How FBR met the revenue target

Against all odds and expectations; with a triumphant look on his face, FBR chairman Salman Siddiq announced on Thursday night that the governments hotly debated revenue target had been met. The revelation put to rest weeks of criticism and doubts voiced by economic analysts and media alike over the likelihood of this feat being accomplished. And who can blame them? The revised revenue collection target that stood at Rs1588 billion, down from an earlier tally of Rs1667 billion had appeared elusive on the back of the floods and slow-moving tax reforms that disallowed significant headway against untapped or under-taxed sectors. In the past, FBR had been accused of withholding tax refunds to shore up its revenue collection. Similarly, it has been observed that the corporate sector has in some instances been instructed to deposit advance taxes that help FBR meet its targets. However, this time, the FBR chairman has ardently disputed similar assertions against tax collectors. So what did FBR get right this time? Some of the initiatives taken in the last days of the outgoing fiscal year are spot on in terms of improving the tax culture, even though the response received so far has been lukewarm. According to media reports, against 70,000 notices issued to high-net worth individuals, 27,000 have voluntarily paid Rs370 million. A vast majority of the respondents who were issued notices have claimed that their incomes were generated abroad or through the agriculture sector, which is not taxed by the federal government. FBR needs to follow up on these filers by asking them for proof of remittances received and payments to provincial tax authorities for agricultural income. Similarly, FBR had to scale down its expectations from the corporate sector as well. On 10 June, FBR served notices to banks for the recovery of withholding taxes amounting to Rs22 billion. However, by the time the dust settled, a modest tally of Rs4.8 billion was received from the banks. Tax authorities have their foot in the door, now they must get full details from banks on withholding taxes as well as on deductions for cash withdrawal. FBR has to strengthen its data bank by capturing utility payments of both retailers and service providers to improve tax receipts from the service sectors. Better coordination with provincial tax authorities is needed to obtain data of real estate transactions, as well as those who are in the commodity trade, especially in the farming sector. Cross-matching of data received from customs, sales tax and income tax must be institutionalised under a technology group. Issuance of notices should be after proper risk profiling and assessment to reduce chances of harassment at the hands of authorities. Detailed audits of assesses should be conducted just once every five years. Random selections must come through proper scrutiny and not just as a means of maintaining legal cover while calling in the assessed. Pakistans tax gap, the difference between the amount owed and collections, has widened from 69 percent in 2005, to 79 percent in 2009. Tax to GDP ratio has also dropped from 10.1 percent in FY10 to 9.3 percent in the outgoing fiscal, according to FBR. In other words, reigning in tax dodgers is more important than ever before. Besides simplifying the tax regime and improving collections, FBR targets also need to be revisited. In its current form, the net collections target incentivises FBR to withhold refunds to fatten the collections tally. Instead, the collection target should be based on gross collections so that there remains no ulterior benefit of delaying paybacks. Incidentally, a review of the mechanism for refunds including the introduction of an independent body for oversight can do wonders for improving confidence in the tax collectors. Policy-making in FBR must rest with a policy board, which has to include representation of the private sector which provides the bulk of tax proceeds. FBR has won the battle for this years target, but the war against the countrys dilapidated tax culture is not over by a long shot.

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CBR Tax collection
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Year       Targets     Revised   Collection   Rebate/
                                   Gross      Refund       Net
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FY02         458         414         483        79         404
FY03         459         459         542        81         461
FY04         510         510         608        87         521
FY05         580         590         691       100         590
FY06         690         690         799        85         713
FY07           -         835         929        82         847
FY08       1,025       1,000       1,075        66       1,008
FY09       1,250       1,179       1,235        74       1,161
FY10       1,380       1,380       1,419        90       1,329
FY11       1,667       1,588       1,690       100       1,590
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Source: FBR
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