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Huzaima Bukhari & Dr. Ikramul Haq
The budget for fiscal year 2020-21, the second one of coalition Government of Pakistan Tehreek-i-Insaf (PTI), is expected on June 12, 2020 when Covid-19 economic toll has already affected businesses and individuals on a massive scale. Prime Minister and his Adviser on Finance & Revenue have promised to present a tax-free, business-friendly and pro-people budget. On the other hand, the Federal Board of Revenue (FBR) is saying that tax target for next fiscal year will be Rs. 5.1 trillion despite an anticipated minus growth in this and possibly in the coming fiscal year due to prevailing uncertainty. FBR collected Rs. 3534 billion From July 2019 to May 2020. Most definitely FBR is going to miss the originally fixed target [Rs5555 billion] by a huge margin and this time they have an excuse, disastrous impact on economy due to Covid-19 pandemic. Though we all know that even prior to Covid-19 outbreak, FBR was far behind even the revised target of Rs. 5238 billion after first review of International Monetary Fund [IMF] under $6 billion Extended Fund Facility (EFF) programme. Later, at Rs. 4,803 billion on eve of incomplete second review held prior to Covid-19 pandemic and after virus outbreak, it was reduced to Rs. 3908 billion.
The collection of FBR in fiscal year (FY) 2018-19 was Rs. 3828.5 billion [target originally assigned was Rs. 4435 billion, which was revised downwards twice, first to Rs. 4398 billion and then to Rs. 4150 billion] which was 0.4% lesser than the collection of previous fiscal year [source: FBR Year Book 2018-19]. Thus, it missed the target by around Rs. 321.5 billion! It is an undisputed fact that FBR has not only miserably failed to tap the real tax potential despite imposing all kinds of oppressive taxes, it has been destroying economic growth by anti-business actions for decades, especially during 2008-18.
For the fiscal year, 2017-18, revenue target was Rs. 4013 billion that was later revised downwards to Rs. 3935 billion. FBR collected only Rs. 3751 billion. It collected income tax of Rs. 1441 billion against the target of Rs. 1562 (deficit of Rs. 121 billion). Sales tax collection at Rs. 1488 billion against target of Rs. 1541 billion witnessing a shortage of Rs. 53 billion. FBR also faced a shortfall of Rs. 16 billion under the head Federal Excise Duty as it collected Rs. 216 billion whereas the target was Rs. 232 billion. Only collection under customs exceeded the target by Rs. 6 billion against the assigned target of Rs. 600 billion. The overall shortfall of Rs. 184 billion vis-à-vis the revised target of Rs.3935 billion and that of Rs. 262 from original target pushed the fiscal deficit to a record Rs. 2.5 trillion as on June 30, 2018. The total revenue collection by FBR in 2016-17 was Rs. 3368 billion. It missed the original target by a wide margin of Rs. 250 billion. In 2015-16, FBR, despite imposing additional taxes of Rs. 360 billion, allegedly blocking over Rs. 220 billion refunds and taking Rs. 30 billion as advance failed to meet the third-time revised target showing shortfall of Rs. 222 billion vis-à-vis original target of Rs. 2810 billion, which was first reduced to Rs. 2691 billion and then to Rs. 2605 billion.
Income tax collection in fiscal year 2014-15 was Rs. 1033.7 billion and projection for 2015-16 was Rs. 1307 billion. The actual collection, reported by FBR, is Rs. 1220 billion—showing shortfall of Rs. 87 billion. Collection of sales tax in 2014-15 was Rs. 1088 billion and projection for 2015-16 was Rs. 1230.3 billion. By raising sales tax on POL products from 17% to 30-50%, the government managed to collect Rs.1329 billion in 2015-16. Customs collection in 2014-15 was Rs. 306 billion and projection for 2015-16 was Rs. 348.5 billion. After levying regulatory duty on over 300 items, it was increased to Rs. 404 billion in 2015-16. Federal Excise collection in 2014-15 was Rs. 162 billion. Against projection of Rs. 200.9 billion, actual collection for 2015-16 was Rs. 177 billion.
Past record of FBR is simply disappointing as above number prove beyond any doubt. This year due to exceptional circumstances, Finance Bill 2020, unlike the previous ones, should not be a hopeless document—containing meaningless amendments in tax codes, imposing more burden on the existing taxpayers—especially through cumbersome withholding of taxes—with no policy shift to enable businesses to survive and revive. It should contain some evocative changes in our tax system that can save all businesses. Proposals from trade and other bodies are with the FBR and Ministry of Finance (MoF) but these are routine ones seeking patchwork here and there. These bodies lack vision to prepare and advocate for a new tax model that is simple, fair, growth-oriented and easy to comply. Taxation in Pakistan is oppressive, lopsided and counterproductive—there is only 2% of corporatization of total business. By heavily taxing corporate sector, FBR has been encouraging undocumented sector. We now need a low-rate, broad-based and equitable tax system as highlighted recently by Pakistan Institute of Development Economic (PIDE) in Policy Viewpoint [16:2020], Doing Taxes Better: Simplify, Open & Grow Economy . The model to implement this new tax policy is available in Towards Flat, Low-rate, Broad and Predictable Taxes [Policy Research Institute of Market Economy (PRIME), 2016].
Taxation should serve as a catalyst for industrial expansion and economic growth. In the past, the ill-directed, illogical, regressive and unfair tax regulations have been causing a dampening effect on the industrial and business growth. The sole stress on meeting revenue targets, without evaluating its impact on the economy, has crippled especially our trade and industry. Had the successive governments concentrated on economic growth and industrial expansion, there would have been consequential substantial rise in taxes. It is impossible to enhance revenues with stagnation in economy. Now in the new forthcoming budget any attempt to over-tax the collapsing economy due to devastating effects of Covid-19 outbreak will be suicidal.
If the government wants to move from undocumented economy to transparent corporatized sector to achieve growth, the government must reduce corporate rates to 20% and tax non-corporate business entities at a higher rate of 30-35% (flat rate).
There cannot be two opinions about the complete shifting of our economic priorities. We, as a nation must concentrate on increasing our productivity, efficiency and economic growth, which alone can ensure more revenues for the State. The main cause of our pathetic economic situation is existence of inefficient, corrupt, repressive and criminal governments/institutions, which do not give a damn for the welfare of the common people. Successive governments’ onerous tax and regulatory policies on the dictates of the foreign masters have pushed millions of people below the poverty line. We will have to move quickly and decisively to reverse this trend by restoring Pakistan’s undeniable geo-strategic and business competitive position in the region. There is an urgent need to take necessary and tough decisions to make Pakistan a respectable place to live, work and invest.
Devising an efficient tax policy for revival of economy badly hit by Covid-19 pandemic/lockdown as well as world over recession and moving towards growth requires an analytical study of all the irritants in our tax policy, codes, procedures and implementation processes. The main irritants—both at federal and provincial levels—have been highlighted in PIDE’s Policy Paper and Budget 2020 amid Covid-19 Crisis: Need for Paradigm Shift [PRIME Institute, 2020]. It is time that the federal and provincial governments adopt recommendations given by PIDE and PRIME.
We need to end the anti-business, anti-growth and anti-people tax policy and safeguard businesses from closures and lay-offs in the existing exceptional circumstances. PIDE & PRIME have done a remarkable job and the government in the coming budget must remove all the maladies identified and undertake holistic reforms aimed at incentivising businesses to survive/revive and ultimately achieve growth that alone can enhance taxes. The number game of fixing targets in budgets in isolation and without research-based data analysis must end now.
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The writers, lawyers and authors of many books, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).