DESPITE a lower than stipulated economic growth last fiscal year, the Federal Board of Revenue collected an all-time high of Rs3,112bn exceeding the target of Rs3,104bn. A few more billions may be added to the revenue after reconciliation of accounts in the next couple of weeks.
While the revenue has increased over years in absolute terms, the tax-to-GDP ratio has stagnated at around 10pc over the past few years. That puts a big question mark about the FBR’s performance as tax compliance and enforcement have deteriorated over the years.
Now the interesting question arises as to how the FBR managed to achieve its revenue target after several years of regular shortfalls. It is simple. The contributing factors are: withdrawal of tax exemptions worth over Rs100bn, new withholding taxes, imposition of regulatory duties on over 350 items and advance taxes.
Tax analysts believe the FBR has managed to achieve the revenue target through unsustainable and one-time artificial measures
The annual revenue collection target of Rs3,104bn was projected on the assumption that economy will grow at a pace of 5.7pc, coupled with 6pc inflation. Both targets were missed as economy grew by 4.7pc and inflation remained below 3pc. Independent experts say the net impact of the two indicators in revenue growth falls from 11.7pc to 7.7pc by end June 2016. Despite this, the revenue growth reached to an all time high of 20pc.
The third indicator is the sharp fall in commodity prices, which becomes a base for import duties — customs collection, sales tax at import’s stage and withholding tax. Yet the customs collection witnessed over 31pc growth.
Tax analysts believe the FBR has managed to achieve the revenue target through unsustainable and one time artificial measures.
But, Special Assistant to Prime Minister for Revenue Haroon Akhtar Khan argued that the actual revenue collection is the result of administrative measures and better enforcement. “We have not taken any artificial measures to achieve the target”, the advisor said, all measures taken are almost sustainable.
Mr Khan ruled out the possibility of advance taxes making final figures look good. However, he conceded that in 2014-15, an amount of around Rs35bn was taken as advance taxes.
It is common knowledge that exporters’ sales tax refunds are withheld to show positive results. The advisor said the total sales tax refunds are less than Rs100bn excluding income tax refunds and customs rebate. The stock of total refunds was Rs200bn in the year 2013, which is now reduced to Rs175bn. The decline in total stock of withheld refunds shows it is not being used as a lever to show feel good figures, says an FBR official.
The government has not succeeded in curbing tax evasion or distributing the burden of taxes fairly and equitably. Nor have tax exemptions been done away effectively. A study shows that tax evasion results in a loss of 5pc tax to GDP ratio. So the real challenge for the FBR is to enhance the narrow base of income tax still persists. Revenue from the existing sources is reaching a saturation point. Over-taxing the same sectors has lead to economic slowdown. Potential taxpayers have yet to be brought in the tax net.
The revenue growth has been restricted by a narrow tax-base, and the identification of 300,000 potential persons to be brought into the tax net, has been a futile exercise. While the number of registered taxpayers has increased, a sizeable segment is evading taxes.
Haroon Akhtar claims the government’s focus is now on not increasing tax rates, but to improve tax collection. Systemic or organised tax fraud is the major challenge for the tax department, which, he said, can only be addressed through better tax enforcement.
The number of taxpayers filing returns has stagnated around 1m and the tax compliance level is at a dismal of 32pc.
The tax revenue of 19 regional tax offices (RTOs) is raised through at source deduction, which accounts for 95-97pc of the total tax return. Currently, the cost of RTOs running these offices is more than the revenue generated by them.
Around 70pc of the income tax is contributed by withholding tax. Some of the withholding tax measures like banking transaction tax of 0.3pc generated around Rs22bn. The rate has now been increased to 0.4pc which will increase further revenue in the current fiscal year.
Super tax imposed last year on big corporate taxpayers generated over Rs24bn. This levy has been extended for the current fiscal year as well.
Published in Dawn, Business & Finance weekly, July 18th, 2016