Pakistan shared a plan with the International Monetary Fund (IMF) on Friday to increase the number of income tax return filers to 6.5 million by June next year, but cautioned the lender about potential risks to the Rs9.4 trillion target from a stronger rupee coupled with low imports.
The tax authorities provided a briefing to the visiting IMF team regarding revenue performance during the first four months of this fiscal year and the outlook for achieving the annual target in the remainder period, according to government sources.
They added that the IMF was informed that the Federal Board of Revenue (FBR) would try to reach the target of Rs9.415 trillion, but the challenges remain. The annual target faces risks from low imports and a stronger rupee, which could dent its customs revenues by Rs250 billion for the entire fiscal year, including Rs180 billion in the remainder period.
The IMF was informed that the FBR would hardly achieve its Rs9.415 trillion targets if imports continue to remain in the negative territory.
During the first four months, imports fell 18.5% to $17 billion. The average exchange rate in these four months remained at Rs291 to a dollar compared to an average rate of Rs299 during the first three months of the fiscal year, indicating a strengthening of the rupee.
However, over the past ten days, the rupee has been on a continuous downward sliding path, as expected due to Pak-IMF talks.
The shortfall in customs revenues will also have implications for sales tax and withholding tax collection at the import stage, and as a result, the FBR’s import taxes could take a hit of Rs560 billion, said the sources. The IMF was informed that this gap of Rs560 billion would be covered by better performance in the collection of taxes at the domestic stage.
During the first four months of this fiscal year, the FBR collected Rs2.75 trillion in taxes, exceeding the four-month target by Rs66 billion despite a shortfall of Rs69 billion in custom duties in just four months.
The IMF was informed that as against the annual target of Rs1.324 trillion, the custom duties collection might remain below Rs1.1 trillion. The Rs1.324 trillion custom duty collection target had been set based on an assumption of over $60 billion in imports.
The IMF inquired about the robustness of domestic tax collection, to which the authorities replied that they were hopeful to continue the momentum on the back of higher profits by commercial banks, better collection of taxes from the real estate sector, and increased revenues from tobacco and beverages.
The sources said that the government will now provide the IMF with a month-wise plan of revenue collection for the November-June 2023-24 period.
After making an assessment, the IMF will inform Pakistan by the end of next week whether it needs to bring in a mini-budget to cover the gap or not.
A day earlier, the interim finance minister mentioned in a meeting that the Rs9.415 trillion annual tax collection target was low for the FBR for this fiscal year, representing a 31% increase over the previous fiscal year’s actual collection.
The finance minister urged the FBR to aim for a tax collection of Rs15 trillion in the next fiscal year, requiring an 84% growth over this year’s projected collection of Rs9.415 trillion.
Income tax returns plan
The FBR also briefed the IMF about progress in filing annual income tax returns and the plan to increase it further. The Fund was told that the FBR received only 2.9 million tax returns, compared to 4.9 million returns filed in the last tax year.
The Fund was told that returns were still higher by around 350,000 than October last year.
The FBR is hopeful to increase the number of filers to 6.5 million by June next year, representing a one-third surge over last year’s actual figure, said the sources.
They aim to set up district tax offices to expand the base by shifting half of the tax force in the regional tax offices to these new offices.
The Special Investment Facilitation Council (SIFC) has already given a target to the FBR to increase the tax base by at least one million during the current fiscal year over last year’s figure of 4.9 million.
Earlier this week, the FBR chairman told The Express Tribune that the FBR would ensure the compulsory tax registration of at least one million filers based on their withholding tax statements. In cases where people had paid Rs15,000 to Rs20,000 in withholding taxes but did not file tax returns, the FBR would serve them notices, he added.
Over 10 million individuals and companies are registered with the FBR, but 7.1 million, or 71%, did not file their annual returns. Last week, the FBR chairman stated that, based on the existing demographics and legal provisions, the potential to increase the tax base was limited to 10 million to 15 million.
The sources said that the plan to promulgate a Presidential Ordinance for broadening the tax base has been shelved on the advice of the Law Division. Now, the FBR will notify new rules under the Income Tax Ordinance by deriving powers from an existing legal clause to make it binding for government departments to share the details of potential filers with the FBR.
The Express Tribune had reported last month that the FBR did not need any new law, as 84 departments and entities were already sharing such details with the FBR.
