FEDERAL BOARD OF REVENUE (FBR)

S.M.ABBAS ZAIDI
Research Analyst
, PAGE

June 16 - 22, 2008

The Federal Board of Revenue (FBR) was created under the Ministry of Finance, through an enactment of FBR Act 2007 in July 2007.

Headed by the chairman and assisted by the secretary the Revenue Division FBR is assisted by the four Members (one each for Direct Taxes, Sales Tax and Federal Excise Duties, Customs and Exports). Besides three Support Members (Legal, Tax Policy and Reforms, and Administration and Coordination); and five Functional Members (HRM, IMS, Audit, Facilitation and Taxpayers Education, and Fiscal Research and Statistics).

The functional members have been inducted from the private sector as part of the restructuring of the FBR and its field formations. Besides Members, various Director Generals are also within FBR fold.

FBR REVENUE COLLECTIONS VERSES TARGETS:

The fiscal year 2007-08 has remained vital for FBR in a sense that an ambitious revenue target of Rs. 1025 was assigned. To achieve this landmark and challenging revenue target, 21% growth was required over last year's revenue collection of Rs. 847 billion, a rate of growth at least 6% points higher than the expected growth in the tax base (GDP at market prices) and 2.2% points higher than last year's achievement of 18.8% when the economy was in a much better shape.

TABLE 1: MONTH-WISE COMPARATIVE NET REVENUE COLLECTION

(Rs. Million)

MONTHS

FY 07-08

July

50,941

August

60,139

September

94,056

October

66,388

November

68,543

December

95,008

July-December

435,075

In response to this target, FBR has collected Rs. 469.4 billion and Rs. 435.1 billion in gross and net terms, respectively during first half of FY: 07-08. The refund payments had declined by 32.5% during the same period. With this outcome, the December target of Rs. 470.2 billion was achieved to the extent of 92.5%, thus putting additional pressure of over 7% to makeup for this underperformance in domestic resource mobilization during the 2nd half of the year.

TABLE 2: PERFORMANCE: NET COLLECTION VIS--VIS TARGETS FOR H1: 2007-08

(Rs. Billion)

.

TARGET

COLLECTION

DIFFERENCE

TARGET

COLLECTION

DIFFERENCE

 

DIRECT TAXES

SALES TAX

July

13.5

14.1

0.6

23.7

26.2

1.4

August

14.1

15.0

0.9

28.7

28.8

3.7

September

48.0

48.4

0.4

28.5

27.7

-4.3

Q1

75.6

77.5

1.9

80.9

82.8

0.9

October

16.5

17.2

0.7

30.0

31.5

4.0

November

17.5

18.7

1.2

31.8

29.7

-1.8

December

83.0

51.2

-31.8

32.5

25.3

-8.2

Q2

117.0

87.1

-29.9

94.3

86.6

-5.9

Half Year

192.6

164.6

-28.0

175.2

169.3

-5.9

 

EXCISE DUTIES

CUSTOMS DUTIES

July

1.0

1.9

0.9

8.2

8.7

0.5

August

6.5

6.6

0.1

10.1

9.7

-0.4

September

7.5

7.5

0.0

10.5

10.5

0.0

Q1

15.0

15.9

0.9

28.8

29.0

0.2

October

7.5

7.5

0.0

10.3

10.2

-0.1

November

8.5

8.3

-0.2

11.9

11.8

-0.1

December

8.5

7.8

-0.7

12.2

10.7

-1.5

Q2

24.5

23.6

-0.9

34.4

32.7

-1.7

Half Year

39.5

39.5

0.0

63.2

61.6

-1.6

The target for first half of the year has been missed by Rs. 35.4 bn, 79% of this decline has been due to direct taxes, as indicated earlier (Table 2). Even the small gain of the first quarter has been lost in the second quarter. Similarly, the GST collection also remained below target in second quarter. The performance of excise duties has been at par with the target. However, since the target for the second half of the year is quite steep, it will require extra effort to reach the end of the year target of Rs. 98 bn.

