FBR’s dilemma   

Huzaima Bukhari & Dr. Ikramul Haq

An unusual decline in revenue collection and steep rise in current expenditures caused a deterioration in all major fiscal indicators during FY19. The overall budget deficit during the year stood at a historic high of 8.9 percent of GDP, which was also in excess of the 4.9 percent target set in the Budget 2018- 19. Meanwhile, the primary and revenue balances worsened substantially, highlighting growing debt stress for the government and a shrinking space for the needed development expenditures—State Bank of Pakistan, Annual Report 2018-19—The State of Pakistan’s Economy

For the fiscal year 2018-19, the Federal Board of Revenue (FBR) has yet not published its annual year book. The seasoned chartered account heading this organisation could not complete the task even after lapse of more than four months of the end of the fiscal year 2018-19. It is thus not possible to make detailed analysis of performance of FBR for the last fiscal year. The target assigned to FBR for 2018-19 was of Rs. 4435 billion, but revised estimate, according to Budget Statement for 2018-19, was Rs. 4150 billion. Thus no wonder that fiscal deficit reached all time record of over Rs. 2.5 trillion.

FBR closed fiscal year 2018-19 under renowned tax expert, Syed Muhammad Shabbar Zaidi, and it is hoped that for the first time correct disclosure of collection figures will be provided to the nation after deducting the actual amount of refunds payable—withheld for years merely to show ‘extraordinary performance’ (sic) by stalwarts of FBR. Not only true disclosure is essential but all due refunds should be paid with compensation without any further delay. Stringent action should also be taken against those who criminally avoided giving appeal effects in favour of taxpayers, blatantly violating order of the higher courts and Tax Tribunals.  

According to Shabbar Zaidi, during the first quarter of the current fiscal year, FBR collected over Rs. 960, which is 90% of the target. FBR’s collection increased by 14.83% as compared to Rs. 836 billion in the same period of 2018-19. The revenue collection during September 2019 stood at Rs. 380 billion compared to Rs. 323 billion in September 2018, showing a growth of 17.64 percent. However, according to the reports, FBR missed a quarterly target of Rs. 1,071 billion, reflecting a shortfall of Rs. 111 billion. FBR collected Rs. 580 billion in the first two months, July and August, of 2019. It blamed import compression for this revenue shortfall, as well as negative growth in Customs Duty and Income Tax. The net impact of import compression caused net revenue loss to the tune of Rs. 100 to Rs. 150 billion. “We have already informed the government about the reasons that seriously impacted FBR’s revenue collection during July-September 2019-20,” said an official of the FBR. The revenue collection of Inland Revenues on account of income tax, sales tax on domestic consumption (local stage) and Federal Excise Duty (FED) achieved 25 percent growth but the negative growth on imports has had serious negative implications on the revenue collection, he added.

According to the source, the customs duty and income tax at import stage witnessed negative growth; however, the sales tax at import stage achieved slight positive growth owing to government’s decision to charge sales tax on the basis of the retail price. The policy measures and the administrative steps helped FBR collect more revenue through sales tax at the import stage.

Recently, Pakistan requested the International Monetary Fund (IMF) to reduce the federal tax target for fiscal year 2019-20 by Rs. 300 billion to Rs. 5.2 trillion as shortfall in collection was widened to Rs.167 billion in just four months of the current fiscal year. The request was made despite Prime Minister Imran Khan’s personal commitment to the nation that he would go all out to achieve the Rs. 5.5 trillion tax collection target fixed for the current fiscal year. A Press report claims that the IMF is also sympathetic after its own model-based assessments showed that the collection would significantly fall short of the target assigned. Sources said in case the collection again remained short of the possibly lower target, then the IMF would push for a mini-budget announcement in January. On the insistence of the IMF, the federal government had set the FBR’s tax collection target at Rs. 5.5 trillion or 12.4% of gross domestic product (GDP), requiring an impossible growth of 44% over previous year’s collection. The target had been set on the basis of projected Rs. 4.150-trillion collection in the last fiscal year, which actually stood lower at Rs. 3.829 trillion.

