IS FBR MAKING A DEMARCHE TO REFORMS?

SHAMIM RIZVI
(feedback@pgeconomist.com)

Nov 7 - 20, 2011

The Chairman FBR Salman Siddiqe made two significant public statements during the last two weeks. The first was made on October 23 in which he confessed that there was a large scale tax evasion in the country and the revenues collected during the year was hardly enough to meet debt servicing and defence expenditure and in fact the country was being run on the borrowed money. The other statement he made a few days later when he came out with a good news that 300,000 new tax payers would be added to the tax net by 31stDecember 2011 as a result of effective and hectic documentation of economy process launched by the FBR a few months back.

He claimed that through data collected from NADRA, bank accounts, electricity bills and foreign travels etc., some 2.3 million have been identified as potential taxpayers out of which some 300,000 people would be brought into the tax net by the end of ongoing year.

The FBR chairman made this discloser at a reception hosted in his honor at the Korangi association of trade and industry, where he was present with a team of his experts engaged in this exercise of catching the tax dodgers. In a reply to a question, he explained that tax evaders include those belonging to agriculture and services sectors. Following the passage of 18th Amendment, these two sectors have been transferred to the jurisdiction of the provincial governments.

The chairman FBR has, in fact, made a wakeup call to the incumbent government by making the shocking statement that the tax department's whole revenue collections go to the debt servicing and defence expenditure.

Out of the total revenues of Rs1500 billion last year, Rs750 billion was used for debt servicing and about Rs450billion went to defence while one percent money is retained by the FBR from tax collection, he said.

For rest of the expenditure to run the country, we resort to more from different sources and as a consequence, the demand for debt servicing is rising further. The country is caught in this vicious circle for the last many years with no way out in sight except to broaden our tax net, he rightly pointed out.

It is a matter of shame that Pakistan, which had reached the stage of take-off in early 1960s and was emerging as a role model for the developing countries, is now at a stage of an unannounced economic emergency as the budget deficit has swelled to a whopping amount of over Rs600 billion.

In the year 2001, the then finance minister, Shaukat Aziz, launched a number of initiatives, which led to higher growth. The policymakers must give a serious thinking as to why there was a sudden nosedive and the size of begging has so widened and we started printing new currency notes of billion of rupees without the required financial backing leading to unprecedented rise in inflation.

The situation worsened more rapidly during the last four years under the incumbent PPP led government, which borrowed recklessly from all possible external and internal sources.

According to the confirmed reports, this government has borrowed more in its tenure of four years then all the previous governments had borrowed during the previous 60 years.

Despite repeated warnings by the IMF and other lending agencies, the government failed to implement a prescribed reform program and as a result the IMF-our main lender-stopped further lending. The reform agenda prescribed by the IMF wanted from Pakistan to undertake many reform measures to improve economy and bring down the rising fiscal deficit.

The main demand was to cut down expenditures and raising revenues by broadening the tax net through withdrawing all unjustified exemptions, reducing the size of informal economy through effective measures, improving the tax to GDP ratio to about 20 percent-an average in the region-from present nine percent, coming down heavily on tax dodgers, and eliminating corruption from the taxation departments. It is indeed good news that the FBR has taken some initiative in this direction.

According to the experts, the real tax potential of Pakistan, by a very conservative estimate, is about Rs4000 billion while the collection made last year was about Rs1550 (against the target of Rs1660 billion). The target for the current financial (2011-12) is Rs1952 billion.

Pakistan's enormous tax gap-a country tax gap is measured by the amount of tax that remains uncollected-is simply horrifying. According to a study recently conducted, about 69 percent of total tax potential remained unrealized. If the FBR manages to realize even 60 percent of the tax, it would cross 15 percent-the target suggested by the IMF and which is the lowest in the region.