Dec 7 - 13, 2009

First quarter (July-September) of current fiscal year has not brought a sigh a relief for revenue collection machinery in Islamabad as the expenditures in this quarter outgrew total tax and non-tax revenue with a considerable difference, making it ponder at measures to reduce fiscal deficit to a level that minimizes the need of public debts, which are growing in proportion to expenditures.

Fiscal deficit in this quarter stood at 1.5 percent of gross domestic products (GDP) as total revenue equaled 2.9 percent of GDP and total expenditures 4.4. Amount-wise, federal government collected Rs427 billion tax and non-tax revenue and spent Rs650 billion in July-September 2009.

To control expenditures is imperative for the government for two reasons. First, revenue estimates for this fiscal year are low when compared to last year. Second, achieving level of fiscal deficit that was 4.2 percent of GDP last year is difficult given the tax revenue shortfall in the first quarter.

Government collected Rs298 billion tax revenue in July-September. As usual, indirect taxes remained a main source of revenue generation. In this quarter, revenue from indirect taxes- customs, sales tax, federal excise, airport tax, and petroleum levy included- was recorded at Rs203 billion while government fetched only Rs84 billion from direct taxes i.e. income tax, workers participation fund, and capital value tax.

In budget 2009-10, federal government kept its expectation low about tax revenue in view of dampened economic activities while it revised upward target of indirect taxes for the year. A cursory look at the trend of indirect taxes show that government continued to consider indirect taxes as main source of tax revenue since it enhanced revenue from indirect taxes by roughly Rs100 billion year on year from 2005-06 up to 2008-09. Although it set low tax-revenue target for FY10 compared to original receipt of FY09, budget estimated Rs820 billion indirect tax receipts as against accrual receipts of Rs718 billion previously.

Despite taxes on petroleum products come under severe public criticism, government seems indifferent, as it is not ready to let pass a main tax revenue source. It does not make sense on the part of people-friendly government to charge a hefty Rs20 per liter on petroleum products. The petroleum levy withdrawal can give off good vibes and though it was done temporally by this administration, yet, since the options to meet tax revenue target have apparently exhausted, the petroleum levy (PL) though unjustifiable remained an delectable imposition.

With the recent surge in domestic oil prices by 7 to nine percent, there will be more earning for the government from PL. Already, people get very disappointed with increase in prices of petroleum products specially diesel, petrol, and LPG, upward prices of which have negative implications on household budgets, knowing they have to bear the burden of faulty petroleum price formula. For recent up in prices of domestic petroleum products government finds bases in increase in oil prices in international market in November. Notably, there was drop for future delivery in January of light sweet crude 62 cents to 77.75 dollars a barrel and Brent North Sea crude 46 cents to 78.89 dollars a barrel. Local businessmen were unequivocal in describing the increase as absurd and illogical, commenting in different sections of press that there was a decrease of 9 percent in international oil price. Unjustifiable levy and taxes such as 16 percent general sales tax on petroleum though increasing revenue may more likely to cause inflation run-up. Heavy taxes on petroleum at rock bottom level escalate government revenue as it did in the first quarter, but they may ignite an inflationary pressure, macroeconomic instability, and poverty, which in turn will lead to decline in tax revenue.

Expenditures on defense affairs and services have been growing substantially since rapidity in military incursions on Taliban in 2005. Ever since, they soared to Rs342 billion in last fiscal year from Rs241 billion in 2005-06. Alone in the quarter under review, government spent Rs86 billion (0.6 percent of GDP) on defense affairs and services. Servicing of domestic debts amounted to Rs129 billion, which is equivalent to 0.9 percent of GDP. Credit to government sector has shot up in this quarter to Rs6000 billion against Rs4500 billion in July-September 2008.

The slack in manufacturing sector and prevalent risks to economic outlook kept budget estimates for revenue of current fiscal 2009-10 at low level compared to original receipts of last fiscal year (2008-09). This budget estimated total revenue at Rs1412 billion as against receipts of Rs1783 billion in FY09, suggest the data of State Bank of Pakistan.

Tax revenue receipts last fiscal year were Rs1179 billion, an increase from Rs1005 billion in FY08. The budget estimation that projected Rs897 billion tax revenue for July-June 2009-10 will be underutilization of actual tax potential.

International financial institutions expressed satisfaction over the improved macro economic indicators of Pakistan's economy. International Monetary Fund (IMF) in its third review-completion of which will settle on the fourth disbursement of stand-by arrangement, which was augmented to US$11,327 million from an earlier approved US$7.6 billion in November 2008, (total disbursements thus far amount to US$5,327 million)-'welcomed the efforts being made by Pakistan to further stabilize the economy, to advance structural reform, and lay the foundations for high and sustainable growth', while mentioning that 'risks to the economic outlook remain'. Pakistan's economy is presently under immense influence of structural adjustment program introduced by the Washington-led lender, which forecasts two percent economic growth for the year.

Chairman federal board of revenue said that there would be no major shortfall in tax revenue in next quarter. He also said that FBR would launch measures to enhance tax revenue. It has no option than to do this to achieve tax to GDP ratio of 14.4 percent of GDP in the next five-year. Advisably, grasping tax evaders should be the thrust of any measure and hopefully, there would be no bombshell on the launching pad to kill low income group. Revenue increment will not be useful until royal wastrel of public money is contained.