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Huzaima Bukhari & Dr. Ikramul Haq
The low degree of accountability of expenditures has made the revenue collection system more vulnerable to frequent restructuring. Placing responsibility to bridge the widening gap between revenue and expenditure on the shoulders of FBR alone will not prove successful—Thieves of State, Rashid Javaid Rana
The Federal Board of Revenue (FBR), under the leadership of Syed Muhammad Shabbar Zaidi, a renowned chartered accountant and tax expert, appointed from the private sector on May 7, 2019, has collected taxes of Rs. 2080 billion during the first half of current fiscal year (FY 2020) that is 16.95 percent higher than Rs. 1784 billion collected in the corresponding period of last fiscal year. However, the collection missed revised revenue collection target by a margin of Rs. 287 billion. The target set was of Rs. 2367 billion.
According to reports, FBR officials are expecting further addition of Rs. 2-4 billion in book adjustments when the final figures are compiled. They are obviously jubilant that their performance is much better than expected. They also expect more funds as in the late hours of December 31, 2019, FBR extended yet again the date for filing of income tax returns/statements for the tax year 2019 until January 31, 2020. The extension is made available to all individuals (salaried and non-salaried), association of persons and companies. It is reported in the Press, that FBR received till the last day of 2019 about 2.15 million returns as against 1.5 million received during the same period of last year.
FBR’s spokesperson, Dr. Hamid Ateeq Sarwar, told the media that “the date is extended to receive another 600,000 due returns”. What is the exact size of tax base? Many say we should receive at least 6.5 million tax returns as out of tax force of 65 million, not less than 10% earns taxable income! They blame weak enforcement and capacity issues of FBR for this gap in the number of filers. All the registered 164 million cellular users as per Pakistan Telecommunication Authority as on November 30, 2019 were paying advance and adjustable income tax of 12.5%. Out of them how many have taxable income? No study/exercise by FBR so far to determine potential tax filers!!
It is worth mentioning that FBR internally revised the first half year’s target to Rs. 2367 billion from the earlier projection of Rs. 2495 billion. On December 23, 2019, the International Monetary Fund (IMF) agreed to a reduction in full year’s target by Rs. 285 billion—originally set target in the budget was Rs. 5503 billion.
The head-wise collection in the first half year vis-à-vis targets set is as under:
- Customs gross collection at Rs. 325 billion fell short of the target of Rs. 414 billion by Rs. 89 billion or 21.5%. The main reason assigned is drastic fall in imports.
- Gross collection of income tax reported at Rs. 790 billion against the target of Rs. 858 billion registering a shortfall of Rs. 68 billion or 7.92%.
- Sales tax collection on goods on gross basis is Rs. 891 billion, lower by Rs. 59 billion of target assigned—that is shortfall of 6.21%.
- Gross collection under federal excise duty (FED) recorded at Rs126 billion whereas the target was Rs. 144 billion, showing a shortfall of Rs18 billion or 12.5%. .
According to reports, FBR claimed that during the first half of the current fiscal year, it paid Rs. 53 billion refunds to taxpayers, mainly to exporters. Rs. 22 billion refunds for sales tax and Rs. 8 billion for income tax were paid through bonds. The taxpayers say total refunds payable, determined not disputed, are still to the tune of over Rs, 250 billion—FBR denies but does not give the exact party-wise figures. We need an independent committee under Federal Tax Ombudsman (FTO) that should investigate and settle this controversy once and for all. The real net collection then can only be determined to gauge the true performance of FBR.
The sluggish economy, double digit inflation, high interest rates, and fall in imports, hurting growth, investment and employment is not the concern of donors/lenders as evident from their various reports/papers. According to a report, IMF cuts FBR’s tax target to Rs. 5.238 trillion, “The International Monetary Fund (IMF) has projected significant fiscal slippages and has finally cut the tax collection target to Rs5.238 trillion, which raises questions over claims of bringing fiscal discipline and restoring macroeconomic stability…Pakistan’s budget deficit will slip from the projected 7.3% of GDP or Rs3.2 trillion to Rs3.4 trillion or 7.6% of GDP, according to the IMF”.
The World Bank in an appraisal paper related to Pakistan Raises Revenue (PRR) has termed “vested interests lobbying for tax exemptions, internal tensions and wariness of change among the Federal Board of Revenue (FBR) staff, and potential disputes affecting provinces’ readiness to collaborate with the FBR as high-risk factors” for tax reforms. The World Bank has estimated “Pakistan’s tax gap at 10% of the GDP or Rs. 3.8 trillion. Our current tax-to-GDP ratio is 12.6% that according to the World Bank should be 23%”.
The important question for the remaining six months of the current fiscal year is: Does the Government possess any workable plan to bridge the huge fiscal deficit of 7.6% of GDP forecast by the IMF for FY 2020? Will the actions proposed by the World Bank under its US$ 400 million ‘Pakistan Raises Revenue Project’ or conditions imposed by the IMF help meet the daunting challenge of debt servicing that has increased to over Rs. 3000 billion? If FBR does collect Rs. 5 trillion, 57% will go to provinces and federal government will be left with no more than Rs. 2500 billion (customs collection is not part of NFC Award). One head, debt servicing alone is more than what federal government retains as taxes after transferring shares of provinces in terms of 7th National Finance Commission (NFC) Award. What is the remedy? Not destroying the ailing economy with more regressive/oppressive taxes, but to reduce monstrous wasteful expenditure—increased many a times and now current account allocation alone to go to 25% of GDP exceeding budget projections! This is where the actual fault lies, as pointed out rightly in Thieves of StatebyRashid Javaid Rana, “The vigorous campaign to reform revenue collection may not prove fruitful without understanding prevailing symptoms such as the lack of societal tax culture, absence of equitable and transparent government spending…..Placing responsibility to bridge the widening gap between revenue and expenditure on the shoulders of FBR alone will not prove successful.”
Perpetual failure of FBR to meet assigned targets is not something new. A large part of the blame goes to political masters who keep on giving amnesties, waivers and immunities. During the last fiscal year, negative growth of 0.4% in revenue collection was the result of policies of appeasement on the part of PMLN and then PTI—both gave unprecedented concessions to ‘Thieves of State’—see detail in Amnesties & tax losses[Huzaima & Ikram, 2019].
Every year FBR fails to collect downward revised target what to speak of originally assigned one in the budget estimates because the tax evaders and avoiders are the favourite children of political masters—lip service against corruption that includes tax evasion but we are not ready to recognise it is an ugly joke.
The ever-widening fiscal deficit, resulting in more borrowing and taking away a large part of the budget for debt servicing, cannot be reduced until (i) we curtail unproductive/ wasteful expenses by 30% (ii) increase non-tax revenues by leasing out valuable state lands and assets e.g. GORs and palatial government houses etc through public auction and for specific activities to generate employment and boost economic activity and (iii) make taxes at all levels—federal, provincial and local—simple, low rate and broad-based, and payable with ease to one federalised agency.
Successive governments have failed to end harmful tax policies, refrained from giving amnesties and immunities to ‘Thieves of State’ and reduce wasteful expenses. No serious effort has been made by any government to broaden the tax base through lowering of rates, effective enforcement and reduction of unproductive/wasteful expenditures. Unfortunately, till today, the PTI is also no exception!
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The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)