Sources said that despite repeated claims, the National Database and Registration Authority (NADRA) did not share actionable data with the FBR with “indicative income” for these individuals. The information provided by NADRA did not include indicative income projections, closing this chapter on the matter.
Published in The Express Tribune, November 4th, 2023.
Pakistan’s economy stuck in ‘low-growth trap’: WB
Martin Raiser, the World Bank’s Regional Vice-President for South Asia, has warned that Pakistan’s economy is stuck in a “low-growth trap” with poor human development outcomes and increasing poverty.
Raiser reaffirmed the bank’s commitment to support the people of Pakistan in his address during a ceremony in Islamabad.
In his address, Raiser delivered a stark assessment of the nation’s economic landscape.
“Pakistan’s economy is stuck in a low-growth trap with poor human development outcomes and increasing poverty. Economic conditions leave Pakistan highly vulnerable to climate shocks, with insufficient public resources to finance development and climate adaptation,” warned Raiser.
“It is now time for Pakistan to decide whether to maintain the patterns of the past or take difficult but crucial steps towards a brighter future.”
Raiser’s remarks underscore the urgency of the significant policy initiatives he unveiled during his visit. These initiatives, encapsulated in a series of policy notes, highlighted the critical policy shifts required for fostering a more productive, sustainable, resilient, and healthier Pakistan.
The policy notes—focusing on child stunting, fiscal sustainability, private sector growth, energy, learning poverty, agriculture, and climate change—are the culmination of several months of outreach and engagements conducted across the country under the “Reforms for a Brighter Future – Time to Decide” banner.
They are intended to help inform the public policy dialogue in the context of the upcoming elections.
The policy notes advocated that Pakistan needs to address its acute human capital crisis—including the high prevalence of stunting and learning poverty—by adopting a coordinated and coherent cross-sectoral approach to basic services involving both provincial and federal governments.
They suggested that Pakistan should improve the quality of public spending and take serious measures to expand the revenue base, ensuring that the better off pay their share.
They also stated that the country should pursue business regulatory and trade reforms and reduce the presence of the state in the economy to increase productivity, competitiveness, and exports.
He said that Pakistan should remove distortions that undermine the performance of the agricultural and energy sectors, including through subsidy reform and privatisation of electricity distribution companies.
Highlighting Pakistan’s acute human capital crisis he said: “Almost 40% of children in Pakistan suffer from stunted growth, more than 78% of Pakistan’s children cannot read and understand a simple text by the age of 10. These are stark indicators of a silent human capital crisis that needs priority attention,” said Martin Raiser.
“With additional spending on water and sanitation of around 1% of GDP per year and better coordination at the local level, stunting could be halved over a decade with significant positive impacts on growth and incomes. This is just one example of the huge economic benefits a coherent and decisive reform strategy could have”.
During his visit, Raiser will meet government officials at the federal and provincial levels, and representatives from the private sector and academia.
He will also visit the Dasu and Tarbela hydropower projects, as well as project sites in Sindh and Punjab.
Little prospect of Russia oil deal
Russia is reluctant to strike a long-term commercial oil export agreement with Pakistan at a price cap of $60 per barrel, say officials.
The European Union and the United States had agreed in December 2022 to slap a price cap of $60 per barrel on Russian crude supplies in a bid to put pressure on Moscow and choke revenue flows over its war in Ukraine. The cap was also aimed at ensuring continuous supplies and avoiding potential shortage of the fuel across world markets.
Washington has given its concurrence for Pakistan’s oil deal with Russia while remaining within the price ceiling. However, Moscow has rejected the price cap.
Pakistan’s government had decided in October to negotiate a long-term oil supply pact with Russia within the price cap. It wants Russia to set free-on-board price at $60 per barrel. Free on board means the actual price charged at port.
design: Ibrahim Yahya
However, Pakistan shelved plans for a government-to-government contract and instead allowed Pakistan Refinery Limited (PRL) to clinch a crude purchase agreement on a commercial basis.
Following that, PRL struck a long-term contract with plans to bring first cargo in December this year.
PRL had been nominated as a procuring entity as per commitments made in the Pakistan-Russia Inter-governmental Commission meeting in January 2023.
PRL will purchase crude oil from Russia according to commercial terms, as agreed from time to time, without violating the international commitments of Pakistan and the international framework governing such transactions.
