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Govt may renegotiate tax target with IMF

July 09, 2009


The IMF has emphasised on improvement in tax-to-GDP ratio which is still in single digit and lowest in the region. -File Photo

KARACHI, The government would have to renegotiate tax collection target with the International Monetary Fund (IMF) even if the Petroleum Development Levy (PDL) is restored, analysts said.
The restoration of the levy could not help the government since the revenue collected through the PDL is non-tax revenue, and doubts were being raised that the government may not meet the tax collection target for the current fiscal year.

Experts said that the government could raise a substantial amount by re-imposing PDL which was abolished after the introduction of carbon tax from the new fiscal year (2009-10).

However, suspension of carbon tax on petroleum products by Supreme Court put the government in another dilemma although it provided immediate relief to general public and was also celebrated by most of the economic segments.

Experts said that the revenue generated through PDL is not tax income while revenue through carbon tax serves the government's purpose of improving the quantum of tax revenue, a condition by International Monetary Fund (IMF).

The IMF has been emphasising on improvement in tax-to-GDP ratio which is still in single digit and lowest in the region.

The government has set a tax-to-GDP target of 9.6 per cent for the fiscal year 2009-10 which is higher than nine per cent of last year.

The carbon tax would have added Rs122 billion in the tax income of the government which could help it achieve the tax-to-GDP ratio this year,' said Farhan Mahmood, a senior analyst at JS Research.
Total revenue target for the current fiscal year is Rs2.17 trillion. Tax revenue targeted is at Rs1.5 trillion.

Indications from the government side show that Supreme Court decision could be contested, but immediate decision could be to restore the PDL that would certainly increase prices of petroleum products.
When PDL was replaced with carbon tax, levy on petrol and diesel was Rs10 and Rs8 per litre, respectively.

'International oil prices have fallen by $9- $10 per barrel during the last week (since replacement of PDL). If the PDL is restored, an upward revision in retail prices by Rs5- 6 liter is expected,' said Mahmood.

Experts said if prevailing oil prices remain intact for the entire 12 months of the current year, the government could earn a non-tax revenue of about Rs110 to Rs120 billion. The oil price is currently at $63 per barrel.

If oil prices fall further, the government could generate additional revenue by not passing on benefit to consumers. 

International economists and analysts are of the view that financial crisis was still not over and economies are under recession. Once recession is over, the global economy would begin to recover that may take time.

'The slowdown of global economic growth may not allow oil traders to increase prices and the government could enjoy a possible fall in oil prices by generating higher revenue and lower foreign exchange spending,' said another analyst.
'Carbon Tax suspension has provided another point for heated dialogue in the meeting with the IMF,' said the analyst.