WASHINGTON: With the International Monetary Fund (IMF) seeking visible improvements in revenue generation from Pakistan, the government has been forced to contemplate the potential impact of proposed measures on salaried individuals and crucial economic sectors, amid a dearth of fresh ideas about how to boost income.

Discussions with Pakistani and IMF officials, as well as US-based economists, indicate that the two parties have reached ‘some’ understanding on raising the General Sales Tax (GST), removing existing tax exemptions and applying ‘zero rating’ only to exported items.

In addition, there is agreement that discount rates will be aligned with market rates. The discount rate used in financial models, such as discounted cash flow (DCF) analysis, should reflect the market rate of return or the cost of capital.

IMF officials have reportedly pointed out that when a government’s debt is very high and there is no willingness to restructure debt to protect creditors, as in Pakistan’s case, the entire burden invariably falls on taxpayers.

Amid unwillingness to restructure debt, Fund is leaning on Islamabad to enhance revenue through taxation, end subsidies on consumption

“Even if creditors share the burden, the government still needs to increase its tax revenue,” a source familiar with the IMF-Pakistan talks told Dawn.

“The Fund’s proposals are sensible. A strong government might be able to manage these taxes, but a weak government cannot. Tough times ahead,” the source warned.

Burden on salaried class

When talks for a new, extensive loan package began in April, the IMF had indicated its willingness to work with the Pakistani authorities.

“But the lender also believes that winning the confidence of investors at home and abroad is critical for the country to overcome the current crisis,” said Nadeem Hussain, a Boston-based economist, explaining why the Fund is demanding tough reforms.

Reflecting on why Pakistan may find it difficult to implement IMF-recommended reforms, Mr Hussain said: “Burdening the salaried class further would demoralise those already making significant contributions to the national income. While taxing specific exports might help, a generalised export tax regime could exacerbate the already volatile export environment.”

Likewise, taxing small farmers, he said, would fundamentally disrupt lower and lower-middle-class rural families. “Instead, large land ownerships and agricultural productions above a certain scale need to be taxed.”

Urging the government to widen the tax net and include more sectors, he said: “Effective communication is essential to ensure citizens understand that paying taxes benefits their own country. Additionally, implementing a wealth tax across the board would help diversify national income sources.”

Need for a credible plan

Meanwhile, Uzair Younus, an economist associated with The Asia Group, a strategic advisory firm based in Washington, said Pakistan’s primary need was to demonstrate a credible plan to achieve revenue targets.

Due to a credibility gap in Pakistan’s willingness and capacity to tax sectors like retail and property, the IMF “insists on raising revenues through proven methods, such as the petroleum levy and sales tax”, he added.

“As long as Pakistani policymakers fail to convincingly signal a genuine commitment to transformative reform, they will remain constrained by IMF-imposed objectives. As a creditor, the IMF will prioritise policies that protect its interests, necessitating their implementation by Pakistan,” Younus said.

Murtaza Haider, a professor of real estate management at Ryerson University, Toronto, highlighted the fundamental disagreement between the IMF and the Pakistani government on tax rates and revenue generation.

“While the IMF aims to enhance Pakistan’s revenue capacity, the government prioritises subsidising consumption without a sustainable financing plan,” he said.

According to him, the IMF recognises the unsustainability of Pakistan’s subsidy practises and insists on expanding revenue generation capabilities.

Without presenting an alternative strategy to the IMF, Pakistan risks worsening the gap between revenue and expenditure. Subsidies funded through loans only increase its financial vulnerability.

Furthermore, Pakistan’s policy of protecting certain classes through undeserved subsidies and tax breaks exacerbates inequality and hampers revenue generation for sustainable development.

The IMF’s goal remains a uniform tax system and an end to special treatments. Ultimately, Pakistan’s urgent need for the loan to prevent default is paramount given the economic pressures it is currently facing.

The ongoing talks between Pakistan and the IMF for a new loan package will extend beyond the budget.

The Fund may persist in pushing for higher income tax rates and taxes on exporters while Pakistan resists, fearing backlash from the salaried class and key sectors like agriculture and health.

Published in Dawn, June 12th, 2024