The refinery has already imported 100,000 tons of Russian Urals crude and processed it successfully. It also made a profit on that transaction. The oil was loaded at a Russian port and offloaded at an Oman port on two small shuttle vessels for onward delivery at Karachi port.
Though PRL, on sidelines of the Russian Energy Forum in October this year, inked a long-term agreement with its Russian counterpart for crude oil supply at mutually agreed specifications, during commercial negotiations, the Russian side did not show its willingness to enter into long-term contracts at the price cap.
In a bid to break deadlock, a Russian delegation is set to arrive on Tuesday (today) to meet key Pakistani officials.
Sources pointed out that Pakistan could not agree on an agreement that would be in breach of the price cap, which could invite US sanctions.
Earlier, Russia shipped one crude oil cargo of 100,000 tons that took one month to reach Pakistan. Freight cost was also borne by the Russian side.
However, “if Russia does not pay freight charges on future cargoes, a deal may be unlikely,” an official remarked.
Experts say Pakistan can benefit from Russia crude oil if it makes regular imports.
The above crude cargo was brought on a trial basis, which PRL processed at a cost cheaper by $7 per barrel.
Russian crude is said to produce 32% high-speed diesel (HSD) and 50% furnace oil as compared to the Arabian Light crude that produces 45% HSD and 25% furnace oil.
Initially, PRL blended 50% Russian oil with the same quantity of Arabian Light being imported from the Gulf market. Later, it mixed 35% Russian crude with 65% Arabian oil that produced a low quantity of furnace oil.
So far, Pakistan has been relying on the Middle East market for its oil requirement but the import of Russian oil has opened a new avenue, which will diversify markets.
Meanwhile, PRL has awarded a contract to contractors for kicking off work on doubling its production capacity from the current 50,000 barrels per day (bpd) to 100,000 bpd. With the expansion of the refinery, there will be potential for significant imports from Russia as well.
Published in The Express Tribune, November 28th, 2023.
Foreign companies repatriate record $272.5m in October
Foreign companies operating in different sectors of Pakistan’s economy have continued to freely repatriate profits to their headquarters abroad, totalling a 39-month high profit of $272.5 million in a single month, October 2023.
October marks the second consecutive month in which they have continued to send profits with no restrictions from the government and the central bank, sending a strong signal to global investors to initiate new investment projects in Pakistan.
Cumulatively in the first four months (Jul-Oct) of the current fiscal year 2023-24, multinational companies (MNCs) have dispatched $485.4 million. This is significantly higher than the total repatriation of $331 million in the previous fiscal year 2022-23, according to the data released by the State Bank of Pakistan (SBP) on Monday.
The central bank’s data suggests the total repatriation in the fourth month was seven times (or 581%) higher compared to $71.3 million dispatched in the same fourth month of the last year.
Overseas Investors of Chamber of Commerce and Industry (OICCI) President, Amir Paracha, acknowledged the resumption of profit repatriation by foreign companies from Pakistan in the wake of improvements in the supply of US dollars in the country in recent times.
He said the government’s support to foreign companies in resuming sending profits to their headquarters abroad would support the country in attracting new foreign investment.
The resumption of repatriation has taken place as the Securities and Exchange Commission of Pakistan (SECP) is making efforts to attract investments in the agriculture, mining, and IT and telecom sectors, mainly from Middle Eastern countries.
Pakistan has been attracting foreign investment mainly in financial, power, oil and gas, and telecommunication sectors. While these four sectors remain top dispatchers of profit from the country.
Multinational companies (MNCs) faced challenges in repatriating profits in the past one-and-a-half years.
The multinational companies have repatriated an average profit of $1.6 billion a year in the past 10 years. They notably sent a high of $2.3 billion in profit alone in 2018.
The latest central bank repatriation data suggests the MNCs have sent the monthly earned profit in addition to the profit withheld in the country in months of low foreign exchange reserves in Pakistan.
Pakistan has never officially announced or unannounced a ban on the repatriation of profits by MNCs in the past two-and-a-half decades. However, the recent depletion in foreign exchange reserves to a critically low level of less than a month has led concerned authorities to delay the dispatch to avoid default on foreign debt repayment.
Profit repatriation had remained low in the previous one-and-a-half years, ranging from $2 million to $60 million a month.
Published in The Express Tribune, November 28th, 2023.
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