TAX NETTING BLACK ECONOMY

SHAMIM AHMED RIZVI
Apr 14 - 20, 2008

The Federal Board of Revenues has collected federal taxes to the tune of about Rs 679 billion during the first nine months (July - March) of the current financial year missing its target for the period by Rs 30 billion. In March alone its has witnessed a short fall of over Rs 17 billion as revenue collected stood at Rs 92.6 billion as against Rs 110 billion target set for the month.

The amount of Rs 679 billion is about 13.7 per cent more as compared to Rs 597 billion collected during the same period last year. However, refunds and rebate payments during the first nine months of 2007-08 witnessed a decline of over 27 percent with total payment of Rs 48 billion as compared to Rs 66 billion in the same period last fiscal year. For achieving the annual target, the FBR required over 20 per cent growth on monthly basis for achieving the desired target of Rs 1,025 billion.

Tax authorities are facing a gigantic task to collect Rs337.1 billion during the last quarter (April-June) of the current fiscal to meet the annual tax target of Rs 1,025 billion by June 30.

The sources said that any possibility for touching Rs 1 trillion is now out of question and if the FBR remains able to collect Rs 990 billion, it will be an achievement on the part of the tax authorities. The FBR deliberately delayed releasing of the monthly revenue collection figures in order to add few billions more before making it public. But the revenue collection dip is so clear that such steps cannot hide facts, said the sources.

With this achievement, the overall growth in collection has improved by 1.2 per cent points as July-February growth was 12.5 per cent. The tax-wise three-quarter growth is as follows: Direct Taxes 8.4 per cent, Sales Tax 17.8 per cent, Federal Excise Duties 29.1 per cent, and Customs Duties 9.9 per cent.

The provisional tax collection March 2008 has recorded an overall growth of 13.1 per cent. The net collection during March 2008 has been Rs 92.6 billion against Rs 82 billion during March 2007. The revenue on account of direct taxes has risen modestly by 3 percent going up from Rs 38.9 billion last March to Rs 40 billion in March 2008. The sales tax collection has been Rs 29.7 billion as against Rs 24.1 billion of last March showing a growth of 23.4 percent. While sales tax on import stage has increased by 8.6 percent, the increase in the domestic component is 44.3 percent. The collection of federal excise duties has increased by 26.7 percent, increasing from Rs 6 billion to Rs 7.6 billion. Finally, a healthy growth of 17.5 percent has also been recorded in the collection of customs duties where the net receipts have reached Rs 15.3 billion against Rs 13 billion of last March.

The federal board of revenue is facing a grim situation regarding achievement of revenue target fixed for fiscal year 2007-08 at Rs 1,025 trillion for its own inefficiency, corruption and lack of leadership. The tall claims to broaden tax base during the last 8 years are now falling apart. The strategy devised by top managers at apex revenue body was faulty and isolated from ground realities. There has hardly been any effective coordination between policymakers and field formations. The issues of motivation, integrity and efficiency are still lingering on despite FBR has entered in its second last year of Tax Reform Administration Project (TARP), launched with borrowed funds.

Though FBR stalwarts say that target fixed at Rs. 1,025 trillion was lower as compared to our real tax potential. According to independent economists and analysts our real tax potential at federal level is not less than Rs 2 trillion. It is sheer lack of political will and incompetence on the part of FBR that we have failed to collect the revenues where these are actually due (unprecedented benefits are available to the rich and foreign companies are remitting huge untaxed profits through abusive transfer pricing transactions). For the last many years, the government has been extorting money from the people who are not supposed to pay any taxes and granting unprecedented concessions and exemptions to the rich (20-year tax exemption has been given to operators of Gwadar Port as if they will do some charitable work). For tapping our actual potential, there is an urgent need to tax the rich, bring undocumented economy in the tax net and distribute the incidence of various taxes judiciously amongst all the segments of society. The tax loss due to one section alone [Section 111(4) of income tax ordinance, 2001] granting complete immunity from probe and taxation to untaxed money fictitiously remitted through non banking channels by paying a very nominal commission to any money exchanger is in billions.

The government of Pakistan, anticipating higher growth in economy, fixed the revenue target for fiscal year 2007-08 at Rs 1.025 trillion, showing an increase of 21% over the collection of Rs 841.4 billion for fiscal year 2006-07. The government projections anticipated that the share of direct taxes in total FBR collection for fiscal year 2007-08 will be Rs 408 billion i.e. 23.6% higher than last year. However, the FBR Chairman had claimed 45% growth in direct taxes during fiscal year 2006-07. The fixing of growth target at 25% for the next year was thus simply irreconcilable vis--vis statement made by the chief of FBR. However, the FBR may fail to reach even Rupees one trillion mark as generous exemptions and concession to the wealthy segments of society are granted. The cost of exemption under one head alone i.e. capital gains on stock markets during fiscal year 2006-07 was Rs. 112.45 billion according to government's own admission at page 262 of Economic Survey 2006-07. Had it not been granted, the total collection for fiscal year 2006-07 would have been Rs 953.85 billion. This exemption continues for fiscal year 2007-08 having negative revenue impact of about Rs 250 billion.

The people of this country are accused of not paying income tax: whereas in reality even a petty shopkeeper in a village (whose total income is much below taxable limit of Rs 100,000) is paying tax as high as Rs 720 per annum along with electricity bills as a commercial user, whereas a rich absentee landlord of his area having agricultural income of million of rupees is not paying a single penny as income tax. A person making million in speculative transactions (shares and property) is enjoying tax exemption.

The unwillingness to tax the rich and mighty reflects pathetic state of affairs vis--vis tax to-GDP ratio from 1990-2000 to 2006-07. The tax to GDP ratio of direct taxes is appallingly low. It may be noted that in these official figures huge amount of indirect taxes is shown under the head of income tax. The actual tax-to-GDP ratio of direct taxes for FY 2006-07 after excluding presumptive taxes will be around 2.4%, whereas officially it is projected at 3.02%.

The rich and mighty who do not pay are the real culprits. Exemptions and concessions those are prevalent in our tax laws (the whole of Second Schedule in the income tax ordinance, 2001, most of the items of sixth schedule of sales tax Act, 1990 and innumerable statutory regulatory orders (SROs) relating to customs and excise) should be done away with. There should be a level playground for everybody. If the government removes all these exemptions and concessions, brings big absentee feudal landlords into the tax net, manages to get taxes from the influential ones and succeeds in imposing GST across the board (preferably with a low rate of 3% at one single point), there will be a record collection of Rs. 2 to 2.5 trillion. This goal can only be achieved if the government simultaneously tackles issues related to tax evasion machinery.

If new coalition government shows political will (Prime Minister himself is big landlord and top leadership has huge business empires!), there is no reason why we cannot achieve double the target fixed for fiscal year 2007-08. if mighty sections of society start paying taxes, Tax Intelligence System (TIS) is introduced to identify non-filers and evaders and mammoth black economy is brought into tax net, our tax to-GDP ratio can jump to 20% in 2008-09 for which FBR want us to wait for another 20 years.