Discord over reforms likely to frustrate revenue ambition

LAHORE: Achieving tax target for the current fiscal year would be an uphill task for the government as the tussle between tax collectors and businesses might hurt the revenue collection.

Initial reports of tax collection in July are, however, not discouraging. The government collected Rs181 billion in the first 20 days of the current month and it needs another Rs125 billion in 11 days to achieve the monthly target.

The target may or may not be achieved, but it would not be missed by a wide margin.

Some economists believe that the International Monetary Fund (IMF) would press the government to enhance revenues to make up for the missed revenue targets of the last fiscal year and to contain the budget deficit within the limits set in the IMF’s $6 billion loan program agreed earlier this month. Demand to increase revenue would mean asking too much from an economy that is already in recession.

Tax collectors remain stubbornly steadfast on their taxation measures for the current fiscal year.

Their efforts created recession in the economy.

The devaluation of rupee and higher inflation has somewhat compensated the impact of recession in the tax collection.

On the import stage, they collected duty and sales tax at Rs158/dollar as against Rs118 a year earlier. They are collecting more sales tax on local sales on higher prices.

It seems that the Federal Board of Revenue (FBR) would not give any relaxation on the documentation that would ensure that the revenues would continue to increase as the year progresses. This, however, would not be enough.

The government would have to take steps to boost manufacturing sector. The construction sector, for instance, is in turmoil both due to increase in costs and due to government measures. Import prices of raw steel have increased substantially due to rupee devaluation.

The FBR is already collecting additional revenues on imports. Increasing sales tax on steel mills production has further enhanced the price for construction industry.

There has been a decline of around 11 percent in the production of iron and steel in 2018/19 when there was no enhanced sales tax.

The production would further decline after new tax measures.

Likewise, cement production declined 3.68 percent in the last fiscal year.

But this figure is misleading. Cement uptake in the domestic market declined around 10 percent – almost the same as decline in steel production. Exports of cement, however, increased 38 percent.

To make the matters worse, the condition of axle load limit has been imposed. There was no such condition in the last three decades. The limit has increased the transportation cost for cement, making it more expensive.

The FBR is, however, justified in forcing cement dealers to come under the documentation mode.

Some minor adjustments in procedures and taxes could boost the construction sector that is the largest creator of unskilled jobs in the country.

Automobile and pharmaceutical sectors also require prudent policies. If the intention of the government is to enhance revenues from automobile sector through excise duty and other taxes then it is surely going to backfire.

The government might collect higher duty per car, but its cumulative revenue collection from the sector would decline because of lower production.

Decline in pharmaceutical production is tragic at a time when patients are running from pillar to post to buy essential drugs many of which are out of stock due to pricing issues.

Health indicators in the country are already worst in the region, inviting a health disaster by denying pharmaceutical sector a commercially viable environment.

Tax efforts should be pursued with vigor but with prudence to avert impact on productivity and job creation.

There should be no letup in documentation drive and against those that under-report production, but the honest and compliant businesses should not be marginalised through higher tax rates.

Pakistan is at a crossroad where any wrong measure would undo the benefits of tax reforms being pursued by the economic managers.