Tax rate cut sought from IMF to stop capital flight

ISLAMABAD:

Pakistan on Thursday urged the International Monetary Fund (IMF) to allow it to cut the tax rates at par with the regional countries to stop the increasing outward flight of money, as the global lender did not see any major progress in tapping true incomes of retailers and real estate dealers.

On the second-last day of the talks, the IMF also briefed the foreign diplomats on the outcomes of the first review. The IMF largely showed satisfaction with the implementation of the programme except in the areas of property, real estate and the privatisation, according to the people privy to the meeting.

The global lender backed a steady increase in the economic growth, saying that any swift shift to higher growth rate might cause concerns regarding higher fiscal and current account deficits.

During the interaction with the foreign diplomats, one diplomat asked about the expansion in the federal cabinet in the middle of the IMF visit to Pakistan. According to sources, the IMF delegation said that the size of the cabinet was still smaller than the previous cabinet.

Prime Minister Shehbaz Sharif has doubled the size of his cabinet to over 50, also creating a new department –the Public Affairs Unit.

The IMF briefed the diplomats about the overall progress in implementing key reforms, particularly the introduction of agriculture income tax. It acknowledged that the progress in collecting the taxes from the agriculture sector would be gradual.

However, the sources said that the IMF stated in the meeting that there was no major success in bringing the retailers to the net, and there was also a need for bringing changes in the real estate sector. The IMF also emphasised on the privatisation agenda, they added.

The IMF briefing was not candid and Mission Chief Nathan Porter gave guided responses to the diplomats, said the sources.

Pakistan and the IMF bridged their gaps on the tax target, which in terms of the size of the economy might stay at 10.6% of the GDP but in absolute terms, it would go down below Rs12.5 trillion due to now estimated reduced size of the economy.

Meanwhile, the Pakistani authorities on Thursday urged the IMF to allow it to reduce the tax rates to stop the capital flight from the country. The issue was raised by the FBR, which said that due to attractive rates in the Gulf region the money was flying out, said the sources.

Due to high transaction taxes, political and economic uncertainty, people are taking their money out and mostly parking in Dubai. The FBR has identified 72 real estate agents, who are instrumental in making investments in the Gulf, according to government sources.

The Express Tribune has seen the list of these names, which carry people from some influential families. However, the government has no means to stop them from investing abroad. Some of them are tax filers with the FBR, said the officials.

The sources said that the FBR admitted before the IMF that the traders and the jewellers were the two hard nuts to crack. The FBR also confessed before the IMF that due to major design flaws, the Tajir Dost Scheme had failed.

The government was supposed to collect Rs50 billion from the traders under the scheme but it ended up collecting peanuts.

The IMF was briefed that the large traders also stopped the smaller ones from joining the scheme and as a result it could not expand the scheme to 43 cities. The FBR plan to bring a minimum of 10 million retailers in the net flopped, the IMF was told.

Nonetheless, the FBR briefed the IMF that it managed to show some progress. During the first eight months of this fiscal year, there was a 30% increase in registrations of new taxpayers and the number of returns increased from 509,173 to 774,494. There was an increase of more than half in the return filing and as a result withholding tax payments also jumped 43% during the first eight months.

The corporate sector tax payments on the back of higher taxes and more filing increased from Rs86 billion to Rs291 billion.

The IMF was told that the FBR had made changes in the income tax returns to facilitate people show their land ownerships. But the FBR did not have access to tehsil and towns level land holding data. There was also a problem that the people have given their lands on lease, which will make it difficult to collect taxes on the agriculture income.

The Fund was told that there was some progress in expanding the point of sale (POS) network to shops –a quasi-real-time connection between the shop and the FBR database. In June there were 30,500 shops integrated through POS –a number that has now grown to 37,200, the IMF was told.

One branded company may own dozens of shops, which means the actual number of traders linked with the FBR may be around 10,000. The FBR is planning to target 137 major chain stores to track the sales, said the sources.

The real challenge will be bringing the wealthy jewellers in the net who stay still out of the FBR web, said the sources.

The sources said that the IMF will modify the FBR’s target of bringing new taxpayers in the net by specifying the actual number of new retailers, real estate dealers and the wholesalers. This is being done to avoid the generic statement that tens of thousands of new taxpayers have been brought to the net, said the sources.