TABLE 3: ADVANCE TAX PAID BY MAJOR SECTORS H1: FY: 07-08:

(Rs. Billion)

SECTOR

Q1

Q2

H1

FY: 07-08

FY: 07-08

FY: 07-08

Oil and Gas

11.0

12.2

23.2

Telecom

1.5

1.6

3.1

Engineering

1.1

0.3

1.4

Automobiles

0.5

0.2

0.7

Sub Total

19.5

25.8

45.3

All Others

6.3

9.6

15.9

Grand Total

25.8

35.4

61.2

The sector's composition of quarterly advance tax payments is presented in above table. These payments relate to few corporate entities categorized within the Oil & Gas Sector, Financial Institutions like Banks, Telecom Sector, Engineering and Automobile sectors. These five sectors have contributed 76% of advance taxes in Q1: 07-08. As expected, a large increase of 71% in these payments was recorded in Q1: 07-08 over Q1: 06-07. Furthermore, barring the telecom sector, the remaining four sectors had made substantially higher payments than last year. Compared to this, advance tax payments by other relatively smaller contributors declined by about Rs. 3.5 bn or 35.7%. However, in second quarter we saw a major decline in the Oil & Gas, Banks and Engineering sectors whereas some improvement was recorded in the telecom, automobile, and other minor sectors. While the overall growth in Q1 was 21.6%, a decline of 8.6% in Q2 reduced the half-year growth to 2.1% well below the projected level.

WITHHOLDING TAXES (WHT):

During H1: 07-08 tax receipts worth Rs. 92.3 billion have been collected against Rs. 77 billion in the corresponding period of last year entailing a significant growth of 19.9%. The share of Withholding Taxes in gross income tax collection that has declined during last few years has now increased to 54% against 40.6% in H1: 06-07 mainly due to substantial decline in voluntary payments and

Improve performance of WHT, thereby putting further question marks on the extent of tax efforts by the department.

TABLE 4: HALF-YEARLY COLLECTION FROM MAJOR REVENUE SPINNERS RELATED TO WITHHOLDING TAXES

(Rs. Million)

COLLECTION HEADS

H1: 07-08

Contracts

32286.5

Imports

12841.7

Salary

8700.9

Telephone Bills

8696.1

Export

5053.1

Securities/Bank Interest

7852.9

Electricity

3093.2

Cash Withdrawals

2572.2

Sub-Total (Eight major items)

81096.6

Share in Total WHT

87.8%

Other WHT

11232.3

Total WHT

92328.9

Share in Gross I. Tax

54.0%

INCOME TAX RETURNS ANALYSIS:

The number of Income Tax Returns and statements received by the revised date of 31st January 2008 as compared to last year are higher by 510,168, indicating a growth of about 33%. While the growth in the number of returns has been 17.8%, the statements have increased by 43.1% (Table 5). The total tax received has declined sharply to Rs. 8.9 bn against Rs. 45.7 bn, thereby registering a negative growth of 80.5%. The number of corporate returns has increased from 11,521 during PFY to 13,933 in CFY however the collection has plummeted from Rs. 43 bn to Rs. 7 bn. A negative growth of around 84% has been registered. A similar outcome has been noticed for other categories of taxpayers including individuals, and AOPs. In respect of the statements, despite a rise in number by 395,456, the collection has declined by around 5.4% which also needs deeper analysis.

TABLE 5: INCOME TAX RETURNS VS COLLECTION 2007-08 AND 2006-07

TAXPAYERS

NO. OF RETURNS RECEIVED

GROWTH

AMOUNT PAID
(RS. MILLION)

GROWTH

.

