Huzaima Bukhari & Dr. Ikramul Haq
It is heartening to note that despite the challenges faced by economy due to Covid-19 endemic, followed by complete and partial lockdowns till now and contraction in imports, the Federal Board of Revenue (FBR) is performing well. According to Press release issued by FBR, it collected “Rs. 1337 billion net revenue in the current Fiscal Year from July to October whereas it was Rs. 1288 billion in the previous year”. It says, “This collection is after issuing refunds of Rs. 128 billion against only Rs. 52 billion last year”. For the month of October alone, total revenue collection was Rs. 333 billion as compared to Rs. 325 billion in the same month last year. The bifurcation given in the Press release shows: “Income Tax collection for July to October stood at Rs. 470 billion. Similarly, collection of Sales Tax, Federal Excise Duty, Customs Duty remained at Rs. 643 billion, Rs. 81 billion and Rs. 206 billion respectively. FBR has collected gross revenue of Rs. 1400 billion in the first four months from July to October which was Rs. 1323 billion in the previous year thus showing an increase of Rs. 77 billion in the current year”.
The Press release further elaborates as under:
“The refunds issued during the month of October this year are over Rs. 15 billion which were Rs. 4.5 billion in the corresponding month last year. Despite increase in refunds, FBR has still managed to cross the revenue collection of October last year.
FBR’s appreciable performance is despite the fact that the economy has been sluggish in the wake of on-going COVID-19 pandemic. Moreover, the Government had extended significant tax relief measures to the public in the Finance Act, 2020 and there was drop in revenues at import stage at 2 %. However, the domestic revenues grew at 13 % in these four months which reflected taxpayers’ growing confidence on the revenue measures being taken by the present government.
During the first four months of current Fiscal Year, smuggled goods worth Rs. 21.48 billion have been seized as compared to seizures of Rs. 13.40 billion during the corresponding months of 2019.
FBR is fully geared towards automation, e-audit, and simplification of procedures, e-payment of duty draw back so as to add to Ease of Doing Business (EoDB). Furthermore, FBR has launched an effective crackdown against corruption, harassment, and misuse of authority. FBR has introduced a simplified one pager Income Tax Returns for the retailers in the current Tax Year. Moreover, FBR has also uploaded Income Tax Returns in Urdu and Regional languages for the retailers and salaried people. FBR has appealed the taxpayers to avail these facilitative measures and ensure filing to Annual Income Tax Returns before the last date i.e. 8th December, 2020”.
Indeed, the present team of FBR, especially the Members (Inland Revenue—Operations) and Member (Customs—Operations) deserve appreciation, as well as the other members and Chairman/Secretary Revenue Division, who is still holding additional charge of these posts, apart from performing duties as Member (Customs—Policy). It is not wise on the part of the Government of Pakistan Tehreek-i-Insaf (PTI) to give additional charge for such an important position. No outsider can run FBR efficiently for lack of firsthand knowledge of difficulties faced by field formation due to lack of facilities and proper training. It is advisable to select a person from within FBR as Chairman/Chairperson and Secretary Revenue Division. The present Chairman FBR and his team have so far performed excellently. The PTI Government must not treat any senior officer on probation for the position of Chairman FBR and Secretary Revenue Division. FBR’s collection matters for the entire country. If it fails to opitimise collection, the provinces also suffer having larger piece of cake—57.5% share under 7th National Finance Commission (NFC) Award.
We all know that presently all broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues [Rs. 4748 billion] for the fiscal year 2019-20 [11.4% of GDP] was merely 8 percent and in overall national revenue base (tax and non-tax revenue) of Rs. 6272 billion [15% GDP]. It was 9 percent against the total national expenditure of Rs. 9648 billion. All provinces together generated taxes of Rs. 414 billion and non-tax revenues of only Rs. 102 billion in fiscal year 2019-20.
The data released by the Ministry of Finance for First Quarter of the current fiscal year (July to September 2020) also shows that under the extraordinary circumstances of sluggish economy due to Covid-19 endemic, the main challenge is on expenditure front and not revenue side. The expenditure of Rs. 742 billion on debt servicing (domestic debt Rs. 685 billion, 39 percent higher compared to the corresponding period last year, and foreign debt servicing of Rs. 57 billion, lower of 27 percent, due to temporary moratorium from G20 countries) and defence spending of Rs. 224 billion, down by 7.7% or Rs. 18.6 billion, together were equal to 95.5% of total collection by FBR from July to September 2020. Debt servicing was equal to 73.5% of FBR’s revenues and defence spending was equal to 22% of the tax revenues.
