Targeting the tax net

February 16, 2020

Continuity in revenue collection policies can be important in achieving the targets

Pakistan is likely to get the third tranche of $452 million under the Extended Fund Facility of $6 billion if the second quarter review finds economic performance satisfactory.

While all aspects of economic performance are under discussion the focal point is the performance of the Federal Board of Revenue (FBR). On the instructions of the IMF an ambitious revenue target of Rs 5.5 trillion was set for the fiscal year 2020. The target seemed to be quite ambitious because the FBR was not able to meet a target of Rs 4.1 trillion last year despite extending two tax amnesty schemes.

Given the tough economic conditions, the IMF has already brought down the target by Rs 262 billion to Rs 5.238 trillion. Senior officials of the Ministry of Finance privy to talks say the government tried to convince the IMF that in the current economic scenario collection of even 4.7 trillion will be a big achievement. However, the IMF mission chief, Ernest Rigo, and his team did not agree to revise the revenue target. IMF officials were also reported to have expressed concerns over the absence of FBR Chairman Shabbar Zaidi.

The chairman is on medical leave but rumours are rife in the federal capital that serious differences have emerged between Shabbar Zaidi and Hafeez Shaikh. In the first week of January, Zaidi took a leave of 15 days due to health issues and then resumed office on January 21. He again went on leave on medical grounds on January 31 this time for an indefinite period.

Sources in the Ministry of Finance say that when FBR chairman rejoined the office, Finance Adviser Dr Abdul Hafeez Shaikh visited the FBR head office and held long meetings with him and some senior officials of the FBR.

The adviser reportedly, expressed his dissatisfaction with the performance of the FBR. He was also unhappy over a delay in the payment of sales tax refunds to the exporters. He reminded the FBR chairman that on his advice he had assured the exporters that their claims will be processed through Fully Automated Sales Tax e-Refund (FAST) system and they will get refunds within 45 to 60 days.

Exporters had complained to the adviser that the new system, FAST, is of no use and the custom officials are not cooperating with them. The adviser had reportedly asked Mr Zaidi if any progress had been made to bring big retail outlets into the tax net. He reportedly pointed out that despite revising the revenue target from Rs 5.5 trillion to 5.28 trillion the FBR was facing a shortfall of Rs 218 billion in the first seven months. He reminded Zaidi that he was given a free hand by Prime Minister Imran Khan.

Exporters had complained to the adviser that the new system, FAST, is of no use and the custom officials are not cooperating.

FBR officials close to the chairman said that Dr Shaikh was not happy with Shabbar Zaidi’s one-to-one meetings with the prime minister. A senior official, speaking on the condition of anonymity, said since Shabbar Zaidi was appointed directly by the prime minister he considered it necessary to update him on his performance. The official also said that sales tax refund was a complex issue which could not be resolved through the mere introduction of FAST software. He pointed out that exporters filed claims of over Rs 400 billion while, according to FBR estimates, the refund was in the range of Rs 250 to Rs 275 billion.

In the past, a lot of bogus claims were unearthed where exporters, with the connivance of corrupt officials, caused huge losses to the national exchequer. He said despite many shortcomings the total refunds this year stood at around Rs120 billion as opposed to Rs65 billion last year. Despite strong resistance, the chairman remained committed to use of CNIC as NTN. Now the CNIC condition on all purchases over Rs50,000 has become effective from February 1. Also, the banks are now bound to provide details of account holders to the FBR.

The last five years’ data shows that the FBR collected about 50 to 55 percent of its taxes at the import stage. The import compression has brought growth in this component to almost zero. This year, imports contracted by $6 billion which reduced revenue collection in terms of custom duties substantially. Because of the economic slowdown, use of petroleum products and gas has declined by 20 percent also affecting the revenue collection target because GST on petroleum products remained one of the major sources of revenue.

The number of tax returns this year has shown a phenomenal increase of 40 percent over the last year.

However, the finance ministry is not impressed by the performance of the FBR. If the double digit inflation and nominal GDP growth are accounted for in the revenue collection, the performance of FBR has not been exceptional, according to ministry sources.

According to sources in the ministry, the IMF believes that a change at the top level of FBR at this stage can be disastrous because revenue collection is already lagging behind the target.

Commenting on the performance of FBR and absence of Shabbar Zaidi, former FBR chairman Ansar Javed, said that the revenue target for FBR looked very ambitious from day one. He said the revenue collection model presented by Shabbar Zaidi is theoretically sound but practically very hard to enforce.

Shabbar Zaidi was right, according to him, in saying that by tapping the retail sector alone, the FBR could generate substantial revenue.

Javed says measures to expand the tax net during times of recession always proved counter-productive. To increase the revenue, Shabbar Zaidi has opened a number of fronts. For a new chairman it will be very difficult to control the situation. He says the government should convince Shabbar Zaidi to complete his tenure as chairman and support his efforts to broaden the tax net.

Targeting the tax net in Pakistan