Islamabad:
The International Monetary Fund (IMF) has again raised the issue of imposing additional fertilizer taxes and introducing an excise tax on pesticide use to partly offset a shortfall in the annual fiscal target, which the government has asked to be postponed until next year.
The global lender has asked the government to trigger the contingency measure by doubling the federal excise tax rate on fertilizers to 10% and introducing a 5% federal excise tax on pesticides, according to government sources involved in the negotiations with the IMF. Sources said that during the ongoing discussions, the IMF team observed that the Federal Board of Revenue (FBR) could fall short of its target by at least Rs 400 billion to Rs 500 billion, depending on several factors.
However, the IMF may not immediately reduce the target or press to cover the entire projected deficit through additional measures. With just two days left in the talks, it is possible that the IMF will agree to reduce the target from around Rs167 billion to Rs240 billion, the sources added. The development comes at a time when at least 3.3 million acres of land is underwater in Punjab, and 27 districts, mostly rich in cash crops, have suffered medium to high losses. The provincial government is finalizing an assistance package.
Officials said the IMF did not press hard after the government assured it that such measures would be required in the next review if the FBR’s tax collection remains below the revised estimates.
The issue remains open for discussion, and the final position will be known once the latest version of the Memorandum of Economic and Financial Policies (MEFP) – the set of conditions that Pakistan will follow for the next review – is shared.
The government had set a tax target of Rs14.13 trillion for the FBR, but during the first quarter, the collection failed by Rs198 billion.
The new FBR target could be between Rs13.963 trillion and Rs13.89 trillion, according to FBR officials. They said the revision could involve reducing the sales tax target from 240 billion rupees to just below 7 trillion rupees for the current fiscal year.
The agriculture sector is already struggling after the government abruptly withdrew the agricultural support price mechanism without timely notice to farmers, said Syed Naveed Qamar, former finance minister of the Pakistan Peoples Party (PPP). Qamar said his party would oppose any decision that increases the cost of agricultural inputs, especially at a time when floods and withdrawal of wheat support price have negatively affected farmers’ incomes. The sector is grappling with climate change and limited water availability, he added.
Meanwhile, the Sindh government on Monday extended the deadline for filing Sindh agricultural income returns by one month to October 30, according to a notification from the Sindh Revenue Board. This will be the first tax return the farming community will file under new provincial income tax laws, implemented as part of the $7 billion IMF bailout package.
The issue of increasing taxes on fertilizers and pesticides also surfaced in June this year. However, following opposition from the PPP, Prime Minister Shehbaz Sharif asked the IMF to postpone the issue. If the government’s latest request for a delay is accepted, it will be the second time in three months that the IMF has changed its position on the issue.
However, the IMF’s renewed focus on the issue raises questions about timing, given the severe strain the agricultural sector is already facing. The sector has suffered losses and as a result, overall economic growth is likely to remain below target.
Against the government’s target of 4.2%, sources said the IMF had forecast economic growth of 3% and below 3.5% for the current fiscal year.
The IMF noted that recent floods have weighed on the outlook, particularly for the agriculture sector, given the damage to major crops in Kharif. The lender continues to project relatively weaker economic growth in the medium term.
Sources said the IMF believes that effective implementation of economic policies can help the economy strengthen macroeconomic stability, increase external competitiveness and improve the business environment of the private sector, supporting a gradual growth pickup to 4.5%.
At the time of negotiations for the $7 billion rescue package, the federal government committed to ending preferential treatment to reduce distortions. He explicitly told the IMF that “its large-scale interventions in agricultural commodity markets, including fertilizers, are no longer fit for purpose” to ensure food security.
The low or no federal excise tax (FED) rate on fertilizers and pesticides has been described as “distorting private sector activity and innovation, exacerbating price volatility and hoarding, and placing fiscal sustainability at risk.”
The IMF and the federal government believe that excessive use of fertilizers by farmers contributes to environmental pollution.
Meanwhile, Planning Minister Ahsan Iqbal on Monday chaired the first meeting of the Cabinet Committee on Agriculture, Climate and Flood Emergencies constituted by the Prime Minister.
The minister stressed the urgency of providing canola seeds to farmers within 15 days to take advantage of the soil moisture left by the floods. “I have organized a 5,000-acre canola seed pilot project in Narowal through corporate sponsorship because we cannot afford to waste time. This is a time for urgent action – we must not waste it,” he said. IQBAL has also established three working groups, which will prepare detailed reports on immediate agricultural relief and seed provision, climate change impacts and resilience strategies.
