Off the target

A review of the FBR’s performance during the first half of FY 2020

The Federal Board of Revenue (FBR) has collected taxes of Rs2080 billion during the first half of current fiscal year (FY 2020) that is 16.95 percent higher than Rs1784 billion collected in the corresponding period of last fiscal year. However, the collection missed the revised revenue collection target by a margin of Rs287 billion. The target set was of Rs2367 billion.

According to reports, the FBR officials are expecting further addition of Rs2-4 billion in book adjustments when the final figures are compiled. They are obviously jubilant that their performance is much better than expected. They also expect more funds as in the late hours of December 31, 2019, FBR extended yet again the date for filing of income tax returns/statements for the tax year 2019 until January 31, 2020. The extension is made available to all individuals (salaried and non-salaried), association of persons and companies. It is reported that the FBR received till the last day of 2019 about 2.15 million returns as against 1.5 million received during the same period last year.

The FBR’s spokesperson, Dr Hamid Ateeq Sarwar, told the media that “the date is extended to receive another 600,000 due returns”. What is the exact size of tax base? Many say we should receive at least 6.5 million tax returns as out of tax force of 65 million, not less than 10 percent earns taxable income! They blame weak enforcement and capacity issues of the FBR for this gap in the number of filers. All the registered 164 million cellular users as per Pakistan Telecommunication Authority as on November 30, 2019 were paying advance and adjustable income tax of 12.5 percent. Out of them how many have taxable income? No study/exercise by the FBR has been undertaken so far to determine the number of potential tax filers.

It is worth mentioning that FBR internally revised the first half year’s target to Rs2367 billion from the earlier projection of Rs2495 billion. On December 23, 2019, the International Monetary Fund (IMF) agreed to a reduction in full year’s target by Rs285 billion — the set target in the budget was Rs5503 billion.

The head-wise collection in the first half year vis-à-vis targets set is as under:

Customs gross collection at Rs325 billion fell short of the target of Rs414 billion by Rs89 billion or 21.5 percent. The main reason assigned is drastic fall in imports.

Gross collection of income tax is reported at Rs790 billion against the target of Rs858 billion registering a shortfall of Rs68 billion or 7.92 percent.

Sales tax collection on goods on gross basis is Rs891 billion, lower by Rs59 billion of the target assigned — a shortfall of 6.21 percent.

Gross collection under federal excise duty (FED) is recorded at Rs126 billion whereas the target was Rs144 billion, showing a shortfall of Rs18 billion or 12.5 percent. .

According to reports, the FBR claimed that during the first half of the current fiscal year, it paid Rs53 billion refunds to taxpayers, mainly to exporters. Rs22 billion refunds for sales tax and Rs8 billion for income tax were paid through bonds. Taxpayers say total refunds payable, determined not disputed, are still to the tune of over Rs250 billion. The FBR denies but does not give the exact party-wise figures. We need an independent committee under FTO that should investigate and settle this controversy once and for all. The real net collection then can only be determined to gauge the true performance of FBR.

The sluggish economy, double digit inflation, high interest rates and fall in imports, which is hurting growth, investment and employment is not the concern of donors/lenders as evident from their various reports/papers. According to a report, “IMF cuts FBR’s tax target to Rs 5.238 trillion”, “The International Monetary Fund (IMF) has projected significant fiscal slippages and has finally cut the tax collection target to Rs5.238 trillion, which raises questions over claims of bringing fiscal discipline and restoring macroeconomic stability…Pakistan’s budget deficit will slip from the projected 7.3 percent of GDP or Rs3.2 trillion to Rs3.4 trillion or 7.6 percent of GDP,” according to the IMF.

The World Bank, in an appraisal paper, has termed “vested interests lobbying for tax exemptions, internal tensions and wariness of change among the Federal Board of Revenue (FBR) staff, and potential disputes affecting provinces’ readiness to collaborate with the FBR high-risk factors” for tax reforms. The World Bank has estimated “Pakistan’s tax gap at 10 percent of the GDP or Rs3.8 trillion. Our current tax-to-GDP ratio is 12.6 percent that according to the World Bank should be 23 percent”.

The important question for the remaining six months of the current fiscal year is: Does the government possess any workable plan to bridge the huge fiscal deficit of 7.6 percent of GDP forecast by the IMF for FY 2020? Will the actions proposed by the World Bank under its US$ 400 million ‘Pakistan Raises Revenue Project’ or conditions imposed by the IMF help meet the daunting challenge of debt servicing that has increased to over Rs3000 billion? If the FBR does collect Rs5 trillion, 57 percent will go to provinces and the federal government will be left with no more than Rs2500 billion (customs collection is not part of NFC Award). One head, debt servicing alone is more than what the federal government retains as taxes after transferring shares of provinces in terms of 7th National Finance Commission (NFC) Award.

What is the remedy? Not destroying the ailing economy with more regressive/oppressive taxes, but to reduce monstrous wasteful expenditure. This is where the actual fault lies, as pointed out rightly in Thieves of State by Rashid Javaid Rana, “The vigorous campaign to reform revenue collection may not prove fruitful without understanding prevailing symptoms such as the lack of societal tax culture, absence of equitable and transparent government spending…..Placing responsibility to bridge the widening gap between revenue and expenditure on the shoulders of FBR alone will not prove successful.”

Perpetual failure of the FBR to meet assigned targets is not something new. A large part of the blame goes to political masters who keep on giving amnesties, waivers and immunities. During the last fiscal year, negative growth of 0.4 percent in revenue collection was the result of policies of appeasement on the part of the PML-N and then the PTI.

Every year the FBR fails to collect downward revised target what to speak of originally assigned one in the budget estimates because tax evaders and avoiders are the favourites of political masters.

The ever-widening fiscal deficit, resulting in more borrowing and taking away a large part of the budget for debt-servicing, cannot be reduced until (i) we curtail unproductive/wasteful expenses by 30 percent (ii) increase non-tax revenues by leasing out valuable state lands and assets e.g. government official residences (GORs) and palatial government houses etc through public auction and for specific activities to generate employment and boost economic activity and (iii) make taxes at all levels — federal, provincial and local — simple, low rate and broad-based, and payable with ease to one federalised agency.

Successive governments have failed to end harmful tax policies, refrain from giving amnesties and immunities and reduce wasteful expenses. No serious effort has been made by any government to broaden the tax base through lowering of rates, effective enforcement and reduction of unproductive/wasteful expenditures. Unfortunately, till today, the PTI is also no exception!

The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)

A review of FBR’s performance during first half of FY 2020