SHORTFALL IN REVENUE COLLECTION
IT IS HIGH TIME TO MAKE A PARADIGM SHIFT IN THE EXISTING TAX POLICY
SHAMIM AHMED RIZVI
May 25 - 31, 2009
Pakistan mission led by Advisor to the Prime Minister on Finance Shaukat Tarin during meeting with the IMF officials last week to review the economic performance had to face a tough time on the issue of tax collection as the IMF officials expressed serious concern over low tax collection. The meeting was informed that the Federal Board of Revenue has collected Rs898billion during the first 10months (July-April) of the ongoing (2008-09) financial year against the target of Rs1300billion assigned to FBR for the full year. It is now clear that the year will end with a big short fall. There has been no increase in tax to GDP ratio as well.
Out of the total tax collections, direct taxes amounted to Rs332 billion while indirect taxes contributed Rs566 billion. Rs61 billion were paid as refunds during the period. Sales tax collection stood at Rs358.9 billion as against Rs293.7 billion last year, showing an improvement of 22.2 percent while collection of Federal Excise Duty was up by 27.6 percent from Rs70.6 billion last year to Rs90.0 billion during July-April, 2009.
Collection from customs duty amounted to Rs117.2 billion as against Rs114.8 billion during July-April, 2008, depicting an insignificant increase of 2.1 percent. This was, more or less, expected due to decline in imports and stagnation in exports during the current year due to global recession. The revenue collected during the 10months this year (Rs898billion), however, shows an increase of 17% Rs763billion during the same period last year. An increase of over 17 percent in tax collections during July-April 2009 would appear to be normal to an ordinary person but actually is quite disturbing due to a number of reasons. Firstly, the trend is disappointing. The FBR collected Rs83.5 billion during the latest month i.e. April, 2009 as against Rs83.7 billion last year, showing a decrease of Rs 0.2 billion.
The collection was also short of the monthly target of Rs98 billion by about Rs14.5 billion. The performance was extremely poor when compared with the previous month i.e. March, 2009 when the FBR had managed to collect Rs103.8 billion. A decline of 22 percent in just one month is very difficult to explain or understand. The cumulative trend also does not inspire any hope. Till October last year, tax collections grew at a very promising rate of 34.6 percent but the rate of increase has dropped consistently since then to 17.7 percent or almost to a half. If the present trend persists, the rate of increase in collections could decline to about 10 percent by the end of the fiscal year.
Secondly, it now seems certain that the country is going to miss the original or revised tax collection target by a hefty margin. With the continuation of present trend, tax collections would not exceed Rs1,100 billion that would be unfortunate and nullify Shaukat Tarin's promise to raise the tax to GDP ratio to 15 percent in the next five years. In fact, this ratio is likely to decline to less than 10 percent this year due to a lower rise in tax collections and a higher increase in inflation rate and consequent rise in nominal GDP.
Lastly, a lower increase in tax collections could not have been much of a problem if available resources met expenditure requirements of the country. The prevailing position is quite the opposite and calls for the mobilization of much higher level of resources. While development has been relegated to a lower priority due to paucity of funds, social sectors are crying for more resources to meet the basic needs of the poor. As if this was not enough, the country is facing insurgency on its western border, which has to be quelled by the use of force, and it is no secret that mobilization of the army, procurement of the necessary equipment and rehabilitation of the displaced persons is a highly expensive proposition.
If the government fails to mobilize the necessary resources to meet these essential requirements, its repercussions are obvious. In this kind of situation, Advisor to Prime Minister on Finance is rightly planning to impose taxes on real estate. Both the developer and contractor need to be brought back into the presumptive tax regime. Out of 1.3 million businesses, having National Tax Numbers (NTN) only 600,000 have filed returns. In light of this, the World Bank is reported to have asked the FBR to launch a new compensation scheme for tax department employees to directly link incentives/pay with their performance to discourage corrupt practices. A reward can be given for locating these missing taxpayers. In addition, a percentage of tax collected from them is given as reward. The incentive package needs to be backed by a strong drive to penalize the non-filers and punish the tax-evaders. Taxes are paid due to fear or upon satisfaction that the money is well spent for the larger good of the society.
Since long FBR is claiming that it is striving hard to improve the tax to GDP ratio, which is perhaps the lowest in the region if not the world. The result of this entire announcement has been zero. Rather this ratio has slightly declined during the past few years. The recalled tax reforms exercise is going in FBR for the last many years without any improve in the situation.
Our present tax structure is most cruel as it often described as taxing the poor more than rich. Only a paradigm shift aimed at realignment of objectives in the existing tax system can stem the existing rot in our society. The resulting elite are mercilessly taxing the poor in the form of indirect taxes like sales tax and federal excise duty and then waste the taxpayers' hard-earned money on their luxurious life style. The State has become so callous that the people living below the poverty line are also subject to tax on purchase of salt being sold under the brand names. However, the dirty rich feudal owning huge areas of land and earning millions of rupees of every month are exempted from any kind of tax on their income.
According to an expert, the achievement of the cherished goal of self-reliance is not possible with the existing outdated oppressive and unjust tax system. Thus, it is high time to make a paradigm shift in the existing tax policy. Our revenue potential for 2009-10 is not less than R.s3 trillion provided the tax base is broadened; pro-growth, equitable and rational policies are devised with the back stakeholders; tax machinery is completely over hauled; and all exemptions and concessions available to the privileged sections of the society are withdrawn. If we succeed in the optimum tax potential, there will no be no need for any internal or external borrowing; implementation of a rational tax policy can convert our current fiscal deficit into surplus within one year, they claim.