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Owing the country: Missing the tax targets

June 10, 2013

THE Federal Board of Revenue is going to miss the tax target — again. Reports suggest that it will not be able to collect even the revised target of Rs2tr, which is 86pc of the original tax estimates of Rs2.38tr for the current fiscal. The board has collected just Rs1.68tr in the first 11 months of the year to May. With an average monthly tax collection of Rs153 billion, the total is unlikely to cross the Rs1.90tr mark by the end of June. This will spell more problems for the new Nawaz Sharif government. The tax collection shortfall means the government will be forced to either borrow more from banks or print new money, or both, to bridge the widening budget deficit, which is feared to swell to 7-8pc of the size of the economy by the close of the year.

There are many factors responsible for the lower-than-estimated collection of taxes. The FBR blames a slowing economy for its inefficiencies. While this is one reason, the board could have done a much better job were it not plagued by rampant corruption at every level, and wrangling among its senior officers for lucrative posts. The board requires wide-ranging governance reform and the increased use of information technology in its functions to improve tax administration, plug loopholes for corruption and decrease the discretionary powers of tax collectors at every level. However, the unwillingness of successive governments to tax the untaxed and under-taxed incomes, and to extend exemptions to various lobbies either to retain or buy their political loyalties, is the most important factor responsible for the far lower-than-potential tax revenue generation. This has resulted in a substantial increase in the burden on existing taxpayers and led governments to resort to indirect taxation at the cost of higher inflation and taxing the poor, who shouldn’t be paying any at all.

The PML-N manifesto promises to broaden the narrow tax base. Also, it promises to cut indirect taxation on the poor and increase direct taxation on the wealthy and powerful. The budget is just a few days away. Early signals on the new government’s tax policy are not very encouraging. With our tax-to-GDP ratio of just above nine per cent being one of the lowest in the world, the first real test of the Nawaz Sharif government will be its ability to collect the tax the wealthy and powerful owe. It will also determine the direction in which the government will want the economy to move — forwards or backwards.