ISLAMABAD: The International Monetary Fund has analyzed tax gaps and estimated 6.9 policy and compliance gaps as Pakistan implements a new $6-8 billion bailout package for its struggling economy. % GDP is $7000 billion annually.
Pakistan’s visiting mission and HPG held talks here on Monday, where a delegation led by Head of Mission Nathan Porter met Finance Minister Muhammad Aurangzeb. The head of the HPG mission said it is important to continue the path of structural economic reform to achieve growth on a stable and sustainable basis in the framework of the expected bailout package of 6-8 billion dollars from the Expanded Fund (EFF).
Pakistan has also raised the issue of increasing the amount of EFF through climate finance to increase the size of the package to $8 billion. A press release on Monday said that the International Monetary Fund mission led by Nathan Porter called Pakistan’s finance minister at the Ministry of Finance on Monday to start further discussions with the Treasury. The meeting was attended by the Governor of the State Bank of Pakistan, the Chairman of the Federal Board of Revenue and senior officials from the Ministry of Finance.
The Minister of Finance thanked the mission for the successful completion of the Standby Agreement (SBA). He reminded the HPG team of the improvement in macroeconomic performance during the SBA and stressed the government’s commitment to continue and expand the reform agenda.
According to official sources, HPG and FBR top brass in the tax investigation gap have held a meeting to discuss the tax proposal. HPG presents an analysis of the tax gap, which is estimated at 6.9% of GDP and worth $7,000 billion annually.
In terms of policy, the International Monetary Fund says there is a gap of 3.4% of GDP, which means $3.4 trillion can be saved by closing the policy gap. from 3.4% of GDP due to policy distortions, there is a gap of 2% of GDP on account of GST, 0.6% of GDP on account of income tax and 0.8% of GDP on account of customs. The tax claim gap is 3.5% of GDP, of which 1.5% of GDP is due to GST, 1.5% of GDP is due to income tax, and 0.3% of GDP is due to custom i and has 0.2%. Federal Excise Duty (FED) Account.
The FBR has analyzed the tax gap with FY22/23 data, which gave an interesting result, estimating a total tax gap of 6.9% of GDP. Policy and implementation gaps account for half of the total tax gap. The policy gap is mainly related to sales tax, while the implementation gap is similar between income tax and sales tax. The retail sector accounted for 30%, the transportation sector 19%, cross-border smuggling and counterfeit bills 12%, and the real estate sector 5%.
Excise duty (FED) only contributes to the performance gap. Previous analysis of tax distribution showed that labor tax was particularly low.
Tax gap analysis can help identify the causes of tax inefficiency and low capacity in Pakistan. Tax opportunity assessment shows what can be expected in terms of tax collection in the current situation; does not provide information about the source of income shortfalls. Tax margin analysis estimates the difference between the actual tax collection and the maximum level that can be collected if the standard tax is applied to the entire tax base. It is a policy loophole that matches the total tax expenditure with exemptions, zero-rating, reduced rates and tax credits for investment and full payment of tax liabilities by taxpayers. Estimated tax gap by reason (tax policy or administration), tax forms, and sources of low sectoral income provide insight.
HPG has also raised the issue of exclusion from sales tax on fertilizers, introduction of effective risk management system to ensure monitoring and enforcement, recovery of 18% gross sales tax on petroleum products, now 0% GST on petroleum products, reduced. tariffs for all sectors, streamlining tax rates across sectors and withdrawing the concessional approach.
HPG also calls for gradual fiscal consolidation and broadening of the tax base (especially in the low-income sector) to strengthen public financing and create space for more priority development and social assistance spending to protect the vulnerable.