From July through October, the FBR provisionally collected Rs.1.28 trillion in taxes and fell short of its four-month target by Rs167 billion, according to FBR officials. The FBR was supposed to collect Rs.1.447 trillion in July-October of the current fiscal year. The Rs.1.28-trillion collection was 16% or Rs.176 billion higher than the previous year but was largely the result of blocking exporters’ refunds and taking advances from big firms. Had the FBR cleared all the sales tax refunds of exporters and not taken advances, its collection would have further dipped to below Rs.1.15 trillion.

The FBR also had to give extension in the deadline for filing annual income tax returns for tax year 2019 up to November 30, 2019 after the number of return filers remained at around 1.1 million till the last date of filing. In tax year 2018, nearly 2.6 million people and companies filed annual tax returns. In the last fiscal year, the FBR had collected Rs. 3.829 trillion in taxes against the original target of Rs. 4435 billion.

The government of Pakistan Tehreek-i-Insaf (PTI) took Rs. 735 billion worth of taxation measures in the budget 2019-20 while the nominal GDP growth was projected at 15% (3% real GDP plus 12% inflation), which will help collect additional taxes of Rs. 574 billion. The growth in revenue collection in the first four months was at the level of nominal GDP growth of 15%. But the FBR believes that its efforts have been undermined by import compression as there is a healthy growth of over 20% at the domestic stage.

The FBR missed the July-October collection targets of income tax, sales tax, customs duty and federal excise duty despite slapping Rs.735 billion worth of additional taxes and imposing 17% sales tax on local sales of five export-oriented sectors. Against the four-month target of Rs. 498 billion, the FBR provisionally collected Rs. 469 billion in income tax, missing the target by Rs. 29 billion. However, as compared to last year, there was an increase of Rs. 73 billion in the collection, showing a growth of 18.5%.

The sales tax collection stood at Rs. 566.5 billion against the target of Rs. 600 billion, falling short of the target by Rs. 33.5 billion despite blocking sales tax refunds. As compared to last year, the sales tax collection was higher by Rs.114 billion or 25.2%. Federal excise duty collection stood at Rs71 billion against the target of Rs. 85 billion, falling short of the goal by Rs.14.2 billion. But there was 20% or Rs.11.8-billion increase in the excise duty collection in first four months of the current fiscal year. Customs duty collection stood at Rs. 209 billion, below the quarterly target of Rs. 264 billion. The target was missed by Rs. 55 billion. A steep contraction in imports adversely affected the customs duty collection.

Perpetual failure of FBR to meet assigned targets is not something new. For last fiscal year, it was assigned the target of Rs. 4435 billion that was later reduced to Rs. 4013 billion and then to Rs. 3935 billion. It missed second time revised target as well. FBR collected Rs. 3842 billion against Rs. 3361 billion during 2016-17, entailing a growth of 14 percent.

Every year FBR fails to collect downward revised target what to speak of originally assigned figure in the budget estimates. This widens fiscal deficit resulting in more borrowing and taking away large part of budget for debt servicing/payment of principal amount.  Fiscal consolidation is one of the daunting challenges faced by Pakistan. Successive governments have failed to end harmful tax policies and reduce wasteful expenses. No serious effort has been made by any government to broaden the tax base through lowering of rates and effective enforcement.

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 single handedly destroying Pakistan’s growth by anti-business actions especially during 2013-18. The then Finance Minister, now a proclaimed offender of the Accountability Court and suspended senator, gave free hand to tax officials to block bona fide refunds, take undue advances from large business houses, use negative taxes like raising unjust demands and freeze bank accounts for recovery. Exporters and other taxpayers, still waiting for refunds, have been denied lawful right of payments/compensation within stipulated time. Had Ishaq Dar concentrated on growth above 6%, as done by China, India and even Bangladesh in the region, we could have avoided the present fiscal and economic mess. Tax is a byproduct of growth and harsh taxation only hampers expansion and prevents investment in existing and new businesses.     

