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Tax mobilisation failure

January 09, 2017
Finance Minister Ishaq Dar conducting computerised balloting for audit for tax year, 2015 (Income Tax, Sales Tax and Federal Excise Duty) at the FBR Headquarters in Islamabad on Jan 5.—APP
Finance Minister Ishaq Dar conducting computerised balloting for audit for tax year, 2015 (Income Tax, Sales Tax and Federal Excise Duty) at the FBR Headquarters in Islamabad on Jan 5.—APP

When the five stakeholders of the National Finance Commission — the centre and four federating units — signed the 7th award on Dec 30, 2009, they committed to ‘achieve 15pc tax to GDP ratio by the terminal year of the award i.e. 2014-15’ by reducing leakages and streamlining tax collection systems.

The starting benchmark for the tax-to-GDP ratio of the fiscal year 2009-10 was 9.3pc. It was agreed that provinces would initiate steps to effectively tax the agriculture and real estate sectors to deliver 5.7pc of additional tax-to-GDP ratio. A year-wise path was also set under clause 2 of Article 9 of the NFC that required the centre to contribute 3.95pc tax to the GDP followed by 1.75pc of GDP from the four provinces.

Six years down the road, all five stakeholders have confirmed that none delivered on the basic premise of the 7th NFC award, one that transferred a cumulative 15pc share in net proceeds from the federal divisible pool to the provinces. Hence, the centre has revived its efforts to get back 7pc of total taxes under any future award.

In a report finalised by the National Finance Commission with consensus and submitted to the parliament, it emerged that all five have failed in the past six fiscal years to deliver on their promise to increase the tax-to-GDP ratio to 15pc in five years. The federal government reported that its tax to GDP improved only 0.2pc in six years against its target of 3.95pc in five years. ‘Tax to GDP ratio has improved marginally. In fact, it improved from 9.4pc in 2012-13 to 9.5pc in 2015-16’, the report said.

The NFC reported that even when the federal government showed some rare improvement in tax collection, the three larger provinces further dwindled even though they enumerated a series of measures to improve revenues.

It said that 2015-16 was an exceptional fiscal year when federal taxes stood at 107.08pc above the budget estimates with total collection of Rs3.66 tr against a target of Rs3.42tr. Of this, FBR receipts stood at Rs3.132tr or 100.9pc of Rs3.104tr budget target.

The overall tax receipts by the four provinces on the other hand fell by almost 6.9pc.

With a larger base, Punjab’s tax collection during 2015-16 also fell 6.92pc to Rs149.5bn while Sindh’s revenue receipts dropped 1.21 pc to Rs123bn. Khyber Pakhunkhwa showed a dismal performance as its revenue collection dropped more than 42pc in 2015-16 to Rs13bn. With a minor tax base, Balochistan however showed an 119pc growth in taxes to Rs4.3bn.

The report revealed that the 0.2pc growth in tax to GDP ratio at the federal level was despite a series of initiatives introduced by the federal government, including elimination of the SRO culture, removal of tax exemptions, rationalisation of import tariffs and tax rates and ‘broadening of tax base that increased number of tax filers from 700,000 in 2012-13 to more than one million in 2015-16’.

It, however, did not say that most of the initiatives for broadening the tax base and improving collections could not deliver the desired results and that at least three tax amnesty schemes had been launched in as many years in various crucial sectors without any meaningful success.

The Punjab government reported that it had brought ten new services into the tax net such as public relations firms, chartered accountants, auditors, corporate law consultants, air travel and transportation of goods by air, chartered flights, hiring of equipment and machinery services, debt collection, supply chain, photography and sponsorships.

It also claimed credit for introducing the infrastructure development cess on the pattern of Sindh and KP at 0.9pc on goods other than fresh food items imported into the province and custom-cleared through ports, dryports and bonded warehouses; besides improving rates, stamp duty mechanism on properties and land valuation increase for capital value tax.

The Sindh government said its tax reforms unit, set up with World Bank support, was contributing significantly towards improved agriculture income tax, stamp duty, registration, excise, motor vehicle tax, infrastructure development cess, electricity duty and sales tax on services.

KP reported it had increased the number of services under the tax net from 48 to 57 and revised rates of at least six critical provincial taxes like taxes on real estate and vehicle bargain agents, parking and permit fees etc.

It blamed the federal government for low tax collections saying clearance for infrastructure cess was delayed by the FBR and electricity duty payments were adjusted against electricity bill payments by the provincial departments.

Balochistan said the major contribution of 21pc in provincial taxes came on account of GST on services besides agriculture income tax and better property taxes.

Despite all this, the report submitted to the parliament as required under Clause 3(B) of Article 160 of the Constitution, said the four provinces received a greater share in taxes than budget estimates during 2015-16 because of better (20pc) collection at the federal level

It said Punjab had been promised Rs895bn in the budget and it received Rs901.45bn, an increase of 0.75pc. Sindh received Rs500.08bn against a budgeted commitment of Rs482.8bn, a rise of 3.6pc, due to high returns on natural resources. KP was promised Rs300.452bn in the budget and it received Rs302.05bn, an increase of 0.52pc. Balochistan was given Rs187.66bn in 2015-16 against a promised share of Rs171.5bn, up by 9.42pc.

Total FBR receipts included some non-divisible pool components. Therefore, after deducting such components, the gross divisible pool taxes were worked out at Rs3.084tr instead of Rs3.131tr.

Of this, the total provincial share (vertical share) was worked out at Rs1.73tr.

Published in Dawn, Business & Finance weekly, January 9th, 2017