IMF advises raising taxes on petroleum, withholding tax for curtailing budget deficit in 2017/2018

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ISLAMABAD: International Monetary Fund (IMF) has advised Pakistan for enhancing petroleum with withholding taxes for curtailing budget deficit at 5 percent during fiscal year 2017/2018.
The IMF in its country report on Pakistan released on Thursday said that strengthened fiscal discipline will be important to reduce debt-related vulnerabilities and rein in the current account deficit.
Despite the pre-election period, the IMF recommended complementing the positive revenue performance with an early introduction of additional measures to contain this year’s budget deficit to 5 percent of GDP (5.4 percent underlying deficit excluding one-off operations) to partly undo last year’s overruns, support efforts to contain import pressures, and strengthen debt sustainability.
“This could be achieved with further elimination of tax concessions and exemptions (0.3 percent of GDP), raising of petroleum taxes, withholding taxes and excises (0.1 percent of GDP), and containing current expenditure (0.1 percent of GDP),” the IMF said.
The IMF said that the fiscal deficit will likely remain elevated. On current policies, IMF projected the budget deficit (excluding grants) to reach 5.5 percent of GDP this year (5.9 percent of GDP underlying deficit excluding one-off operations).
Stronger tax revenue (12.9 percent of GDP, up from 12.5 percent last year)—owing to robust import growth, higher oil prices, the recent exchange rate depreciation, and imposition of regulatory duties—and lower interest expenditure are expected to provide a moderating effect on the deficit.
In addition, the authorities’ decision to restrain the budgeted surge in development spending and to closely coordinate with the provinces to maintain fiscal discipline will be helpful. That said, the pre-election period could pose significant risks to maintaining fiscal discipline. Over the medium term, quasi-fiscal losses and arrears by PSEs are expected to persist and the fiscal deficit will likely remain elevated, at around 5.8 percent of GDP, as growing interest expenditure and Public Sector Enterprise’s subsidy requirements would be counterbalanced by improvements in revenue collection.