AS the exercise of formulating the next federal budget begins, it would be pertinent to look at the prevailing ground reality in one key area — tax revenue — on which new budgetary policies and proposals can be realistically anchored.

One thing is clear: the government sets ambitious targets to build up hopes of the common citizens, even though it lacks the wherewithal to achieve them. To quote a comment: “the government believes that if you cannot deliver, at least give hope to the people”.

However, the situation should be worrisome for a government struggling to find money to clear the zooming circular debt and which is heavily dependent on foreign and domestic debts to tide over its fiscal and current account problems. The improvements in macroeconomic indicators have been largely driven by foreign capital inflows, with structural imbalances subduing economic fundamentals.

While reforms are slow to come, economic development and growth are also not fast enough to have an all-pervading durable impact on the macroeconomic indicators.

But back to tax revenue. Federal collection is expected to reach Rs2.56-2.6trn in FY15 if revenues grows15pc in the remaining four months of the fiscal; the growth rate for the eight months is 13pc. The original budget target of Rs2.81trn was revised down to Rs2.791trn last month.

While reforms are slow to come, economic development and growth are also not fast enough to have an all-pervading durable impact on the macroeconomic indicators

This will be the second consecutive year that the PML-N government will have missed its revenue-collection target by a big margin. The only option for the government is to either raise existing tax rates or introduce new taxes. The fundamental flaws in the tax machinery so far remain almost untouched.

The administrative issues evolve around poor compliance, week enforcement and inefficiency within the tax machinery. The Federal Board of Revenue (FBR) is facing problems in enforcing compliance, as only 750,000 had people filed income tax returns till December 5, against 835,000 returns filed in the previous year.

More troublesome is the fact that the ranks of taxpayers seems to be shrinking every year. In 2011, 1.44m people had filed tax returns; in 2013, only 840,000 did so.

On the corporate front, there are over 64,000 registered companies, of which only 15,000 filed income tax returns by December 31. That compares with 24,000 that had filed returns in the previous year.

This trend was acknowledged in a recent SECP report, which said over 4,600 companies have cheated the tax authorities, as they are still doing business but not filing income tax returns.

On the other hand, around 154,874 notices were issued to potential taxpayers between July 2013 and January 7, but only 31,901 people filed their returns. The government has tasked authorities to increase the tax base by 50pc by bringing in a further 1.25m people onto the tax rolls, but this target has been missed by a wide margin.

Lack of professionalism and efficiency within the tax department is another hindrance in revenue collection. Officers responsible for making initial assessments/projects, that are ultimately way off-track, need to be held accountable, while the good performing ones need to be rewarded.

At the outset, the revenue target for this fiscal was based on the assumption that the FBR would collect Rs2.275trn in FY14 (base year). But the revenue base was eroded by Rs20bn as Rs2.256trn was collected in the year.

Yet, the government has been reluctant in reshuffling the top tax managers despite their failure in achieving the tax target.

Apart from failures on the enforcement front, multiple domestic and international factors have impacted projected economic indicators, which bodes ill for tax collection. Economic growth is likely to miss the 5.1pc target and end at 4.3pc, while inflation is at a 10-year low; both these developments will impact collections.

The Asian Development Bank’s 2015 outlook points out that taxable transactions fell steeply amid lower global commodity prices, including those of petroleum products.

In response to the hit on tax revenues from this front, the general sales tax on petroleum products was raised from 17pc to 27pc over December and February. Taxes and regulatory duties on furnace oil and certain luxury items were also increased in February.

Apart from the fuel sector, another major revenue generator is large-scale manufacturing. However, growth in LSM sector has been far from satisfactory, mostly owing to persistent energy shortages which has led to unutilised industrial capacity.

Despite implementing a number of structural measures to improve tax compliance and broadening the tax base, the reforms have yet to yield a buoyant tax system.

Published in Dawn, Economic & Business, March 30th , 2015

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