Evaluating FBR’s performance

PML-N’s first budget (for FY14) contained a heavy dose of taxation proposals. It included an increase in the standard GST rate from 16 percent to 17 percent. A number of new withholding taxes were put into place along with the increases in advance tax and minimum tax. Significant measures have also been announced to widen the tax net and reduce tax evasion.
Based on these proposals and normal growth, FBR revenues are projected at Rs2,475 billion in FY14. This represents a growth of over 27 percent over last year’s revenues of Rs1,946 billion. As such, FBR is expected to raise its tax-to-GDP ratio from 8.5 percent in FY13 to 9.5 percent of the GDP during the current fiscal year. Such a large increase has seldom been achieved.
The lack of realism in this revenue target was quickly realized by the IMF in the process of defining the key parameters of the new programme of support to Pakistan. The FBR revenue target has consequently been scaled down by more than 5 percent to Rs2,345 billion. The expectation now is that the FBR’s tax-to-GDP ratio will increase by 0.5 percent of the GDP.
What is the progress of revenues in the first nine months of 2013-14? According to media reports, FBR has collected Rs1,575 billion up to March 2014. This represents a growth rate of 16.5 percent over the corresponding period of last year.
At this rate, FBR revenues are expected to reach Rs2,270 billion by the end of June 2014. This will imply a shortfall of Rs75 billion when compared to IMF’s projection and a shortfall of Rs205 billion when compared to the original budget target. However, it will be a good performance when compared with the growth rate of only 3 percent achieved in FY13.
How have the individual taxes performed? GST collection has witnessed a relatively fast growth of over 20 percent. This can be attributed primarily to the increase in the tax rate. Income tax revenues have shown moderate growth of 16 percent, largely due to the increase in revenue from the expanded withholding tax regime. The IMF projection is for a growth rate of 21 percent. The shortfall can be attributed to the withdrawal of most of the measures for widening the tax net and failure in getting the large number of non-filers to file returns.
The worrying area is customs duty, which has shown negative growth. Imports have grown by 11 percent in rupee terms. Imports of major dutiable items in customs duty revenues like edible oil, petroleum products (especially high speed diesel oil) and automobiles have declined. The smallest source of revenue, excise duty, has demonstrated rapid growth of 23 percent.
The overall impression from the lack of realization of the revenue target, despite heavy additional taxation, is that the underlying tax bases in the economy are not growing fast. FBR continues to show the same lackluster performance as in the last few years. It is clear now that the FBR’s tax-to-GDP ratio will increase by only about 0.2 percent of the GDP compared to the original budget target of a quantum jump of 1 percent of the GDP.
The basic message for the forthcoming budget is that there ought to be greater realism in the projection of tax revenues in an economy, which is showing a growth rate of less than 4 percent. Heavy additional taxation could even retard the process of growth.