The government is "alarmed and clueless" about how to fulfill the conditions by the May 27 deadline, the PakTribune reported. Analysts say it will be hard for the government to take the required measures, both deeply unpopular, in such a short timeframe.
Increasing power charges and imposing VAT are seen by the International Monetary Fund (IMF) and World Bank as necessarysteps in increasing revenue for the cash-strapped government.
The World Bank has told Pakistani authorities that they will have to show clear-cut progress on three actions by May 27, after which documents will be circulated among the World Bank's board of directors on the basis of which it will consider approval of $300 million under the Poverty Reduction Support Credit at its scheduled meeting on June 29 in Washington DC, the PakTribune reported, without citing sources. The third required action is the establishment of single treasury accounts.
If Pakistan successfully implements the VAT and power tariff conditions, the approval of $300 million will be made during the World Bank meeting, Dawn newspaper reported, without citing sources.
A less rigid stance by the World Bank was reported by Pakistan's Daily Mail, which said the World Bank will continue its assistance program for Pakistan even if Islamabad fails to implement an integrated VAT from the next fiscal year, which starts on July 1.
"But Pakistan will have to give credible reasons for the failure," the Daily Mail report said, quoting an unidentified "top source" at the bank.
The central government at present is at loggerheads with the government of Sindh province, which wishes to keep control over the collection of VAT on services. Prime Minister Yousaf Raza Gilani is expected to convene a meeting this week to resolve the stalemate.
Islamabad has already failed to meet an April 1 IMF deadline for increasing electricity tariffs, while VAT is a requirement the IMF set when it agreed in in November 2008 to give Pakistan a US$7.6 billion emergency package to avert a balance of payments crisis. The amount was raised to $11.3 billion last July.
The World Bank has been assisting Pakistan in preparations to introduce VAT during the past year, even as business communities across the country have argued strongly against it. Rules and regulations have been finalized for implementation of the tax from July 1.
The Pakistani business community wants VAT to be postponed for the next two to three years so that tax authorities can develop a payment mechanism and remove anomalies in the proposed VAT regime.
"The government has been urged to amend the proposed VAT law, create awareness on the subject among prospect taxpayers by holding seminars and using other effective tools to spread related information and improve confidence of the taxpayers," The News reported Zakaria Usman, vice president of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), as saying. "Every country in the world, wherever the said tax is collected, designed it in accordance with the prevailing conditions."
Critics also say that VAT will add to inflationary pressures prices. Replacement of the existing general sales tax (GST) with VAT would increase the prices of over 122 categories of items including food by at least 15%, The Nation reported. About 22 categories in the food group and agriculture, currently exempt from GST, would be brought under the tax net through VAT, it said.
Some analysts believe that imposition of VAT could spark widespread tax evasion as a protest from businesses and a public that has been ill-prepared for the change.
The general population and industry are already feeling the burden of rising prices for petroleum products, electricity and gas, which the government has raised steadily since January, in line with its IMF bailout terms. Inflation rose to a three-month high of 13.26% in April, as the impact of increased oil costs pushed up the price of food.
Cutting inflation by raising interest rates is made more difficult by the fact that these are already among the highest in the world. This week, the central bank kept its policy discount rate unchanged at 12.5%, where it has held since it was cut three times in 2009.
Pakistan’s discount rate is the highest among the benchmark interest rates of 53 central banks, according to the Bloomberg. The equivalent rate in neighboring India is at 5.7%, while Lebanon’s repurchase rate is the second-highest at 12%.
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