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Tax headaches and FBR

December 11, 2018


FACED with a revenue shortfall in excess of Rs100bn, the government is reportedly hunting for ideas on raising new taxes through which to bridge the fiscal deficit. The amount is almost 10pc of the total revenue collected in the first quarter of the fiscal year. It makes for a large shortfall, creating a deficit equal to or larger than 1.4pc of GDP (the reported figure from July to September). It is not unusual for new governments to run a large deficit in the first quarter, and there have been examples in the recent past. Nevertheless, at present levels, the figure is on the higher side in view of first-quarter deficits of the past 10 years. Perhaps FY2011 was the only time when it was higher, and that was the first year when the effects of allocations under the new NFC award were setting in. At one go, the first-quarter provincial share in federal revenues had more than doubled.

Thus far, the government has been focused on finding the resources with which to plug a yawning deficit on the external account, but its attention must surely now turn to also include the fiscal deficit. Reports say that the matter has acquired enough urgency to be elevated to the level of the prime minister, who has been briefed by officials of the Federal Board of Revenue about the reasons behind the sharp shortfall, and measures have been suggested to arrest it. The shortfall has also prompted a significant reshuffle in the FBR. The new tax measures include, according to the same reports, reforming the mechanism for taxing petrol and diesel so that tax is levied as an absolute amount rather than a percentage of the price, with an attempt to restore taxes on mobile phone cards.

What is important in all this is that whatever short-term measures are adopted, they must not be regressive, nor should they increase the burden on compliant taxpayers. The temptation to squeeze those within the tax net is always strong, and comes almost as a reflex action to FBR officials. It is for this reason that the government needs to be on its guard against such advice. Likewise, regressive taxes tend to be the most elastic and offer the path of least resistance to the tax bureaucracy, which is notorious for its corruption and laziness. The government has promised change, with an emphasis on the tax machinery. The PTI manifesto promises deep FBR reforms to change the structure and face of the organisation, and the prime minister reiterated that commitment in his maiden speech to the nation, in which he promised to begin his agenda for change with the FBR. Clearly, the time to start work on the promise has now arrived, even if navigating the space between higher revenues and social justice can prove to be a tightrope act.

Published in Dawn, December 11th, 2018