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Revenue target revised downward

The government has realized that the target fixed was on the high side and needed downward revision.


Sep 17 - 23, 2001

Contrary to the past traditions, the revenue target for the current financial year (2001-2002) has been revised downward by Rs.13 billion during the first quarter. As in the past the successive government had been fixing ambitious revenue target in the budget and then trying hard to convince the donors that the target will be met. It was always by the end of 3rd quarter that the Finance Ministry would publically admit that the targets were unrealistic and impossible to achieve.

A revenue target of Rs. 457 billion was fixed for the current fiscal. It is good on the part of the government that, only in view of two months (July and August 2001) performance, the government has realized that the target fixed was on the high side and needed downward revision. In consultation with IMF mission which visited Pakistan 2 weeks back, the government has agreed to a revised target of Rs.444 billion for the current financial year. According to the independent analyst, however, tax collecting machinery will have to be geared up to meet even this target which still appears ambitious in view of July-August performance in which only Rs. 44.7 billion could be collected against the target of Rs.81.5 billion set for the first quarter (July-September 2001). It seem difficult, if not impossible, to collect about Rs. 37 billion during the current month of September.

Finance Minister Shaukat Aziz addressing a press conference on Thursday last stated that the tax target had been curtailed due to slippages in achieving the last fiscal year's revenue goals. Last year, the government was aiming to collect Rs.406.7 billion (after many downward revisions from the original budget estimates of Rs. 435.7 billion) but ended up collecting Rs.389.38 billion by June 30, 2001.

"The change was made just to adjust for the change of base," said the minister adding that the budget deficit target of 4.9% of the GDP and development outlay of Rs.130 billion would be fully protected. "We'll make up for this shortfall through other sources, including the non-tax revenues, he said.

However, the claim of the minister and assumption of the CBR are highly optimistic for the current fiscal year, even after scaling down the target by Rs.13.7 billion it would be hard to actually achieve it. The system of projecting tax revenue target is highly non-professional, lacking credibility.

First, the CBR had no system to actually work out tax elasticities. Secondly, it had no role in policy making. The Finance Division makes forecasts given the budgetary requirements without realising the capacity of the CBR, and potential of the system. A large taxable income is still out of the tax net.

There are realistic assumptions suggesting that tax revenue almost equal to 8% of the GDP is evaded, or goes to the pockets of the tax officials every year. The tax survey launched last year to strengthen the documentation process failed to yield additional revenues due to follow up concessions granted by the state to appease the agitating retail merchants.

Then smuggling is the other major factor. During last two years, the CBR got a big boost by registering about Rs. 80 billion increase from Rs.308 billion of 1998-99 to Rs. 389.38 billion of 2000-01. However, almost 30-40 billion of it came just by replacing the accounting of Petroleum Development Surcharge (PDS) with the Sales Tax.

All this increase had already been factored in. So, assuming that same 13-14% growth in tax numbers would be possible during the years is not a very realistic assumption. The government expects 4% GDP growth and 5% inflation rate during the year. This would mean that by showing good performance the CBR can tap this additionality of 9% in nominal terms. Tax measures of about Rs. 16 billion were also announced in the budget, which would mean half per cent of the GDP. The strengthening of the audit capacity, and use of survey data through use of information technology, is being considered as a primary tool to generate an additional amount of revenues. However, this is highly difficult to forecast any amount of revenue through this exercise. Even if the CBR makes a major effort and collect about one percent of the GDP revenues by doing this, it would mean a total growth of 10.5%.

A major component of total tax collection, about 35% is collected at the import stage. If the rupee continues to tumble against the dollar, as it did by showing 22.9% devaluation last year, it would help increase the revenue numbers as well.

But all these assumptions fail to justify that how the total would match with Rs.444 tax revenue target. Though the government had announced this number after detailed consultations with the International Monetary Fund (IMF), its further downward revision is not unlikely. The minister said that development budget would not be reduced this year. Last year, development expenditures were restricted to about Rs.90 billion owing to revenue slippages. Defence budget was also reduced to 3.8% of the GDP.

The Finance Minister claimed that the government would ensure higher collection of non-tax revenues. Increase in non-tax revenues depend on the financial state of affairs of the public sector corporation (PSCs). Given the current status of KESC, PIA and even Wapda, it would be very difficult for these corporations to pay back their debts to the federal government, which is non-tax revenue. In fact, IMF reckoned that the PSCs were a major threat to budget.

Finance Minister Shaukat Aziz is right when he says that there is a lot of room for an increase in non-CBR revenue and for reduction in the non-essential expenditures. These avenues have, however, remained unexplored with focus remaining on traditional sources. This, on the one hand, has been instrumental in pushing the economy towards deeper recession, besides, creating bitter sentiment that the tax recovery drive remains confined to captive taxpayers. For the revenue generation exercise to be really effective, the moral authority of the government established through judicious incidence of taxes besides good governance hold the key and any potential sources that remain unexplored in this regard are seen at with suspicion and mistrust resulting in visible hesitancy to pay taxes voluntarily.

Though the Finance Minister assured that there will be no cut in the annual development plan and that the social sector allocations will remain intact, any future reduction in revenue target can hardly be done without cutting on development budget. That the revenue collection met the target for the month of August is encouraging and it is believed that the trend will be maintained to ensure that such a situation does not arise in future. At a time when the government is focusing on poverty reduction scheme through empowerment of the individual, any cut in the development budget would be seen with great disappointment. Even in the 10-year perspective plan, as announced by the finance minister, human resource development remains the top priority with the allocation of 31 per cent resources. That such an awareness with regard to development of human resources is prevailing at the top level is heartening but cannot be effective unless it is supported by effective strategy to meet the revenue collection target. Any impediment is this regard would make the goal of self reliance hard to achieve.