31-01-08

31-01-07

ABSOLUTE

(%)

31-01-08

31-01-07

ABSOLUTE

(%)

RETURNS

Corporate Cases

13,933

11,521

2,412

20.9

7,076.9

43,142.1

-36065.2

-83.6

AOPs

24,876

21,702

3,174

14.6

103.5

107.0

-3.5

-3.3

Salaried Individuals

102,871

64,174

38,697

60.3

91.6

199.9

-108.3

-54.2

Non-Salaried Individuals

616,395

545,966

70,429

12.9

1,461.5

2,085.0

-623.5

-29.9

Sub-total returns

758,075

643,363

114,712

17.8

8,733.5

45,534.0

-36800.5

-80.8

STATEMENTS

Salary Certificates

82,436

275,593

-193157

-70.1

15.8

66.7

-50.9

-76.3

Importers

15,425

13,473

1,952

14.5

0.9

0.2

0.7

350.0

Exporters

10,212

10,028

184

1.8

1.0

2.6

-1.6

-61.5

Contractors/ Suppliers

32,266

33,183

-917

-2.8

6.2

12.4

-6.2

-50.0

Others (Including Retailers)

1,171,656

584,262

587,394

100.5

165.8

118.6

47.2

39.8

Sub-total Statements

1,311,995

916,539

395,456

43.1

189.7

200.5

-10.8

-5.4

Total

2,070,070

1,559,902

510,168

32.7

8,923.2

45,734.5

-36811.3

-80.5

SALES TAX:

The GST regime of FBR has also undergone some critical changes since July 2007. To start with, the federal excise return has been combined with the sales tax return. This indeed is a facilitating measure for the taxpayers, as those who are liable to pay FED and are also GST registered persons, will now be submitting one return rather than two, thus saving their precious resources and costs involved in fulfilling their tax obligations at two separate occasions within a month. It is also convenient from tax administration side as it would be easier for tax administrators to observe consistency of records of same taxpayers across two taxes. The second important change within GST regime has been the conversion of collectorates as tax collecting agencies into Regional Tax Offices (RTOs) and LTUs. This process of collection of all internal taxes (Direct Taxes, GST & FED) under one roof is again a facilitating measure. However, it has required "redefining" of territorial jurisdictions of GST as well as DT having implications for both, the taxpayers and the tax collectors. Thirdly, as part of the automation process, electronic filing of GST/ FED return has been made mandatory for large business from July-07.

TABLE 6: COLLECTION OF SALES TAX DURING H1:2007-08

(Rs. Million)

TAX-HEAD

.

COLLECTION

GROWTH

.

GROSS

REFUND

NET

GROSS

REFUND

NET

Sales Tax Imports

95,114

44

95,070

11.4

-4.3

11.4

Sales Tax Domestic

89,288

15,042

74,246

6.3

-34.7

21.9

Sales Tax (Total)

184,406

15,086

169,316

8.9

-34.6

15.8

Sales Tax (Domestic) Collection and Major Revenue Spinners:

Nearly 75% of gross ST (D) collection was contributed by ten commodities during July-December 2007, whereas last year this share was 66%. An increase of 11% has been largely due to a procedural change with respect to energy sector where FBR has opted for a "No Tax No Refund" strategy for those payments, essentially from WAPDA that were initially collected and refunded later.

TABLE 7: GROSS COLLECTION OF GST (DOMESTIC) FROM MAJOR REVENUE SPINNERS

(Rs. Billion)

COMMODITIES/ITEMS

JULY-DECEMBER

SHARE (%)

2007-08

2007-08

Telecom Services

21.8

24.4

POL Products including LPG

16.6

18.6

Natural Gas

8.1

9.0

Sugar

5.1

5.7

Cigarettes

4.0

4.4

Iron & Steel Products

3.3

3.7

Services (Hotel & Travel etc.)

3.0

3.3

Cement

1.8

2.0

Beverages

2.1

2.3

Auto Parts

1.5

1.7

Major Ten Commodities

67.2

75.3

Other

22.1

24.7

All Commodities

89.3

100.0

The Telecom services as a sector has maintained its top position in ST (D) contribution with a healthy growth of 27.3% in H1: 07-08 as compared to the corresponding period last year.

