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Shortfall in revenue collection

To cover the shortfall the government had to accept the IMF directive to enhance the prices of petroleum

Jan 15 - 21, 2001

During the first six months of the current financial year the Central Board of Revenue (CBR) has been able to collect only Rs. 177.5 billion against its target of Rs. 190 billion. There is a shortfall of over Rs. 12.5 billion despite optimism of the Finance Ministry and repeated assurances of the CBR that the target fixed for the current year will not only be met but exceeded by a big margin.

For the year 2000-2001 the government has fixed a target of Rs. 435 billion which is Rs.90 billion more than the actual receipts last year. There was almost a concensus between the CBR and the Finance Ministry that the revenue generation would exceed by over Rs. 100 billion as a result of the ongoing tax surveys. The authorities sounded so confident that they made CE to believe that revenue generation could be increased to Rs. 550 billion for the year 2001-2002 when the tax survey exercise would be completed throughout the country. According to the CBR the initial survey of the first 13 big cities which was completed by end Oct 2000 had revealed massive tax evasion and the optimism that revenue generation could do be increased to Rs. 600 billion during the next 2 years (during which period all tax evaders will be brought into tax net) was fully justified. A senior member of CBR confided to this correspondent in Oct last. "We never thought tax evasion was of that high level. Now there should be no problem in adding Rs. 100 billion to the national revenues during the current financial year."

During the first phase of tax survey of around 700,000 households and business houses in 13 big cities were given survey forms and about 542000 were received back before 15 Oct which included about 400,000 from residential areas. The automation wing of the CBR announced in Nov. that "only as a result of scrutiny of around 400,000 houses in posh areas of 13 cities, about 100,000 notices are to be issued to either tax dodgers, non filers and under filers. The survey forms received from commercial and Business Community are yet to be checked and scrutinised where chances of tax evasion are much larger." According to the initial scrutiny by Pakistan Revenue Automation Ltd. (PRAL) more than 25000 owners or tenants of houses built on a plot of 1000 yards or more are just not in the tax net although they are getting rents or paying rents that warrants tax liability of the owners or tenants, which is taxable. Similarly the analysis showed that of all property owners 25 per cent declared the income to be less than Rs. 50,000, the 60 per cent said their income was less than one lakh rupees and 15 per cent declared the income to be less than three lakh rupees. Obviously, PRAL suspects there is gross underreporting. This would involve examination of tax records and subsequent action on defaults. Similarly PRAL found that of the one lakh new national tax numbers given to individuals, 75,000 persons did not pay tax in the past and it is to be ascertained if they filed any tax return for 2000-2001 assessment year or not.

A different picture was however, presented when CE was briefed on tax survey estimates and revenue generation position last month. He was reportedly told that because of slow response on tax survey the projected increase of Rs. 90 billion may not be achieved during the current fiscal. The new estimate was put at Rs. 50 billion to which CE did not agree and he directed the CBR chairman to speed up the process, take his stall to task and come up the desired level.

CBR Chairman Riaz Hussain Naqvi, while responding to the Chief Executive Pervez Musharraf's question of revenue shortfall, told him that slow economic growth, lesser imports, especially of edible oil, problems with the sugar industry, expectations of tax payers to further extend income tax returns date, concessions given to various classes, especially the traders, and delay in start of tax survey were the main causes. Explaining the reasons he said that economic growth, a factor in determining the revenue collection, could not reach the targets. Furthermore, the imports were also lesser than it was envisaged when the policies were drafted. Especially, the edible oil import was much less than the anticipations. In the sugar industry, late start of crushing season caused delay in their filing of returns. CBR did not extend final dates of filing returns in spite of their strong demand. It was also a reason for less tax collection. In case of income tax returns, tax payers had been expecting another extension but it was not done. The business community, in return, was saying that when the notices of CBR would be received, they would deal with it. The delay caused in carrying out survey and then initial image problems and conflicts with traders were another reason of low tax collection.

To cover the shortfall of over Rs. 12 billion in the first six months (July-Dec 2000) of the current financial year the government had to accept the IMF directive to enhance the prices of petroleum and its products to raise additional revenue of about Rs. 11 billion amid sharp criticism by the public at large. Although high international oil prices have been blamed for frequent escalations in domestic oil prices, the fact remains that it is the high incidence of taxes which has been adding to this burden more than any other factor. As some recent reports have suggested the government has been collecting Rs. 50 billion every year oil price-fixing mechanism consumer-unfriendly, and counter-productive for the country's economy.

For the whole year, the government has fixed the revenue target at Rs. 435 billion which is Rs. 90 billion more than actual receipts of last year. As such it will involve a high effort. The whole strategy to realise this biggest revenue target is based on widening of the tax base, documenting the economy, extending the scope of the general sales tax to the wholesale and retail stage and improving tax administration. The basic question which needs to be addressed is whether the present taxation base and the new resource mobilisation strategy can lead to the full attainment of this year's huge and unprecedented target. If any slippage occurs at the end of the day, it will be critically essential to review whether the target has been ambitious or the efforts to attain it have been in any way lagging behind the expectations.

While fixing the revenue targets, the state of the economy cannot be ignored. In a recession-prone situation, it is always difficult to generate additional revenue. The whole taxation system is undergoing structural change with emphasis shifting from customs and excise duties to consumption-oriented sales tax. Customs duty is proposed to be further reduced from 35 to 30% from the next financial year. The scope of cultural incomes into the tax net, in the meantime, it will be necessary to fix more realistic and full attainable revenue targets. That will also obviate the need for mini budgets or frequent duty adjustments. The imperative is that fiscal policy should be used to boost the economy which will yield higher revenue on a sustained basis.