Over reporting, faulty fixation

Setting unrealistic revenue targets is imprudent budgeting and results in lack of transparency

In the document titled Federal Budget 2020-21: Budget in Brief, a revised version presented by the Ministry of Finance (MoF) many days after the announcement of the federal budget for the fiscal year (FY) 2020-21 on June 2, the collection of Federal Board of Revenue is overstated and the target for the next FY is fixed ambitiously. This is a serious matter as it not only reflects fiscal mismanagement but also would be detrimental for provinces that have prepared and announced their budgets based on the federal government projections of their share in revenues under the 7th National Finance Commission (NFC) Award. Setting unrealistic revenue targets will result in less funds for provinces than promised, except in the case of Balochistan which has a fixed share under the 7th NFC Award. This amounts to imprudent budgeting and lack of transparency in fiscal matters.

There are anomalies like Rs 3.207 billion collected on account of Workers’ Welfare Fund (WWF) being reported as tax collection by FBR. Besides refunds amounting to billions of rupees are still pending. The collection by the FBR has thus been clearly overstated.

The WWF collection according to the document (Table 4: FBR 4—FBR Taxes) achieved the FY 2019-20 target of Rs 5,050 million. The target for FY 2020-21 is set at Rs 3,207 million. This is in utter violation of a judgment of the Supreme Court (2017 PLD 28) holding that WWF contributions do not constitute a tax. The 18th Constitutional Amendment in 2010 devolved the subject (labour) to the provinces, and Sindh and the Punjab have already legislated their respective Workers’ Welfare Fund laws. The FBR can no longer collect WWF on their behalf. The collection on behalf of Khyber Pakhtunkhwa and Balochistan belongs to the provincial governments but has been shown as FBR’s receipt. This shows that the Ministry of Finance while preparing the budget and the cabinet at the time of its approval overlooked the binding judgment of the Supreme Court.

The Annual Budget Statement containing estimated receipts and expenditure laid before the National Assembly of Pakistan for FY 2020-21 in terms of Article 80(1) of the Constitution gives revised estimate of FBR’s collection for the current fiscal year at Rs 3,908 billion against the original budgeted target of Rs 5,555 billion. The FBR’s target for next FY 2020-21 is fixed at Rs 4,963 billion (a 27 percent increase). How this increase has been calculated is not explained, when as per the claim of the PTI government a “tax-free budget” has been presented. Let us remind Dr Hafeez Shaikh that the target assigned to FBR for last year was Rs 4,435 billion, which was twice revised downwards (first, to Rs 4,398 billion and then to Rs 4,150 billion) yet it collected only Rs 3,828.5 billion (0.4 percent less than the collection of the previous fiscal year). This has resulted in an all-time high fiscal deficit of 8.9 percent of the GDP as per the State Bank of Pakistan’s Annual Report 2018-19—The State of Pakistan’s Economy.

The government’s failure to tap the actual tax potential is highly problematic for the provincial governments. Poor FBR performance – it never collected even Rs 4 trillion – adversely affects the provinces as they overwhelmingly depend on their shares under the NFC Award.

It is pertinent to highlight that Dr Abdul Hafeez Shaikh, adviser to the Prime Minister on Finance and Revenue, in a statement, “advised the provinces not to make their budgets on the basis of proposed Rs 4.963 trillion tax collection target fixed for FBR for fiscal year 2020-21” and added: “The provinces should make their budgets while keeping in mind the Federal Board of Revenue’s past performance and difference between performance, projections and reality”. This is a mockery of fiscal management which he himself is admitting – that the revenue target fixed for FBR is not dependable. Nowhere in the world will any government deal with fiscal management in so casual a manner.

Dr Ashfaque H Khan in Setting FBR target for 2020-21 (Business Recorder, June 11, 2020) noted: “Projecting budgetary targets, in general, and tax revenue, in particular, with a fair degree of accuracy is an essential element of sound fiscal management and, therefore, of maintaining fiscal discipline in the country... If they persist on setting an unrealistic revenue target like that of last year, it will have multiple implications for fiscal discipline in the country... FBR Revenue for 2020-21 equals to Base Year Revenue multiplied by the product of nominal GDP growth rate and tax elasticity (9.5 x 0.85 = 8.1 percent)... Rs 3,850 x (1.081) = Rs 4,162 billion. Assuming some additional efforts, which will be made by the FBR administration, the tax target should not be more than Rs 4,250 billion.”

The FBR has collected Rs 3,534 billion from July 2019 to May 2020 and in June 2020 for meeting the revised target needs to collect Rs 374 billion, which appears an uphill task due to the disastrous impact of the Covid-19 pandemic on the economy. Even prior to Covid-19 outbreak the FBR was far behind even the revised target of Rs 5,238 billion after first review of the International Monetary Fund (IMF) under $6 billion Extended Fund Facility (EFF) programme. It was later revised to Rs 4,803 billion on the eve of an incomplete second IMF review, held prior to the Covid-19 pandemic, and after the virus outbreak, finally reduced to Rs 3,908 billion.

Fixing an unachievable tax target for the FBR is the continuation of a legacy of ill-directed, illogical, regressive and unfair taxes causing a dampening effect on the industrial and business growth. In the aftermath of the negative economic impact of Covid-19, Pakistan needs to do just the opposite. Setting ambitious revenue targets, without evaluating their impact on an already troubled economy will further harm trade and industry. A majority of the measures announced in the Finance Bill 2020 amount to over-taxing an economy in deep recession. This is the worst one can think of, let alone justify on any grounds.

The writers, lawyers and authors, are adjunct faculty at the Lahore University of Management Sciences (LUMS)

Over reporting, faulty fixation : Setting unrealistic revenue targets is imprudent budgeting and results in lack of transparency