World Bank asks Pakistan to adopt National Fiscal Policy amid bailout talks with IMF

This is now expected to be made part of the next International Monetary Fund programme that Pakistan Finance Minister Muhammad Aurangzeb will be discussing with the lender next week in Washington on the sidelines of World Bank-IMF spring meetings, Dawn reported.

Amid the staggering economic crisis in Pakistan, the World Bank has asked Islamabad to adopt a national fiscal policy by aligning federal and provincial spending with constitutional mandates, merge various federal and provincial revenue agencies into a single general sales tax (GST) collection agency, and effectively tax agriculture, capital gains and real estate in the next fiscal year's budget, Dawn reported on Monday. "Implement the new Fiscal Responsibility and Debt Limitation Acts (FDRLA) at the federal and provincial levels, including through development and implementation of a national medium-term fiscal framework through the FY25 budget process," the World Bank asked the government in its latest policy advice.

This is now expected to be made part of the next International Monetary Fund programme that Pakistan Finance Minister Muhammad Aurangzeb will be discussing with the lender next week in Washington on the sidelines of World Bank-IMF spring meetings, Dawn reported. The bank demanded tangible progress on GST harmonisation across the federation and its federating units, "including through rollout of the GST portal" and move towards "rate harmonisation to facilitate tax compliance and the provision of input tax credits".

On top of this, the World Bank also suggested "consolidation of all GST collection responsibilities with a single agency, which could then distribute revenues in accordance with constitutional provisions" to reduce administrative complexity. At present, GST is collected by the Federal Board of Revenue, mostly on goods and some services, while similar revenue boards are operating in provinces to collect GST on some services. However, given the overlapping nature of certain services, the stakeholders have been facing GST collection adjustments among the provinces.

More importantly, the World Bank wants decisive actions to mobilise revenues from underutilised sources -- particularly those relating to the unfinished agenda of the 7th National Finance Commission (NFC) award of 2010: urban immovable property tax, agricultural income tax, and capital gain taxes. While conceding greater federal pool resources to the provinces, it was agreed to effectively bring these areas into the tax net to increase the tax-to-GDP ratio to 15 per cent in five years, but the deal (NFC) was drafted in a weak manner.

Dawn reported that the NFC had "recommended that the federal and provincial governments streamline their tax collection systems to reduce leakages and increase their revenue through efforts to improve taxes and achieve a tax-to-GDP ratio of 15pc by terminal year 2014-15. Provinces would initiate steps to effectively tax the agriculture and real estate sectors". However, this has remained a pipe dream over the following 15 years. As for urban immovable property tax, the World Bank has demanded the application of harmonised valuation tables (currently based on rental value) to be updated annually based on observed variables such as inflation, insurance valuation, and sales records, and also to equalise rates between owner-occupiers and rentals.

In this regard, the bank also wants authorities to harmonise and reduce exemptions such as area-based exemptions, owner-occupier exemptions, and non-resident exemptions and to unify federal deemed income tax and urban immovable property tax. For agricultural income tax, the World Bank has asked the government to make the definition of land area consistent, reconsider exemptions based on the size of land holdings and set common minimum rates based on crop acreage or production estimates.

At the same time, the government should also incorporate irrigation and/or constructed buildings to differentiate per-hectare minimum rates. Dawn reported that regarding the capital gains tax, the bank has advised the government to unify the treatment of builders, property developers, real estate investment trusts (REITs) and others, simplify the types of taxes related to capital gains and transfers -- capital gains tax (CGT), capital value tax (CVT), stamp duty, withholding tax, etc -- and remove years-held based differential rates and simplify the rate structure.

Overall, the World Bank has suggested broader revenue reforms to expand the tax base, improve progressivity and ease compliance. To achieve this, it wants to close existing corporate and sales tax exemptions, including tax exemptions for real estate, the energy sector, Covid response, and some basic household goods, and instead compensate poor households for negative impacts through enhanced social protection.

To improve tax compliance, the bank has called for addressing constraints delaying the rollout of the track-and-trace system to all sectors and simplifying the tax structure by reforming the "personal income tax (PIT) system to reduce complexity by aligning schemes for salaried and non-salaried workers" and reform PIT schedules to increase equity by eliminating privileged treatment of specific income sources and by harmonising rate structures across taxable income sources. The Planning Commission has already prepared a national planning framework for the upcoming National Economic Council, with the overall theme of ending provincial projects from the federal budget and improving resource deployment through federal and provincial "synergy" in the light of the "true spirit of the constitutional scheme", including the 7th National Finance Commission Award and 18th constitutional amendment, Dawn reported.

An official said the planning framework would "offer an operational strategy for federal and provincial governments in the context of prevailing constitutional responsibilities and roles for the shared and common objective of development and growth". He said the concept of balanced development and regional equity was not only the responsibility of the federal government but equally that of the provinces through their respective development programmes, and it was also the essence of the 7th NFC and 18th Amendment. (ANI)

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)