An in-depth analysis of Year Book 2017-18 of FBR exposes the tall claims of expanding tax base, extraordinary growth in collection and improving tax-to-GDP ratio to a satisfactory level (9% in FY 2013-14 to 11.2% in FY 2017-18). The reality is known to all—higher (sic) collection was due to exorbitant sales tax on POL products, due to over 65 withholding income tax tax provisions and enhancement of their rates, blocked refunds of billons and by taking advances from taxpayers. It is clear by now that the sordid story of collection through withholdings and advances continues even under the government of PTI as it took no corrective measures after coming into power.    

The main reliance of FBR since 1991-92 has been on indirect taxes, even under the Income Tax Ordinance, 2001 that after Finance Act, 2019 contains over 75 withholding tax provisions, many of which constitute minimum tax liability. Out of total collection under withholding provisions of Rs. 1047 billion in FY 2017-18, the element of full and final taxation (indirect tax in substance) was 64 percent!

For the fiscal year, 2017-18, revenue target was Rs. 4013 billion that was later revised downward to Rs. 3935 billion. FBR collected only Rs. 3842 billion. It is an undeniable fact that FBR has failed to get due tax from the rich and mighty and thus its main emphasis is on withholding taxes (WHT). FBR’s Year Book 2017-18 concedes that “WHT contribute “a major chunk i.e. 65% to the total collection of income tax”. It adds that “the WHT collection during FY 2017-18 has been Rs. 1047 billion against Rs. 944 billion indicating a growth of around 10.9%”. The actual contribution of WHT is 68.5% that is 3.5% more than what FBR has claimed in Year Book 2017-18.  

FBR’s own efforts (collection on demand) yielded only Rs. 102.82 billion (6.7%)—from arrears Rs. 17.69 billion (1.2%) and from current demand Rs. 85.13 billion (5.6%). It confirms negligible share on the part of FBR to tap the actual tax potential as it would have been hurtful to the rich, majority of which are non-filers, despite having substantial undeclared, untaxed wealth and the audacity of ruling this country as a matter of right. They are ready to pay additional tax at source as non-filers but are not inclined to file tax returns.

The total revenue collection in 2016-17 was Rs. 3368 billion. FBR 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.

FBR has a long history of overstating revenue collections by manipulating figures through blocking bona fide refunds and taking enormous advance payments from banks and other large taxpayers. Way back in 1999, ‘revenuecracy’ (term borrowed from Dr. Pervez Tahir) inflicted shame on the country by gross misreporting of data to the IMF. Subsequently, a commitment was made to the IMF to review fiscal data from financial year 1989-90 onwards. The data compiled for financial years 1994 to 2000 confirmed that tax revenues were inflated by billions of rupees. The tax collectors—data manipulators is a more appropriate term for them—showed higher tax collections through fudging of figures and the nation had to pay a heavy cost for it (not only in terms of fine paid to the IMF) but by further tarnishing the image of the country in the international community that nothing is transparent here.

The persistent manipulation of revenue collection figures has been a serious, but neglected matter. Time and again independent analysts and foreign institutions have expressed their indignation over this malpractice, but the successive governments have never ordered any inquiry into the matter. Never ever has FBR disclosed in its collection statements how much undisputed and established refunds remained unpaid on the closing date of the fiscal year, which must be subtracted from the gross revenue receipts to portray the correct net revenue collection. It only mentions the actual refunds issued, whereas accrued and ascertainable liability of refunds should also be taken into account to reflect the true picture of net revenue realised during a financial year. Mr. Shabbar Zaidi, who claims to believe in transparency, has also yet not made public the true facts for 2013-19.

It is strange that FBR in its annual year books does not give total number of income tax filers and total number of registered sales tax persons on the closing date of every financial year for which it highlights its performance. For the sake of transparency, they must give on website historic and current up-to-date data of return filers and sales tax registered persons as early as possible. Hopefully, Mr. Shabbar Zaidi will take a serious note!

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The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)