CONFRONTED with daunting challenges, the PML-N has limited time and space to evolve effective tax proposals for its maiden budget.
The current fiscal year is set to see huge shortfall in revenue target owing to poor governance in the tax administration and faulty tax policies.
The new government will present its tax proposals in a couple of weeks as the country records its lowest tax-to-GDP ratio marked by low tax compliance. In these hard times it would be a challenging job to qualify for the IMF’s Extended Fund Facility An IMF team is due in Islamabad sometime in June to discuss what has been described by a Fund official as ‘vulnerabilities’ in the Pakistani economy.
The revenue target for the current fiscal year has been lowered to Rs2,050 billion from the budgetary projection of Rs2,381 billion – reflecting a shortfall of Rs331 billion. This will widen the country’s deteriorating budget deficit.
The budget deficit is projected at 7.5 per cent, in case the Federal Board of Revenue (FBR) collects Rs2,050 billion by end June 2013. If revenue is restricted to Rs2,000 billion instead, the budget deficit will go up to eight per cent.
Pakistan’s tax-to-GDP ratio will come down from 9.1 per cent to around eight per cent this year – the lowest in the last 35 years.
Three factors have led to this dismal revenue realisation. It was agreed in the 7th NFC Award that provincial governments will take effective steps to collect taxes on farm income and real estate to help the country’s falling tax-to-GDP ratio increase to 15 per cent by the terminal year 2014-15. However, nothing has happened on this account. But provinces are getting their enhanced share from the Federal Divisible Pool as entitled under the 7th NFC Award.
Meanwhile, the tax compliance level fell to 23 per cent in 2012 from 39.5 per cent in 2011. It was 65 per cent in 2010. This poor tax compliance level can be attributed to the suspension of the tax audit. The compliance level in performing countries ranges between 70-80 per cent.
Data shows that more than 2.03 million wealthy people in Punjab are not paying taxes. Meanwhile, less than one million people in Sindh, and 386,233 in Khyber Pakhtunkhwa, 69,174 in Balochistan, 5,311 in Gilgit-Baltistan, and 46,657 in AJK are evading taxes.
At the same time, the tax return filing rate in Punjab is behind that of the rest of the country. Around 54 per cent of taxpayers did not file returns here in 2012.
This will be a test case for the PML-N to improve the tax compliance in the province which gave it a thumping electoral victory.
In 2012, Lahore emerged as a major city where 439,901 wealthy people did not pay taxes. It was followed by 208,274 people in Rawalpindi, 165,698 in Faisalabad, 116,748 in Sialkot and 110,864 in Gujranwala. In Sindh, Karachi emerged as the leading city where 726,375 people did not figure on the tax roll, followed by Hyderabad at 65,188.
Altogether, around 3.1 million tax evading rich were identified. Of these, 2.4 million did not have a National Tax Number (NTN), and 0.7 million were NTN holders who did not file tax returns. Bringing these people into the tax net will be a challenge for the incoming PML-N government..
The tax gap — difference between potential and actual collection — hovers around 60 per cent. This is one area where PML-N can work to improve revenue collection. It is believed that almost 84 per cent of tariff and duty rates have either been exempted or reduced for the benefit of special interests through statutory regulatory orders (SROs).
The whopping exemptions extended over the past few years have benefited mostly influential people. These SROs are a ‘financial NRO’ for the elite. The new government will have to withdraw much of these exemptions, and enforce tax audits, to raise tax revenues.
The sales tax law was introduced by then-prime minister Nawaz Sharif in the 1990s. But this law has now become outdated, and needs to be reformed. The previous government had, in 2010, already made an attempt to introduce a reformed general sales tax (RGST) law, which was blocked by opposition parties.
However, the PML-N was the only opposition party which took part in discussing the draft law, and also made recommendations to improve it.
On the other hand, the textile and clothing lobby has been one of the major supporters of the PML-N in the May 11 elections, especially from Faisalabad. And it will be a hard decision to withdraw exemptions from this holy cow. The government can, however, continue GST exemptions only on food items, as is the norm in many countries.
In short, the PML-N will have to broaden the tax base, revive tax audit, step up automation and reform the tax administration.