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A legacy of firefighting

April 17, 2017

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Confronted with a huge shortfall in the revenue collection target, the Federal Board of Revenue has opted for short-term measures, such as easy-to-collect taxes for bridging the revenue gap in the last quarter of the current fiscal year.

The tax revenue has increased by around seven per cent against the projected target of over 17pc, to the required level. The new measures are expected to yield 15pc - 20pc growth in the last quarter.

Pakistan has assured the IMF that revenue will be around Rs3,549bn which will keep the budget deficit at 4.1pc by end June 2017. If the collection falls short of the projected revised target, it this will raise the budget deficit.

The original budget target of Rs3,620bn was revised down to Rs3,549bn. Provisional tax collection stood at Rs2,256bn up to March 2017, against Rs2,117bn in the same period last fiscal year — an increase of 6.56pc.


The government is, once again, struggling to find money to clear the zooming circular debt


However, the government is struggling to find money to clear the zooming circular debt, and repay debts.

The FBR estimates an additional yield of Rs1,17bn through extra measures mostly related to enforcement.

Under the proposed plan the FBR estimates collecting around Rs36bn out of collectable arrears and current demand; Rs15bn from cigarette manufacturers; Rs10bn from those taxpayers, who have shown negative sales and income in the current fiscal year; Rs15bn on account of finalisation of audit cases; Rs12bn from enforcement of non-filers to make them file tax returns; Rs10bn on re-activation of the alternate dispute resolution committee; Rs11bn on account of budgetary measure enforcement; Rs4bn from various withholding taxes audit and Rs4bn from customs enforcement measures.

A senior tax official said the shortfall in the first nine months was due to the pro-growth incentives offered to various sectors of the economy, particularly exports and agriculture; the major revenue gap amounting to Rs120bn was caused by not passing the full impact of increasing oil prices to the consumers.

Similarly, lowering duty rates on fertilisers resulted in a shortfall of Rs48bn while zero-rating for five sectors cost the exchequer Rs39bn. The export package will have a negative impact of Rs10bn on revenue collection in the current fiscal year, the official said. Moreover, the FBR also paid past outstanding refunds to exporters and other taxpayers as well.

A tax expert says the fundamental flaws in the tax machinery so far remain almost untouched.

Administrative issues evolve around poor compliance, week enforcement and inefficiency within the tax machinery. The FBR is facing problems in enforcing compliance, as return filing has remained around one million for the past couple of years.

While the revenue has increased over time, in absolute terms, the tax-to-GDP ratio has stagnated at around 10pc. Critics say tax compliance and enforcement have deteriorated over the years.

Tax analysts believe the FBR normally manages to achieve the revenue target through unsustainable and one-time artificial measures

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 amounted to a loss of 5pc tax to GDP ratio.

Revenue from the existing sources is reaching a saturation point. Over-taxing the same sectors is yielding poor results while potential taxpayers have yet to be brought into the tax net.

Published in Dawn, Economic & Business, April 17th, 2017