Over reporting, faulty fixation
Huzaima Bukhari & Dr. Ikramul Haq
In document titled, Federal Budget 2020-21: Budget in Brief, revised version presented by Ministry of Finance (MoF) many days after announcement of federal budget for fiscal year (FY) 2020-21 on June 2, 2020, the collection of Federal Board of Revenue is overstated and target for the next FY is fixed ambitiously. This is a serious matter, as it not only reflects on fiscal mismanagement but also would be detrimental for provinces that have prepared and already announced their budgets based on projection given by the federal government of their share in revenues under the 7th National Commission Award (NFC). The over-fixation of tax targets by the federal government and later lesser distribution as promised, except in the case of Balochistan that has a fixed share under 7th NFC Award, means imprudent budgeting and lack of transparency in fiscal matters.
It is worthwhile to mention that Rs. 3.207 billion collected on account of Workers’ Welfare Fund (WWF) is shown as tax collection of FBR and refunds of billions are still pending! This is clear overstatement of collection by FBR. Target of WWF as per document [Table 4: FBR 4—FBR Taxes] for FY 2019-20 achieved at Rs. 5,050 million and target for FY 2020-21 is set at Rs. 3,207 million. It is in utter violation of judgement of Supreme Court (2017 PLD 28) holding that WWF contributions do not constitute a tax. The 18th Constitutional Amendment in 2010 devolved the subject of labour to the provinces and Sindh and Punjab have already legislated their respective Workers’ Welfare Fund Laws. FBR no longer can collect WWF on their behalf. The collection on behalf of Khyber Pakhtunkhwa and Balochistan belongs to them but blatantly shown as FBR’s receipt. It shows that the MoF while preparing budget, and Cabinet at the time of its approval overlooked the Constitutional position and binding judgment of Supreme Court.
The Annual Budget Statement containing estimated receipts and expenditure laid before the National Assembly of Pakistan for FY 2020-21 in terms of Article 80(1) of the Constitution gives revised estimate of FBR’s collection for the current fiscal year at Rs. 3908 billion against the original budgeted target of Rs. 5555 billion. The FBR’s target for next FY 2020-21 is fixed at Rs. 4963 billion (27% increase). How has this increase been calculated is not explained, when as per claim of PTI Government “tax-free budget is presented”. Let us remind Dr. Hafeez Shaikh that the target assigned to FBR for last year was Rs. 4435 billion, which was revised downwards twice [first to Rs. 4398 billion and then to Rs. 4150 billion] yet it collected only Rs. 3828.5 billion (0.4% lesser than the collection of the previous fiscal year). This has resulted in an all-time high record of fiscal deficit of 8.9% of GDP as per State Bank of Pakistan’s ‘Annual Report 2018-19—The State of Pakistan’s Economy’.
The failure to tap actual tax potential by the federal government is highly problematic for the provincial governments. Dismal performance byFBR, it never collected even Rs. 4 trillion that adversely affects the provinces, as they overwhelmingly depend on their shares under NFC Award.
It is pertinent to highlight that Dr Abdul Hafeez Shaikh, Adviser to the Prime Minister on Finance and Revenue, in a statement, “advised the provinces not to make their budgets on the basis of proposed Rs. 4.963 trillion tax collection target fixed for FBR for fiscal year 2020-21” and added: “The provinces should make their budgets while keeping in mind the Federal Board of Revenue’s past performance and difference between performance, projections and reality”. This is a mockery of fiscal management that he himself is admitting that revenue target fixed for FBR is not dependable. Nowhere, in the world, any government will deal with fiscal management in such a non-professional/casual manner.
Dr. Ashfaque H. Khan in Setting FBR target for 2020-21[Business Recorder, June 11, 2020] noted: Projecting budgetary targets, in general, and tax revenue, in particular, with a fair degree of accuracy is an essential element of sound fiscal management and, therefore, of maintaining fiscal discipline in the country…If they persist on setting an unrealistic revenue target like that of last year, it will have multiple implications for fiscal discipline in the country…… FBR Revenue for 2020-21 equal to Base Year Revenue multiplied by the product of nominal GDP growth rate and tax elasticity (9.5 x 0.85 = 8.1%)….Rs 3,850 x (1.081 = Rs 4,162 billion. Assuming some additional efforts, which will be made by the FBR administration, the tax target should not be more than Rs 4,250 billion.
FBR has collected Rs. 3534 billion during July 2019 to May 2020 and in June 2020 for meeting the revised target needs to collect Rs. 374 billion, which appears an uphill task due to disastrous impact on economy in view of Covid-19 pandemic. It is an established fact 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. It was later revised to Rs. 4803 billion on the eve of incomplete second IMF review, held prior to Covid-19 pandemic, and after virus outbreak, finally reduced to Rs. 3908 billion.
Fixing of unachievable tax target for FBR is continuation of the past legacy of ill-directed, illogical, regressive and unfair taxes causing a dampening effect on the industrial and business growth whereas in the aftermath of negative economic impact of Covid-19 epidemic, Pakistan needs to do just the opposite. Sole stress on fixing ambitious revenue targets, without evaluating its impact on already troubled economy will certainly further destroy trade and industry. Majority of the measures announced in Finance Bill 2020 amounts to over-taxing the economy that is in deep recession. It is the worst one can think of, let alone justifying it on any grounds!
The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)