Cash-strapped Pakistan is set to miss the International Monetary Fund's condition to refund Rs 75 billion to taxpayers. The country will likely miss the condition in the first quarter despite an incentive by the global lender, a media report said on Friday. The International Monetary Fund (IMF) had offered to soften the tough primary budget deficit reduction target if the country performs better in tax refunds. A loan deal of USD 6 billion is in place.

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Pakistan expected to reduce the primary budget deficit

Under the USD 6 billion IMF loan deal, Pakistan is required to reduce the primary budget deficit, calculated by excluding interest payments, to Rs 276 billion in the current fiscal year 2019-20 from last year's level of Rs 1.350 trillion, The Express Tribune reported. According to the IMF, the first quarter's primary budget deficit target is Rs 102 billion, which can be relaxed to an extent if the government pays more than Rs 75 billion in tax arrears. Against the quarterly target of reducing the tax arrears by Rs 75 billion, Prime Minister Imran Khan-led government has so far cleared Rs 22 billion of the arrears, which are only 30 per cent of the targeted amount, according to figures released by the Federal Board of Revenue (FBR) this week. If the government released the remaining Rs 53 billion, it would adversely hit the challenging quarterly revenue target of Rs 1.071 trillion, also given by the IMF.

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The FBR has set Rs 1.111 trillion target for the July-September quarter, the report said, quoting sources. The key reason behind the low disbursement of tax refunds was a highly ambitious annual revenue collection target of Rs 5.5 trillion. Despite setting a relatively low target of Rs 644 billion, the FBR could collect only Rs 580 billion in July and August, missing the two-month goal by Rs 64 billion. Sources said the FBR's plan was to release a certain amount of refunds through promissory notes that it issued at a fixed rate of 10 per cent. They said the promissory notes could not be issued at a faster pace due to the banks' reluctance to accept these notes as collateral. The State Bank of Pakistan (SBP) was also unwilling to treat these notes as part of the statutory liquidity ratio of banks, the report said.

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SBP view on the situation

The SBP's view was that these notes could not be treated as a debt due to certain legal obstacles, according to the FBR sources. Both the targets of enhancing revenues and clearing refunds were contradictory in nature for the FBR, which has shown inflated collections on many occasions by blocking refunds. According to the report, Adviser to Prime Minister on Finance Abdul Hafeez Shaikh held meetings with FBR officials aimed at knowing the status of tax refunds and the possibility of collecting Rs 5.5 trillion. The initial assessment was that there was no possibility of collecting more than Rs 4.8 trillion in the given economic conditions, said the sources. FBR's Member Inland Revenue Policy Hamid Atiq Sarwar told the National Assembly Standing Committee on Finance last week that the FBR may collect Rs 4.8 trillion to Rs 5.2 trillion in taxes.

"Total outstanding refunds stand at over Rs 500 billion," a top FBR official told the daily a few days ago.

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The figure has been compiled on the basis of individual reports received from all field formations. However, the FBR had not shared the Rs 500 billion arrears with the IMF. It has shared only the processed refunds, which have also not yet been finalized, the report said. In the upcoming review of the IMF programme, Pakistan and the IMF will again discuss the refund payment target as the government's understanding is that the current year's refund payments should only be according to the current year's flow of refunds. But the IMF indicative target required the government to return Rs 75 billion to the taxpayers in the first quarter and then Rs 57.5 billion in each of the remaining three quarters.

The IMF staff-level report has shown that the global lender has linked the refund payments with the primary budget deficit target. If the government releases more than Rs 75 billion in refunds before September 30, the primary budget deficit target of Rs 102 billion will be relaxed by the same amount. However, it seems the government has missed the opportunity of providing relief to the industrialists by not taking advantage of this incentive.

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