Taxing times

The PTI government has now found itself confronted with another major challenge: improving tax collection. The outgoing government had presented the current government with a poisoned chalice after deciding to offer large tax cuts in its outgoing budget. This, in addition to the SC decision to suspend tax collection on mobile phones and a reduction in sales tax on petroleum products, has led to a Rs102 billion shortfall in revenue collection in the first five months of the fiscal year. Top FBR officials are worried about the situation and have brief the prime minister about the issue. Now, it appears that the federal government is going to resolve the situation by introducing new taxes. The shortfall itself has come from the reduced petroleum tax and mobile phone tax, which have cost Rs35 billion and Rs16 billion each. The trouble is that shortfalls in tax collection can only be solved through tax collection, which means that any benefit accrued by the public will now be offset by a new set of taxes, which will recover the amount by other means.

Questions over the legality of any such move will have to be seen, much like the tax on mobile phone cards. The FBR’s first point of call is to propose that the SC be approached to restore the mobile phone card tax. The annual revenue collection on the cards is around Rs80 billion, which the FBR would not like to lose. The other more interesting proposal is to fix the sales tax per litre of petrol so that it remains constant, even when oil prices change. There are advantages of such a move, both in terms of taxation and in terms of its potential benefit to the public when oil prices go up. This would improve revenue projection and was used before in 2016 amidst falling oil prices.

For the government, it would be important to gets its forecast right on international oil prices. The current scenario suits it better if prices are to rise, but it might not be the best if prices fall. The FBR also says that the tax base itself has been reduced by around Rs90 billion. Provincial tax collection is falling short of the mark. This has made it hard for the government to meet the 14 percent tax growth target at the end of the fiscal year. The current government has only restored the taxes on the salaried class, while tax cuts on other goods and services have not been restored yet. The government is likely to respond with emergency tax measures, which are unlikely to solve the more serious crisis in tax collection, which still pertains to income tax collection. The PTI, despite its promises, will continue the indirect taxation approach, where the burden continues to fall on consumers, rather than the providers of goods and services. Temporary relief might work but it is not a solution in the long term.