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The FBR is finding it hard to meet even the revised revenue collection target as based on 13 percent growth achieved in 10 months, the deficit will remain around Rs120-130 billion from the revised target of Rs2690 billion. Sources reveal that sales tax growth suffered more, while direct taxes and enhanced withholding taxes provided some cushion.
But higher gap between filers and no-filers is incentivizing the cash economy to keep growing. It is a tricky option to enhance WHT/GST on non-filers to encourage documentation as this can take more businesses totally out of the system. The WHT grew by 33 percent or Rs142 billion in FY14 while overall direct taxes grew by 19 percent to exhibit that onus is falling more on WHT whose share in direct taxes has increased from 5.5 percent to reach 61 percent.
It is expected to be even higher in FY15 as WHT rate has been raised further in the last budget. The detailed numbers will show how productive this approach has been.
The core of the issue behind low collection lies on sales tax and more specifically on domestic sales tax. The domestic GST has shown virtually no growth at all in 10MFY15. One reason is sluggish real sector performance as LSM has grown by around two percent so far and if the contribution of steel sector to this growth is excluded, that tally is even lower.
The other reason cited by the government is the fall in oil prices which according to them has eroded the FBRs revenue potential. It is true that petroleum products are the major contributor in sales tax with a share of 45 percent (Rs231bn) in domestic GST in FY14. However, it is not completely true (based on BR Researchs calculation) that the loss has incurred in this sector.
Rather the GST on petroleum products is over compensated by high volumetric growth and higher GST rate at present. Initially, there was a dent due to lower petroleum prices, but lately high volumes and doubling of GST worked out well for tax collecting authorities. For instance, in case of HSD the sales tax collected in 10FY15 is exhibiting 10 percent growth, year-on-year.
The sales of petroleum products really picked up in the last few months due to low prices and substitution from CNG. The YoY growth in HSD and Motor Spirit volumes was 28 percent and 36 percent, respectively in Jan-Apr 2015 and that has helped FBR to raise some additional revenues; especially due to higher GST (22%-34%) charged in these months.
HSD is the highest contributor to sales tax in petroleum products and the government has generated Rs112 billion in Jul-Apr FY15; as against Rs102 billion collected in the similar period of the previous year. The growth has really picked in the last two months and is likely to stay up in May-June to make the revenue collection even better. Similar is the story of Motor Spirit where the 10-month GST collection has risen by four percent.
Yes, GST on petroleum products may not exhibit anywhere close to 30 percent growth over last year but it surely will be in the vicinity of 6-9 percent for FY15. That is not bad given the prices of products fell by 40 percent. In case of furnace oil, the growth has started to accelerate as well in the past few months - it grew by five percent in Jan-Apr while Jul-Apr imports sales fell by two percent. Then the five percent regulatory duty on FO will generated another Rs16 billion (on annualized basis). So its a myth that stagnation of GST collection is due to lower oil prices.
But the government shall not be jubilating on the pick-up in sales of petroleum products as its challenging the port capacity to handle high volumes of petroleum imports. We have already experienced the bitter taste of acute shortage a few months back and any delay in a shipment can trigger another crisis of same magnitude. Plus, overall high imports carrying a risk of choking of ports which are surely under capacity to handle ongoing growth in consumption demand which is largely met by imports.
The overall GST collection has grown by six percent so far (0% in domestic GST, 12% in imported GST) against the 24 percent growth budgeted (annualized shortfall is expected at Rs180bn). The number could be even worse by incorporating Rs118 billion pending refunds. The healthy growth in imported GST is due to rise in imported goods prices and withdrawal of a few SROs on input adjustment - but latter is adjusted against output at manufacturing stage to nullify overall impact.
The flying invoicing phenomenon has deteriorated the situation as input to output ratio has increased from 70 to 74 percent in the last two years; as the manufacturers present inflated input prices from non-registered suppliers to illegally lower their tax liability.
Then there is another problem of under invoicing of imports especially from China. According UN Comtrade data; Chinas exports to Pakistan were at $13.2 billion in 2014 while SBP data shows $6.8 billion imports from China in the same period. The 52 percent gap suggests massive under invoicing to the tune of 50 percent i.e. imports from China, on paper, are valued at half. However the problem of under invoicing is nothing new. The quantum has jumped significantly in the last few years due to higher imports - the gap was $2.6 billion in 2009 which has increased to $6.84 billion in 2014 (see table).
Dar should look into these grey areas for enhancing tax collection, rather than squeezing further on the already taxpaying sectors!


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Chinas exports to Pakistan
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UN comtrade SBP Gap
$ bn $ bn $ bn %
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2014 13.20 6.36 6.84 52%
2013 11.00 5.83 5.17 47%
2012 9.30 4.47 4.83 52%
2011 8.40 4.19 4.21 50%
2010 6.93 3.76 3.17 46%
2009 5.51 2.90 2.61 47%
2008 6.05 2.96 3.09 51%
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Source: UN comtrade, SBP

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