FEDERAL tax revenues rebounded in the first quarter of the current financial year on the back of a growing economy supported by public goods and, no less important, by a surge in voluntary direct tax payments.

The total revenue jumped up by 22 per cent, up from 6.3pc growth in the previous year, with direct taxes increasing at almost the same pace —20pc — as the rate of indirect taxes.

The State Bank of Pakistan (SBP) data shows that voluntary tax payments (VTP), having a share of 22pc in total direct taxes, shot up by 16.9pc despite a cut in corporate tax by one percentage point and a 36.6pc decline in bank profits.

It is not clear whether this is the beginning of a behavioural change — where “taxes are not seen as a burden but as a voluntary contribution for public goods” — or merely the result of enhanced business margins.

SBP’s latest quarterly report suggests that corporate profitability (of other than banking sector) might have contributed to this marked improvement in voluntary tax compliance.

In the special section of the quarterly report, the central bank has suggested that the tax authorities should design appropriate “nudges” to mould taxpayers’ behaviour to promote voluntary compliance. For this, the report stresses that the various causes of taxpayers’ “deviation” from “rational behaviour” needs to be identified and analysed to design appropriate responses separately in each case.

Growing economy backed by public goods offers policymakers a good opportunity to gradually move away from ‘emphasis on traditional approaches’ and adopt ‘innovative tools’ for boosting resource mobilisation

The report also quotes the example of some countries which have developed behavioural insights for resource mobilisation and benefited from this innovative approach. In the case of social norm acting as a barrier, a strong message could be sent across that every tax payment made is “an assurance of a more organised society and a more secure future”.

But for social norm to change, there is a strong need to ensure two things. First, every tax rupee is spent on public good and not siphoned off by rent-seekers. Secondly, the tax system should gradually rid itself of extractive and iniquitous tax policies as VTP increases.

Priority should go to reducing the burden of sales tax on goods and repressive withholding tax, each of which account for 74pc of indirect and direct taxes, respectively.

The problem of “perceived complexity of tax procedures”, quoted as an example in the report, is being tackled by national and provincial tax authorities through the induction of online facility. That includes an important effort to reduce interaction between tax officials and taxpayers.

There is merit in SBP’s suggestion for tax authorities to set up a behavioural insight unit to nudge people for VTP. These behavioural units can intensively communicate with taxpayers and send information in a particular format to influence taxpayers’ behaviour and secure desired outcome.

However, there is also evidence pointing towards a different reason behind increasing tax revenues. Federal development spending took a big jump to Rs100bn from Rs64bn over the comparative periods under review. In the past two to three years, energy supplies have improved and infrastructure has been significantly upgraded. It is possible that public goods, which have fuelled growth, may have also been a catalyst for increasing VTP.

A promising trend in tax performance is evolving fiscal federation leading to enhanced provincial tax revenues. Helped by 43.7pc increase in provincial tax revenue during the quarter (exceeding the increase of 22pc on FBR’s revenue collection), the combined provincial own tax revenue accounted for 16pc of the combined central and sub-national tax revenue.

Sales tax on services and property tax were major revenue spinners. Incidentally, sales tax on retail services has been retained by the federation. Fiscal federalism has helped the provinces to gradually reduce their dependence on federal resource transfers.

To ease financial fiscal constraints on the federal government, Sindh has proposed to the National Finance Commission that it should be allowed to collect sales tax on goods, as provided in the Constitution, without disturbing the existing distribution formula under the 7th NFC award.

Sindh says a larger pool of sales tax on goods will equally benefit all stakeholders. The additional revenue amount will be shared by Balochistan, KP and the federation, who fear that their share would drop if the suggested mode of collection is changed.

“Everyone will benefit,” says an official and adds that Sindh may be “rewarded by a certain percentage of extra collection that exceeds set targets”. Unlike devolution, the proposal reflects the true spirit of fiscal federalism.

The growing economy backed by public goods offers policymakers a good opportunity to gradually move away from too much “emphasis on traditional approaches” and adopt “innovative tools” for boosting resource mobilisation.

jawaidbokhari2016@gmail.com

Published in Dawn, The Business and Finance Weekly, February 5th, 2018