On the non-tax revenue front, collection by federal government was Rs. 356 billion and all the provinces combined collected merely Rs. 200 million. The net federal receipts, after transfer of share of four provinces under NFC Award, comes to Rs. 1.35 trillion, showing decrease by Rs. 6 billion over the same quarter of previous year. The share of provinces in federal collection also reduced by Rs. 108 billion or 18% to Rs. 504 billion, despite a 4.7% increase in FBR’s tax collection. This is the real challenge for the federal government that after meeting debt servicing, transfer to provinces and defence, it is left with little or no money. The overall fiscal deficit was Rs. 84.3 billion or 1.1 percent of GDP, though primary balance at Rs. 257.7 billion showed the surplus at 0.6 percent of GDP.
It is rightly noted in Fiscal roundup: 1QFY21, Business Recorder, November 10, 2020: “The higher deficit is due to increase in government spending on Covid related relief package, lower taxation growth due to economic slowdown, and higher debt servicing despite the fact that interest rates are almost halved. This is due to issuance of long-term debt (PIBs) at peaking rates. Even one-year papers are still carrying high rates. In subsequent quarters, debt servicing will come down. Moreover, the currency appreciation in the second quarter would dilute the external debt servicing too”.
While the federal government is accumulating debts [Unshackling debt shackles, Business Recorder, November 6, 2020], the provinces are heavily dependent on transfers from NFC Award. In the first quarter of the current fiscal year, federal tax collection was Rs. 1122 billion and all provinces collected only Rs. 112 million. The deficit is thus due to increase in expenditure, especially the monstrous debt servicing. In the circumstances, it is essential to revisit the entire scheme of NFC Award [Federation, taxes & distribution—I, Business Recorder, October 9, 2020, Federation, taxes & distribution—II, Business Recorder, October 11, 2020 and Need to reconsider fiscal management, Business Recorder, September 4, 2020].
The solution as proposed in the above articles is to move towards harmonised sales tax on goods and services for which there is a need to debate in public and Parliament for reaching a consensus. The total collection by imposing unified sales tax on goods and services can reach nearly Rs. 4000 billion as against collection of around Rs. 1596 billion by FBR in 2019-20 through sales tax on goods and cumulatively of Rs. 232 billion by provinces through sales tax on services. The additional revenue collection of nearly Rs. 2000 billion will not only give fiscal space to the federal government to narrow down fiscal deficit but will also enhance distribution amount to the provinces. Distribution will be strictly as per Article 160 of the Constitution.
The failure to tap real tax potential at national level poses a tough challenge to both the federal and provincial governments. For this the solution was given in Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’, Business Recorder, August 31, 2018, but ignored by the coalition governments of PTI Government in three provinces and Pakistan Peoples Party (PPP) in Sindh. In the National Economic Council, an agenda for having efficient All Pakistan Tax Service and establishment of single national tax collection agency should be discussed. Indeed, Pakistan needs a paradigm shift in the existing tax policy and revamping of entire tax administration. The federation and federating units must seriously consider establishing Pakistan Revenue Board or Authority (nomenclature hardly matters) capable of generating sufficient resources for the federal and provincial governments. The size of the cake—divisible pool—is so small that nothing substantial can be done to come out of debt enslavement and to spend adequately for the welfare of the people, no matter which part of the country they belong to.
With the existing fragmented tax administration at federal and provincial level and high tax rates, we cannot increase growth. Growth alone can help Pakistan to come out of debt trap. The modern and fully automated national tax agency, manned by professionals working under All Pakistan Unified Tax Service, can collect sufficient taxes for all tiers of governments—federal, provincial and local—to come out of the present fiscal mess, thus providing relief to the poor, as well as trade and industry. Under the given scenario, federation-provinces fiscal woes will continue unabated. Taxes collected at local level should be spent exclusively for giving free education, quality health services, decent housing and transport as well as all modern civic amenities to the local residents as ordained in Article 140A of the Constitution. Unless, it is done, more and more people will be pushed below the poverty line and dream of making Pakistan a welfare state will not be materalised.
The way forward is imposition of harmonised sales tax on goods and services, and all incomes, from whatever source, should be taxed at a uniform rate that should be low but broad-based without any exemptions or waivers and strong enforcement—withdraw unnecessary burdensome withholding provisions, take concrete measures for ease of doing business, reduce taxes, but collect the same firmly and fairly, and cut wasteful expenses drastically. This will help both the federal and provincial governments to reduce, even eliminate fiscal deficit, increase development outlays and boost growth in the challenging times of Covid-19 endemic. The higher and sustainable growth of at least 6% for a decade in all sectors, especially in agriculture to meet local needs of all commodities and create exportable surplus, and target of value-added diversified exports, especially in much-ignore IT sector, are not possible with excessive taxes and high cost of doing business, especially with exorbitant fuel/energy prices. The all-out reforms [Taxation hindering investment, Business Recorder, August 21, 2020] alone can reduce fiscal deficit and create a prosperous nation free of debt quagmire.
The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).