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Its all about revenue collection

Now its time to reform the country's taxation system


July 16 - 22 , 2001

The government of Gen. Pervez Musharraf, has apparently learnt a lesson from its failure on the revenue generation front during the financial year ending on June 30 last and taken two corrective measures well in time. It asked to CBR Chairman to resign and decided to revise the revenue target of Rs. 457 billion for the new financial year 2001-2002 downward to a realistic level and make necessary adjustments on the expenditure side in conformity with fresh revenue estimates.

Both these steps are most appropriate. Chairman of the CBR must be made responsible to meet the revenue target fixed for a financial year on his assessments and estimates. To gain favour or at least be in good books of the government, it has been almost a practice in our country that the CBR gives a rosy picture of expected revenues at the time of budget making and then, throughout the year, they are looking for excuses and finding explanations for not coming upto the mark. Expenditure estimates are fixed in the light of ambitious revenue target and at the end of the year the government finds itself in a quandary as the revenues sides fails to keep pace with expenditure.

While commenting on the last year (2000-2001) budget PAGE reported in its issue of May 8-12 "preparation of the budget for the financial year 2000-2001 is in the final stages. The Central Board of Revenue (CBR) are expecting a giant leap of about Rs. 100 billion in the tax revenue during the next financial year. The revenue target for the fiscal year 2000-2001 is being proposed as Rs. 450 billion as against Rs. 360 billion (apparently difficult to meet) for the current financial year. This quantum jump is being justified due to on-going efforts of the government to curb smuggling, documentation of economy, strict levy of general sales tax GST across the board and nabbing of tax evaders and discovery of concealed wealth through nationwide tax surveys."

Briefing newsmen on the National Tax Survey (NTS) member sales tax Mr. Sarfraz said that CBR expected to collect additional revenue of about Rs. 100 billion through NTS. Explaining the broad modalities of the survey which is to be launched by end May, Sarfraz said that he hoped to net half a million new tax payers as a result of this 3 stage exercise.

A look at the actual data, however, reveals a completely different picture. Policy statements generally turned out to be hollow and political rhetoric. During the three years ending 1998-99, the rise in federal tax revenues has been so low that the ratio of actual tax collections to GDP has declined continuously from 15.5 per cent in 1995-96 to only 10.2 per cent in 1998-99. This clearly shows the inability of the governments to capture a reasonable level of taxes from rising incomes. It may also be mentioned that tax-GDP ratio in comparable economies is significantly higher than in Pakistan which means that it is not the level of income but other problems that are responsible for this dismal state of affairs in the country.

Another distinguishing feature of the fiscal scene has been the fixation of ambitious targets of tax collections at the beginning of the year and then revising them downwards periodically during the course of the year in line with the actual monthly receipts. Perhaps the same mistake is being repeated now while preparing budget for the year 2000-2001. Various hints dropped by the Finance Minister and other government functionaries reveal an almost complete overhaul of the present system on pragmatic and efficient lines. According to a latest report, the government is aiming at the revenue collection target of Rs. 450 billion or about 14 per cent of GDP"

The Finance Minister however, realised that the figure of Rs. 450 billion sounded too ambitious and he brought it down to Rs. 436 billion in his budget speech. The government is reported to have collected Rs. 385 billion tax revenue during the outgoing 2000-2001 financial year. This is way behind the original tax target of Rs. 436 billion. But this target was thrice revised, first to Rs. 430 billion, then to Rs. 417 billion and finally to Rs. 407 billion. Seen against this background, it becomes quite clear that the original tax target was high and, therefore, had to be revised. Still the recovery has remained low.

This appears highly ambitious but it is not impossible to collect Rs. 457 billion as tax revenues if the corruption is controlled considerably if not totally eliminated, in the tax collecting organization, tax evasion is checked and concealed wealth is brought into tax net. The present government seems earnest in controlling these impediments in growth of national economy.

Lately, the government has focused its attention on reforming the country's taxation system. In this regard, it had set up two committees, one headed by Shahid Hussain, a former World Bank vice-president and the other by a former deputy chairman of the Planning Commission, Saeed Qureshi. While some of the recommendations of these committees found their way into this year's budget, much work still needs to be done to bring the system in sync with the modern day needs of the economy. The tax-GDP ratio, which has remained static at 12 per cent, should be raised to at least 20 per cent. The ratio of direct taxes is low which should also go up to shift the burden away from indirect taxes whose share is as high as 80 per cent in the total revenue. The contact between tax payers and tax collectors should be reduced. Tax procedures should be simplified and tax administration improved. The new financial year should seen redoubling of the effort in this direction.