ISLAMABAD: As drafting of a law on Value-Added Tax (VAT) has entered a crucial stage, with technical group meetings scheduled to take place in Dubai on Nov 2, the World Bank has expressed its dissatisfaction over the pace of progress on revenue reforms, attributing it to resistance from ‘vested interest’ and ‘lack of political will.’

The government, as part of the 2009-10 budget, was to adopt significant legal changes to the current General Sales Tax (GST), moving it closer to VAT by minimising exemptions and zero-ratings, thereby broadening the tax-base and revenues. However, this has not happened, the Bank says in its latest Update on Pakistan’s economy.

Further, the restructuring of the Federal Board of Revenue (FBR), launched at the beginning of 2009, reversed in May owing to a court case by the customs group which opposed the reforms.

After a delay, the restructuring process was launched again in July and it was expected to be completed by the end of September. But the FBR has not given any time-frame for the completion of reforms and according to the FBR chairman, it is a continuing process.

The World Bank report stated that the revenues continued to underperform in the first two months of 2009-10, and FBR tax collection during July-August 2009 increased only by 3.6 per cent compared to 19.5 per cent required to reach the annual target. While direct and sales taxes grew by 2.9 per cent and 9.7 per cent, respectively, excise and custom duties collection contracted by 4.3 and 14 per cent, compared to the corresponding period of last year.

The report says developments in the first two months of 2009-10 suggest that the worrisome trends continue.

First, continued government inaction on power tariffs implies that electricity subsidies will remain high in 2009-10. Second, the subsidy bill was increasing significantly at the provincial level, as Sindh has followed Punjab in launching a provincial income support programme.

In addition, Punjab has doubled its wheat procurement target, implying a large increase in wheat subsidy.

Moreover, large subsidies were allocated to provision of wheat and wheat flour to poor segments of society at substantially reduced rates. Similarly, subsidies were being provided both at federal and provincial levels for agricultural sector and fertilisers.

Finally, the federal scheme of providing loans to people for starting small business is also likely to have a significant impact on the fiscal situation.

The World Bank notes regretted that progress with structural reforms has been mixed with progress in key areas’ lackluster.

However, on the positive side, automatic fuel price adjustment mechanism, which was re-introduced in early 2009, has been in operation and domestic prices of fuel products have been adjusted monthly, consistent with the changes in import parity price. Also, the pilot progamme of Benazir Income Support Programme (BISP) with the new targeting instrument – the poverty scorecard – has been conducted and a full roll-out of the new targeting methodology is expected to start next, albeit with a substantial delay due to capacity constraints.