SALES TAX COLLECTION ON IMPORTS:

The ST (M) collection has been Rs. 95.1 billion during H1:07-08 as compared to Rs 85.3 billion in the corresponding period of PFY. The growth in tax receipts of 11.4% is consistent with 14.1% the growth in imports during the period.

TABLE 8: NET COLLECTION OF SALES TAX IMPORTS FROM TEN MAJOR INDUSTRY GROUPS

(Rs. Million)

COMMODITY

FY: 07-08

SHARE (%)

POL Products

40,222

42.3

Edible Oil/Ghee

6,618

7.0

Plastic and Articles

6,597

6.9

Vehicles and Auto Parts

6,479

6.8

Iron & Steel

4,965

5.2

Electrical Machinery

3,202

3.4

Mechanical Machinery

2,966

3.1

Paper and Paperboard

2,228

2.3

Organic Chemicals

2,220

2.3

Oil Seeds & Misc. Grains

1,871

2.0

Sub-Total

77,367

81.4

Others

17,706

18.6

Total Sales Tax at Imports

95,073

100.0

CUSTOMS DUTIES:

The gross and net collection from CD during H1:07-08 has been Rs. 67.4 bn and Rs. 61.6 bn, respectively. The differences, i.e., Rs. 5.8 bn have been paid back as refund/ rebates. Furthermore, the decline of 1.9% in gross collection has been compensated through decrease in refunds of Rs. 2.2 bn therefore the net collection has increased by 1.5%. The CD target for first half of year of Rs. 63.2 bn has been missed by a small amount of Rs. 1.6 bn, which has already been recouped in Jan-08.

TABLE 9: MAJOR REVENUE SPINNERS OF CUSTOMS DUTIES AND EFFECTIVE RATES
(GROWTH AND EFFECTIVE RATES IN PERCENT)

TARIFF DESCRIPTION

GROWTH
(H1;07-08 OVER H1:06-07)

EFFECTIVE RATES ON DUTIABLE IMPORTS

.

TOTAL IMPORT

DUTIABLE IMPORTS

CUSTOMS DUTIES

UP TO DEC-07

UP TO DEC-06

Vehicles

-11.4

-11.2

-13.1

35.6

36.4

Edible oil and Waxes

57.1

59.5

-0.5

18.3

29.3

POL Products

20.2

-3.3

3.4

10.3

9.6

Electrical Machinery

3.4

-3.2

11.1

8.4

7.4

Mechanical Machinery

-4.6

-5.6

0.4

7.3

6.8

Plastic Resins, etc.

13.2

10.2

10.6

8.1

8.0

Iron and Steel

31.7

1.3

8.1

11.4

10.7

Paper and Paperboard

17.6

23.2

20.1

20.8

21.3

Organic Chemicals

10.4

3.8

-3.7

7.6

8.2

Articles of Iron & Steel

-11.9

-10.9

3.2

11.9

10.2

Dyes, Paints etc.

17.6

15.1

16.8

12.5

12.3

Rubber & Articles

9.7

-9.5

8.2

12.8

10.7

Coffee and Tea etc.

-8.5

-11.8

-2.1

11.1

10.0

Misc Chemical Products

2.5

-18.8

-5.4

9.5

8.1

Man Made Filament

3.4

-1.7

1.4

9.3

9.0

Sub-total

11.8

1.5

-0.2

12.5

12.7

Others

21.3

.2

-7.9

17.9

19.5

Grand Total

14.1

1.3

-1.9

13.3

13.8

CONCLUSION:

The overall performance of FBR was consistent and most of the targets were achieved although those targets were very challenging. However, today the economic situation of Pakistan is running from a tough situation therefore, the government must provide a tax policy which is pragmatic, investment oriented and business friendly. This tax policy must be the primary objective of this new government. Meanwhile, FBR can achieve its objectives, if the government concentrates on economic growth and industrial expansion as this would give substantial rise to tax and lower unemployment and uncertainty which is prevailing in our economy.