Mobilising non-tax revenue is just as difficult as tax revenue. But then the government has to decide every year how much taxes it should collect and how much non-tax revenue it should generate.
Structural flaws in taxation and the political system make it difficult to hit tax targets. And a lack of capacity to run state-owned enterprises (SOEs) profitably and the absence of right policies come in the way of realising non-tax revenue targets. Success and failures in target realisation also depend, to a great extent, on the global and regional economic situations and domestic circumstances.
That said, tax and non-tax revenue targets in Pakistan’s next fiscal year budget seem hard to achieve — but not at all impossible. The government has set Rs5.8 trillion as its target for tax revenue for 2021-22. But the Federal Board of Revenue (FBR) has made it clear that without applying new policy or administrative measures, actual tax revenue based on macroeconomic projections could be only Rs5.33tr. Which means the government plans to collect at least Rs493 billion (Rs5.83tr minus Rs5.33tr) by introducing new policy or administrative measures — like not passing on the benefit of a fall in international oil prices to consumers or allowing tax officials of the ranks of assistant collectors and above to arrest tax defaulters. Such policy and administrative measures have already backfired politically and continuing with them will prove too difficult.
The SBP’s earnings might be affected if low interest rates persist
That makes the task of meeting the non-tax revenue target all the more important for the government even if it meets the basic tax revenue target of Rs5.33tr.
The target for non-tax revenue collection is Rs2.08tr. When we add this amount to the overall tax revenue target of Rs5.83tr, we get the total revenue receipts target of Rs7.91tr. The government needs to have this much money in the national kitty next year against the projected expenditures of Rs8.49tr. The gap between the two will obviously be fixed with borrowing from banks and non-bank sources.
Over the years, governments in Pakistan have failed to tap the full potential of non-tax revenue. The foremost reason for this failure is that most of SOEs or public-sector enterprises (PSEs) are not run on professional grounds. Some amongst them — PIA, Pakistan Steel, Pakistan Railways and power distribution companies — have rather become a drain on the national exchequer instead of being a source of non-tax revenue.
Pakistan had agreed with the International Monetary Fund (IMF) under its 2013 lending programme — and has once again agreed with it under its current lending programme — to pursue PSE reforms. But not much happened as a result of the 2013 agreement and the ongoing PSE reform plan is also progressing at a very slow pace.
Now under an Asian Development Bank (ADB)-supported initiative, Pakistan has bifurcated its PSEs under two main categories — ones that need to be privatised and the others whose financial performance will be watched constantly by the Securities and Exchange Commission of Pakistan (SECP) and the Ministry of Finance. If this initiative works well, then non-tax revenue generation from PSEs can yield the targeted amount of non-tax revenue.
Successive governments have failed to tap the full potential of non-tax revenue. The foremost reason for this failure is that most SOEs operate unprofessionally
For 2021-22, the target for raising revenue from such PSEs plus the properties owned by the government is Rs265.8bn. But meeting this target depends upon how aggressively the SECP and the Ministry of Finance push them to improve their financial performance. In 2020-21, the target set for them saw an 11pc slippage, according to the budget estimates.
Receipts from the Civil Administration are another key source of non-tax revenue of the federal government. These include federal licence fees, fines imposed on violation of federal laws, dividends on federal investment, petroleum levy, Gas Infrastructure Development Cess, Natural Gas Development Surcharge and others. And that is where a silver lining exists. Because of increased computerisation and greater use of IT-enabled services, leakages in such receipts are expected to fall, thus raising the actualised amount of receipts. Dividends on federal investment in private-sector companies are also expected to remain high due to the incentives that the 2021-22 budget has offered to the stock market — the most important being a cut in the capital gain tax.
The target for non-tax revenue under this head is Rs684bn for 2021-22. This target is lower than the estimated collection of Rs727.5bn in 2020-21 and the past trend in the collection of non-tax revenue under this head is encouraging, according to the budget estimates. So one can expect that a sizable chunk of non-tax revenue would come handy in 2021-22 via the federal government’s administration receipts.
Profits earned by the State Bank of Pakistan (SBP) and Pakistan Telecommunication Authority (PTA) also a part of non-tax revenue. For 2021-22, the government has estimated a Rs650bn transfer of the SBP profit to the national exchequer, up from Rs620bn in 2020-21. But if low interest rates persist even for the first one or two quarters of 2021-22, the central bank’s earnings might be affected and the annual transfer of Rs650bn could become hard to materialise. In that scenario, greater activity of the SBP in the interbank forex market to ward off volatility in the exchange rate should help it keep its profits high.
Net earnings of PTA can or cannot remain high enough in the next fiscal year to boost non-tax revenue. That depends on the pace of the payment of existing GSM (global system for mobile communication) fee by cellular phone companies and on the exact timing of the auction of a higher minimum Next Generation Mobile Services spectrum.
Forex earnings under this head become part of foreign direct investment but higher spectrum offering also results in higher fee collection by PTA.
Published in Dawn, The Business and Finance Weekly, June 21st, 2021