wealth Fund, the government has committed to drastically reduce the Public Sector Development Programme, ensure timely tariff adjustments in gas and electricity sectors, bring agriculture and retail sectors into effective tax net and immediately impose or increase withholding tax and excise duties on several items to meet any revenue shortfall.

According to documents released by the International Monetary Fund as part of the recently approved $7 billion Extended Fund Facility, Pakistan has stayed on course of its commitments through a total of 22 structural benchmarks until Sept 25, as the country required about $110.5bn in foreign financing over the next five years (2025 to 2029) at an average of $22bn per year. These needs generally remain funded with some minor gaps over the next two years.

The government has committed to expanding the Tajir Dost Scheme to bring retailers into the tax net to 36 more cities, from six major cities at present, providing about Rs250bn revenue from the scheme this year and growing progressively.

The government has also promised to ensure asset declaration of all government officers (Grade 17-22), but that would not be available to public scrutiny, and accessible to banks, tax authorities and, the financial monitoring unit and the top investigation agency on specific demand.

The government has also committed to privatising four power sector entities during the current year, including two in the distribution and two generation plants.

As part of the contingency plan, the government has committed that should the three-month rolling average revenue collection fall short of the projected target by 1pc, it will increase advance income tax on import of machinery, import of raw materials, industrial undertakings and commercial importers and increase withholding tax on supplies, services, contracts and increase federal excise duty on aerated and sugary drinks.

The IMF staff raised concerns over the establishment of a Sovereign Wealth Fund involving about seven major profitable entities and the creation of the Special Investment Facilitation Council (SIFC).

“Staff has highlighted the need to ensure a level playing field with regard to the investment environment and avoid a watering down in governance standards. These issues remain to be addressed,” it said.

However, the government promised to take additional steps to promote investment and ensure competitive neutrality and a level playing field. “We commit to ensuring that the SIFC does not propose, nor that the government provide, regulatory, spending, or tax-based incentives of any sort, or any guaranteed returns, or take any other action that could distort the investment landscape” and to establish a set of best transparency and accountability practices for SIFC operations and ensure that all investment made under the SIFC results from the standard Public Investment Management framework, it said.

The government also promised to amend the 2023 Sovereign Wealth Fund (SWF) Act by the end of December to ensure that its state-owned enterprises (SOEs) revert to the SOE Act’s governance structures and to ensure that the SWF itself comes under governance mechanisms and safeguards in line with its principal nature as a holding company.

For the next year, the government committed in advance to introduce a 5pc increase in the FED on fertiliser and pesticides in the FY2026 budget.

Under the National Fiscal Pact with the provinces, the four provinces have committed to amend their agricultural income tax regimes to fully align them, through necessary legislative changes, with federal personal income (small farmers) and corporate income (commercial agriculture) tax regimes by the end of October.

“Each province will begin taxation of agricultural income under this new regime from Jan 1, 2025, with a collection for the second half of FY25 agricultural income in July 2025” and the FBR will assist them in implementing and assessing this tax to ensure fairness of the tax system as income from agriculture will be taxed in the same way as other income. They will also apply uniform property tax rates.

The provinces have also agreed to transition the GST on services from a positive list to a negative list approach to combat tax evasion to take effect from the start of FY26. This strategic shift aims to enhance transparency and reduce loopholes by ensuring that all items not explicitly exempted are subject to taxation.

Furthermore, to adequately safeguard against potential fiscal risks, the federal government will allocate emergency contingency funds totalling 0.3pc of GDP, equivalent to Rs348bn.

The provincial governments would also work towards allocating 1pc of their expenditures for emergency contingencies as well in FY26.

Some spending responsibilities would also be transferred from the federal to the provincial governments in line with the spending allocations established in the 18th Amendment, including additional contributions for higher education, health, social protection, and regional public infrastructure investment. At the same time, the provinces will take steps to increase their own tax-collection efforts in sales tax on services, property tax, and agricultural income tax.

The government has also given an undertaking to improve the primary balance and to utilise the windfall from SBP dividends exceeding 1pc GDP to cover interest payments and reduce credit requirements.

The government has committed not to allow supplementary grants prior to parliamentary approval except for natural disasters and not to provide any new tax amnesty or preferential tax treatment. The government will also not provide any tax concessions to any new economic zones and will gradually phase out existing ones.

Under the new IMF programme, the government would increase the tax-to-GDP ratio by 3 percentage points in three years, for which a 1.5 pps increase has already been introduced in the current year budget worth Rs1.75 trillion.

“We aim to increase our tax-to-GDP ratio to 13.7pc while achieving a primary surplus of 2pc of GDP by FY28,” the finance minister committed, adding that while some tax rate increases might be unavoidable, the tax policy and administration strategy will focus on bringing in the tax net the undertaxed sectors and bridge the compliance gap.

The government will repeal the remaining exemptions for donations and non-profit organisations in the Second Schedule of the income tax ordinance, making them eligible for tax credits instead.

The FBR will introduce a single turnover-based registration threshold for both income tax and sales tax for a straightforward sales tax system and continue streamlining the GST to ensure a unified reduced rate in the FY26 budget and transform GST into a broad-based value-added tax, as in the developed countries.

The monetary policy will remain appropriately tight to guide down inflation towards the target alongside continued efforts to improve policy frameworks and strengthen monetary transmission.

Published in Dawn, October 12th, 2024