Nov 12 - 18, 2007

For the first time during the last years the Federal Board of Revenue (FBR) previously known as CB R has missed the tax collection target by a wide margin of Rs.20.3 billion during the first 4 months (July- Oct) of the current financial year. Revenue collection stood at Rs.264.1 billion against the actual target of Rs.284.4 billion.

This huge revenue shortfall has forced the FBR to readjust the tax collection target for the first half (July -December) without changing the overall target of Rs.1.025 trillion for the financial year 2007-08. Tax authorities believe that the shortfall would be made up during the coming months of fiscal year. However, the ground realities do not support this optimism. The Chairman FBR, Abdullah Yusuf, while admitting that the target of Rs.1.025 trillion for the year is ambitious, insists that it is achievable. Other senior officials of the FBR while talking to this correspondent on condition of anonymity maintained that the target was ambitious and politically motivated. It would be a tremendous task to achieve it. Independent experts fear that there may be a shortfall of Rs.50 billion by the end of financial year.

According to provisional revenue figures released by the FBR, the FBR authorities had envisaged tax target of Rs.218 billion for the first quarter but the Board remained able to collected only Rs.204.8 billion, registering a shortfall by around Rs.14 billion. For the month of October 2007, the FBR has envisaged tax target of Rs.66.4 billion but tax collection stood at Rs.59.3 billion, registering a shortfall by RS. 7.1 billion.

Keeping in view the overall revenue shortfall in first four months, the FBR authorities decided to readjust tax collection figures for July-Dec period of the current fiscal year. "The FBR is facing revenue shortfall owing to changes introduced by the government in laws related to advance tax and political uncertainty also hampered the tax collection," a high level official in the FBR confided to this correspondent

For the first quarter (July-September) target was set at Rs.218 billion compared to Rs.183.9 billion for the same period of the previous fiscal, envisaging an increase of 21.3 percent. The revenue target was RS. 47.8 billion compared to Rs.46.2 billion in the same month of the previous fiscal. In August 2007, the CBR target was Rs.58.5 billion. In September 2007, the FBR had envisaged to collect Rs.111.8 billion against Rs.91.4 billion in the same month of the previous fiscal. In the second quarter (October-December), the FBR envisages tax collection of Rs.280.3 billion against RS. 226.6 billion in the same period of 2006-07, an increase of 23.7 percent. For October 2007, the tax target was Rs.66.4 billion against Rs.53.3 billion in the previous year.

The provisional tax collection indicates a cumulative growth of 11.5%. The net collection during the period has been Rs.264.5 billion against RS. 237.2 billion in the same period last year. The revenue on account of direct taxes has maintained its buoyant posture, as Rs.93.8 billion have been collected during July-October 2007 against Rs.82.5 billion last year, showing a growth of 13.6%. The sales tax collection has reached RS. 109.8 billion against RS. 97.6 billion, indicating a growth of 12.6%. Whereas the growth in 12.2%, the domestic sales tax collection has increased by 13.1%, going up from Rs.41.4 billion to Rs.46.8 billion. The tax receipts on account of excise duties have recorded a significant increase of 17.5% touching Rs.23 billion against RS. 19.5 billion in the past. The collection of Rs.38 billion from customs duties has been marginally up by 0.8% as compared to last year figure. The net collection of Rs.59.3 billion during October 2007 is expected to increase further when provisional figures are finalized.

According to independent economist and analyst, the potential of revenue collection is much higher than Rs.1 trillion which FBR is finding difficult to achieve. According to them the biggest issue is the tax evasion and growing size of black economy. A conservative estimate is that Rs.600 billions generated every year in Pakistan by parallel economy. Add to this, the black money generated through smuggling in goods and narcotics trade that is between Rs.300 billion and Rs.500 billion. This makes a whooping Rs.1000 billion. When the presence of black money is so apparent, why its criminal accumulation and generation are not revealed and the offenders punished, is a question which has been baffling honest citizens. They ask, whether it is on account of lack o political will, or rampant corruption, or collusion of tax dodgers and the tax administrators at defrauding the revenue, or the political system or the effectiveness and defectiveness of laws, or the pervasive stubborn indifference of the citizens towards their duties? Those who plundered the wealth of the nation were set free to have a good time in "exile" and those who abused powers are being invited to come again for ruling and looting whatever is left.

