Tax revenues

Published April 2, 2022

THE 29pc growth in tax revenue collection by the FBR during the first three quarters of the present financial year to March from the last fiscal is encouraging. But is it enough? Or does it represent the country’s true tax potential? A cursory look at the disintegrated tax data issued by the FBR for the period under review will confirm that the increased revenue collection does not show an improvement in tax compliance and enforcement. Nor does it give us hope that the FBR will succeed in achieving the enhanced tax target of over Rs6.1tr for the ongoing fiscal as agreed with the IMF in January. The bulk of Rs4.38tr collected so far — 52pc of the total tax revenue — has come from a massive jump in imports fuelled by spiking domestic demand due to the procyclical policies pursued by the government in the first half of the fiscal. Once imports started to slow down and taxes on purchases of petroleum products were slashed, the collection also began betraying signs of tapering in the last few months. Indirect taxes — GST, customs duty, FED, etc — constituting almost two-thirds of the total collection are also a big question mark over the capacity and ability of the tax machinery to boost revenues. Even a large chunk of direct taxes (on incomes) is raked up by businesses that are required to withhold a percentage of their transactions for the FBR, or is gathered at the import stage.

Tax revenues are the main source of governments’ spending capacity all over the world. Pakistan’s failure to raise its tax-to-GDP ratio beyond 9pc to 12pc means that the government would have limited capability to invest in essential public services, and finance economic and social development. Little wonder then that successive governments have had no choice other than to take on debt to pay for their burgeoning expenditure and fund development in the country. Boosting tax revenues for public investments and improved service delivery has by far been the country’s most fundamental challenge and a major cause of the economic troubles confronting us today. Yet no government has dared to fix the FBR to improve tax governance, compliance and enforcement for fear of a political backlash. Thus, Pakistan’s tax administration remains one of the most corrupt, inequitable and inefficient in the world, in spite of several attempts to reform the system in the past. Expecting a sustainable economic turnaround without revamping the existing tax system and machinery makes no sense.

Published in Dawn, April 2nd, 2022

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