November 05, 2007	Monday	Shawwal 23, 1428

The Federal Board of Revenue (FBR) has missed the first quarter tax revenue target of Rs218 billion by a wide margin of Rs13 billion. No doubt, the FBR will try to make up for the shortfall in the coming months so that the original target is not revised downwards. However, the ground realities are not so favourable.

Surprisingly, the target for the first quarter (July-September) has been revised downward to around Rs204.8 billion-- almost equal to the actual revenue collection.

On October 31, the tax authorities announced that the lowered revised target of Rs264.1 set for the four months July-October has been achieved. This revision carries a message for the finance ministry that it has set an over-ambitious target for the fiscal year 2007-08. As the recorded shortfall has been passed on to the second or third quarter, it will be a challenge for tax authorities to hit the original target or keep it unchanged.

Some officials concede that the target is an ambitious one and politically-motivated. It would be a tremendous task to achieve more than 21 per cent growth per month to fulfil the annual target. The economic wizards projected a nominal growth of 14 per cent as base for revenue realisation during the current fiscal year. The revenue growth was not satisfactory at nine per cent over the first quarter – also being lower than last year.

Because of some procedural changes in the system, extension of income tax filing dates, re-structuring of the regional tax offices (RTOs) etc, the tax authorities said the assigned target has been missed but it might be achieved in the coming months.

The situation seems to be somewhat different. The sales tax grew by five per cent in the last fiscal year when the collection was Rs309 billion. Now the FBR has projected Rs382 billion target for 2007-08 with an estimated growth of 23.6 per cent.

The question arises as to how so much of revenue could be collected when there is no change in the tax structure and its base, while the incomes generated from a high economic growth are not fully taxed. Is there a real slackness in the tax machinery to generate the required growth for reaching the Rs1, 025 billion target ? These issues are being discussed at official and private levels in the backdrop of the tax shortfall recorded in the first quarter this year.

It is feared that there may be a shortfall of more than Rs50 billion in the annual tax revenue target. The shortfall may turn out to be even higher in view of ensuing general elections during which tax machinery generally becomes ineffective due to one reason or the other.

Already the law and order situation is hampering the normal domestic and foreign trading, impacting the revenue generation. According to one estimate, a single day strike deprives the national exchequer of revenues of around Rs3 billion..

The country has not witnessed any major nation-wide strike. Interestingly, whether these external factors may in future affect the government’s revenue generation capabilities or not, is being speculated among the concerned quarters.

Many factors could be attributed to the low growth in tax revenue but the major ones among all those are the narrow tax base, loopholes in the tax system and suspension of an effective audit.

Around 90 per cent of the total general sales tax (GST) has been raised from just 15 items during 2006-07. The major contributors include, telecom services, POL products, natural gas, sugar, cigarettes, services, LPG, cement, beverages, auto parts, iron, steel, gases and acids.

Last year, it was the income tax which recorded an unprecedented increase of 46 per cent, and came to the rescue of the tax department in achieving the overall tax collection target of Rs835 billion. Three other leading indirect taxes — customs, sales tax and federal excise duty — even remained short of the downward revised target indicating a dismal performance during the year under review.

This clearly portrays the real tax picture which has reached the saturation point. As to what can be raised from these selected commodities or individuals has already been achieved. The next step needs some political support and dedication of tax officials to bring potential taxpayers in the net.

Some analysts view 2007-08 as a bad year for revenue collection. The tax officials are worried that they may not achieve the target.

It will be the new democratic government which will face the music as previously the revenue targets were not only achieved but surpassed due to economic boom of the past three successive years.

The unprecedented growth in imports had helped the tax authorities in achieving the revenue targets. However, the FBR did not diversify the revenue base nor plugged the loopholes in the tax machinery.

As shortfall is visible, the FBR may try old tactics to get more advance taxes from corporates or withhold refunds in a bid to show positive results, tax officials said, and added it would again distort the whole chain of revenue collection process.

Analysts said that less than 10 per cent of the tax-GDP ratio was a poor performance when seen against a high economic growth of over seven per cent over the last four years.

The FBR has projected an annual growth of around 18 per cent in tax revenue for reaching the proposed target of Rs4.3 trillion in the next 10 years against the current year’s projection of Rs1025 billion. This growth in revenue would materialise only if the economy sustains a growth in the range of eight to 8.5 per cent per annum, besides an average inflation of around seven per cent. The rest of the growth in revenue would be from additional taxation measures or bringing more tax-evaders in the net.

But again this projection is just based on the presentation made to President Musharraf in February last. It has no solid base as no study had actually been conducted to work out potential of revenue generation in different sectors.

The basis for revenue increase was the GDP growth. If the GDP growth remains below the projected target, the revenue would also not grow as targeted. Currently, the FBR generates more than 60 per cent of the total revenue from import-related taxes.

The presentation identified a few areas which contribute lesser revenue to the national exchequer. However, no study was being conducted to work out whether there was any potential in these sectors and how it could be realised.

For the last seven years, it was time and again highlighted that the country had a narrow tax-base, but no practical efforts have, so far, been made excluding a tax survey which produced no results. Though the number of registered taxpayers has increased manifold over the past few years, a sizeable number is not paying the taxes.

President Musharraf asked the FBR officials to particularly tap areas which had more potential for generating revenue. He said that sectors like retail, wholesale and transportation had immense potential for revenue generation.

In a presentation to traders at Islamabad Chamber recently, a World Bank expert, James Alm advised the government to minimise the tax rate and broaden its tax collection net to get more revenue for development activities. He cited the example of Egypt and Turkey which decreased tax rates to broaden their tax net and got very encouraging results.

He proposed that every new inducted tax payer should be eligible for a fix rate for at least five years and after that he should be subjected to the income-tax slab. This would encourage new tax payers to pay taxes.

Traditionally, the government has opted for the same old tactics to extend the last date for filing of income tax returns first to October 20 from September 30 and finally to October 31 to generate maximum revenue. But this will just fetch taxes in the range of Rs2-3 billion.

The ambitious revenue target may not be achieved and may subsequently be revised downward. What the tax officials need to do is to broaden the tax base and improve their efficiency.