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The prospects of three times revised revenue target?

May 13 -19, 2002

The IMF review team which is currently in Pakistan has expressed its indignation over the performance of the Central Board of Revenue (CBR) and the prospects of meeting the three time revised revenue target of Rs.414 billion for the current financial year ending June 30, 2002.

According to the latest figures the CBR has, during the 10 months (July-April) has been able to collect only Rs.304 billion against Rs.345 billion estimated for the period. It is Rs.3 billion less then the collection during the corresponding 10 months during the last year. The target for revenue collection for the current fiscal was fixed at Rs.457 billion in the budget estimates. It had 3 downward revisions bringing the figure to Rs.414 billion finally. There is still a gap of Rs.110 billion which cannot possibly be filled during May/ June 2002.

The expression of concern by the IMF visiting team over revenue shortfall cannot be overlooked specially in view of the fact that the 3rd installment of $1.3 billion Poverty Reduction and Growth Facility Programme is due next month. This shortfall in revenue, after firm commitments, may lead to problems. Despite smooth sailing with donors, the revenue shortfall has remained an irritant that continues to haunt economic managers of the country. Not only for sake of smooth relations with donors, but also for carrying out the economic reforms process to its logical end, realisation of revenue target continues to hold critical importance. The role of CBR was discussed with Pakistan officials and they were impressed upon to take steps which could enhance the efficiency and, therefore, results of CBR.

It is reported that now the CBR is envisaging a new overhauling and restructuring programme to improve its efficiency in its revenue collection efforts. According to a senior official of the Board, this plan is being developed with the help of the World Bank and International Monetary Fund (IMF) CBR is in process to engage international consultants to finalize the strategy, which is expected to be ready by August 2002. The Bank is expected to finance $250 million (Rs.15 billion) for this three-year revamping programme during 2002-2005 that may cost around Rs.20 billion in total.

In recent years, CBR had prepared several restructuring programmes, but none of them could be implemented. The officials of the international financial institutions (IFIs), including the Asian Development Bank, blame taxmen impeding any such effort due to vested interest. The Bank reckons the Central Board of Revenue is most corrupt organization, along with Wapda and KESC.

However, tax officials claim that main problem was the issue of financing. CBR having a workforce of almost 30 thousand spends only Rs. 2.5 billion on its own operations, including salaries, which is about 0.6 per cent of the revenue collection. Any reorganization effort would require market based pay structures, and large investments in information technology, which the government is reluctant to offer.

The IMF team has also expressed its concern over failure to increase exports and reportedly advised for diversification of items and their value addition. The example of Bangladesh as the one country which has achieved massive increase in exports through diversification and value addition must have provided a food for thought to many who matter in the economic affairs of the country. In Pakistan's case, all attempts to increase exports failed to yield any positive results. The economic slowdown has not only affected exports, however. Imports too have been failing and the trend further exacerbated in recent months. The September 11 events of the last year had a devastating effect on Pakistan economic potential. The war against terrorism has different effects on different countries but Pakistan had to suffer the most for being geographically contagious to Afghanistan. It is primarily for this reason, the imports fell 30-35 per cent during the first six months of 2001-2002, resulting in enormous pressure on revenues of the country. Dr Ashfaque Hassan Khan, economic advisor to the ministry of finance rightly cited the 9/11 event as being responsible for the falling revenues as a direct result of the falling imports.

Despite the foreign exchange reserves of more than $5 billion and reforms process being on track, Pakistan economic woes continue to haunt as the revenue collection and exports fail to come up to the desired level. The official claim of economic revival and growth too appear nowhere in sight.

The success of the stabilisation programme may be the first step the successful step rather but it can hardly over-come the problems of growth and unemployment. Though the donors are helpful in bringing about social change, it would be naive to expect that the change could be effective without mobilising the domestic resources. The revenue shortfall will have to be overcome if the funds for social sector development are to be allocated. Having achieved the much needed fiscal stability, it is high time that the steps be taken to ensure growth, which is the first step on the road to progress and prosperity.

Despite efforts by the Musharraf government to put the economy on an even keel, there is a persistent complaint that it has not done enough to restructure the tax collection machinery which continues to be corrupt and inefficient. There is a perception that the government has not been able to match its words with concrete action. Tax collection is a key state function. It is from this factor that the Central Board of Revenue, as the main tax collection agency, derives its importance. The restructuring of the CBR is thus crucial for economic revival. Some of the methods and policies pursued by the department have been termed as heavy-handed and pro-rich. For instance, there is a perception that a handful of wealthy individuals and corporations have been able to avoid income tax through various deductions and credits, and have got enormous refunds allegedly with the connivance of tax collectors. The presumptive Tax Regime no longer serves the objectives for which it was set up. The number of individual taxpayers required to comply with the PTR have continued to grow, while the tax burden has progressively fallen on the poor.