It is not possible to determine the precise amount of revenue loss and size of black money or informal economy in Pakistan. Revenue loss estimated by World Bank because of smuggling alone in 2004-2005 amounted to 5.08 billion dollars. In 2003 quantum of tax evaded was estimated at over Rs.450 billion. Another report estimates revenue loss, because of distortionary tax regulations and administrations, at Rs.40 to Rs.45 billion in 1989-90 and Rs.104 billion in 1995-96. Apart from direct monetary costs of corruption, other significant costs, such as loss of government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment, are destroying the very fibre of civil society in Pakistan.

Dr. Aqdas Ali Kazmi, ex-Joint Chief Economist, Planning Commission of Pakistan, has stated in his research paper tax policy and Resource Mobilization in Pakistan t hat 70% part of economy consists of 36% pure black economy, 18% exempted economy, 9% illegal economy, 4.5% unrecorded economy and 2.5% informal economy (unreported economy). His study says that the problem in the low resource mobilization is the rigid system of taxation, and the emphasis of the government on increasing revenue, ignoring the details of long term policy measures.

According to very conservative estimates the real tax potential of undeclared wealth in Pakistan is between PKR 700-1000 billion. Successive governments have utterly failed to persuade the Pakistani people to pay taxes due from them.

Taxing agricultural income has been a subject of heated debate in the country over the decades, with the powerful agriculture lobby's close links to weights, arguing that most of the agricultural holdings are too small to generate taxable surpluses of income. "However, the argument is countered by the pro tax lobby, which bases its position on the universal principle that it would be unfair and illogical to make a distinction between agricultural and non agricultural income for purposes of taxation. According to available data, agriculture accounts for 21.6 of Pakistan's GDP, which puts it ahead of all other sectors of the economy. Further, agriculture contributes to the country's GDP growth as a supplier of raw materials to industry as well as a market of industrial products, and is a main source of our foreign exchange earnings.

There should be no complication with regard to the imposition of income tax on agriculture. There are many reasons to support this view. First, just as incomes below a certain level are exempted from tax in non-agricultural sectors for purposes of taxation, the same principle should be applied to agricultural income. Some pro tax analysts have justified taxing agriculture on the ground of horizontal equity, i.e. Individuals in equal economic position should be taxed equally. Second, income tax is imposed on personal income, and not on sectors as a whole., Many sectors of the economy often experience bad times, but this does not mean that persons belonging to these sectors should be exempted from paying taxes, if indeed they do have income above the tax free threshold. The principle of "horizontal equity" must therefore be applicable to all types of income, regardless of the source. Third, exemption of agriculture from income tax serves a as a disincentive to those who pay taxes, and raises the possibility of tax evasion and fraud by showing income from non agricultural sources as agricultural income. Fourth, despite poor financial position of many subsistence farmers, a large number of individuals connected to agriculture earn huge personal incomes, and there are no legal or ethical grounds not to tax their income. Further, there is said to be considerable evasion of income tax by those having both agricultural and non agricultural incomes, as a part of their non agricultural income is often shown by them as accruing from agriculture,. Fifth, the tax to GDP ratio in Pakistan, which stands at about 9 percent, is one of the lowest in the world. (It is 20 percent in the US and about 34 percent in Britain".

The main causes of a low tax to GDP ratio in Pakistan, as identified by CBR, include a narrow tax base, poor compliance by taxpayers, too many exemptions (the most notable being agriculture), the presence of a huge underground economy, and a mismatch between sectoral contributions in the tax to GDP ratio. What is quite astonishing is that successive governments in Pakistan have failed to levy agricultural income tax, which only goes to show the huge clout the feudal lobby wields in the country. Keeping the economy's foremost sector out of the income tax net for decades altogether is a feat that may not be achievable in many Third World oligarchies. It is hoped that President Musharraf, who took over the reigns of power to set the system right, will do something about it.