FBR paying refunds through supplementary grants

ISLAMABAD: The FBR has adopted a ‘unique’ method for paying Rs100 billion refunds through supplementary grants in a bid to inflate its revenue collection for last fiscal year.

It had happened first time in the country’s history that such ‘innovation’ was made to show that the FBR achieved growth of just over 4 percent. When contacted to FBR high-ups, they argued that the last fiscal year was unusual so the government decided to provide tax refunds through supplementary grants. This refund payment was part of overall stimulus package of Rs1,240 billion to ward off negative impacts after outbreak of COVID-19 pandemic.

The government had assigned the FBR target of Rs5,555 billion for 2019-20 that was revised downward to Rs5,238 billion after first review of IMF. When Pakistan-IMF were finalising incomplete second review, both sides had agreed to further reduce the FBR target to Rs4,803 billion. Then the COVID-19 pandemic had erupted, the FBR target was further slashed to Rs3,908 billion. Now the FBR claimed to collect Rs3,989 billion collection in last fiscal year that ended on June 30, 2020.

However, independent economists do not agree to this stance and stated that the government in order to avoid the humiliation of an overall year-on-year decline in FBR collection for the second consecutive year adopted a unique tactic in the just concluded financial year.

Refunds of overpaid income tax and sales tax amounting to Rs100 billion instead of being adjusted against FBR revenues were paid out of a supplementary grant allocated by Finance Division to FBR. Refunds are always deducted from the gross collection of the type of tax to which the refunds relate and the collection reported by FBR is always the net collection excluding the amount of refund.

However, in the last year instead of deducting the entire amount of refunds from the gross collection made by FBR, refunds of Rs100 billion were paid from the expenditure budget and did not impact the collection reported by FBR. This treatment is not only violation of the principles of accounting of government finances but is also unsound financial management.

The government never tires of airing its grievances regarding the revenue distribution between the federation and the provinces under the 7th NFC award, but is displaying an inability to address the challenges inherent in the revenue distribution formula.

Had the refunds been paid from FBR revenues, the federal government would have borne the burden to the extent of Rs42.5 billion and the remaining amount of Rs57.5 billion would have been borne by the provinces, as per the revenue sharing mechanism. However, by diverging from the established practices the federal government took upon it the entire burden of Rs100 billion and that too just to show an inflated collection by FBR.

The government is also claiming credit for having paid higher amount of sales tax refunds as compared with the preceding year.

This ignores the fact that this was the first year in which the zero rating of the inputs of the five export oriented sectors namely textiles, leather, carpets, surgical and sports goods was withdrawn. At the time of withdrawal of zero rating through Budget 2019, the FBR promised the exporters to refund the sales tax paid on inputs to them in a few days.

However, the refunds claimed by exporters even for the month of July 2019 are still unpaid and the FBR pocketed the tax collected from exporters without paying the entire amount of refund due to them. The sales tax refunds had to be of necessity higher than the refunds paid in the preceding year but these needed to be much higher if the entire amount due to exporters had been paid, they concluded.