Tax collections during July-February

Tax collection record of the country continues to be poor. According to latest data, Federal Board of Revenue (FBR) was able to collect Rs 873.8 billion during the first eight months of the current fiscal (July-February, 2011) as compared to Rs 791.4 billion in the corresponding period of last year, showing an improvement of only 10.4 percent.
It was also disheartening to know that the rate of increase of direct tax collections, which are inherently progressive, was less than half of indirect taxes that are generally considered as regressive or inequitable. Collections from direct taxes stood at Rs 310.2 billion during the first eight months of FY11, showing an increase of only 6.1 percent over the corresponding period of FY10 while indirect taxes amounted to Rs 563.6 billion or higher by 12.9 percent during the same period.
A break-up of revenue collection during July-February, 2011 showed that all the tax categories registered varying degrees of growth. Sales tax collection was up by 14.8 percent at Rs 377.8 billion, federal excise duty was higher by 3.8 percent at Rs 77.5 billion and receipts from customs duty at Rs 108.4 billion reflected an increase of 13.6 percent. Sales tax collected at the import stage was Rs 188.5 billion while Rs 189.5 billion were collected from domestic consumption. FBR also paid refunds and rebate amounting to Rs 65.6 billion which was higher by 29.8 percent as compared to Rs 50.5 billion paid in the same period last year. Tax collections during the latest month ie February, 2011 were also not satisfactory. As against the target of Rs 130 billion, FBR could collect only Rs 103.8 billion, indicating a substantial shortfall of Rs 26.2 billion. Direct tax collections at Rs 32.5 billion were much below the target of Rs 47 billion for February, 2011 while other sources of tax collections also indicated poor performance.
A very slow growth in tax collections during the year so far is really disturbing for a number of reasons. The budget estimates for 2010-11 had envisaged aggregate tax collections at Rs 1,667 billion but, as the year progressed, the target was reduced to Rs 1,604 billion due mainly to floods. The latest figures suggest very clearly that even this downward revised target is almost impossible to achieve. According to the available data, the FBR was able to collect about Rs 109 billion on a monthly average basis till February, 2011 and only a miraculous performance could enable it to collect Rs 731 billion (Rs 183 billion every month) in the remaining part of the year. Lower tax collections in the face of mounting expenditures including those on security and debt servicing would result in widening the fiscal gap beyond the original projections. The reluctance of the bilateral donors to provide budgetary assistance and blockade of about $1.5 billion, $500 million each by the World Bank, ADB and IDB because of the problems with the IMF programme is forcing the government to rely increasingly on domestic sources of finance, particularly on State Bank borrowings, which is highly inflationary. Widening fiscal deficit is also complicating the monetary policy formulation, crowding out the private sector credit, pushing up the interest rate structure and undermining the prospects for growth of the economy. Reduction in allocation for PSDP due to a tight fiscal position would add to the deprivation of the poor through a drastic cut in expenditures on social sectors. In the months ahead, poor performance in the fiscal area could also spill over to foreign sector of the economy.
It is, however, sad to note that neither the government is serious to reduce the current expenditures to improve the fiscal position of the country nor the opposition parties are in a mood to help the government mobilise resources through additional measures. The idea of RGST is now almost buried while government is being forced through various tactics to maintain the domestic prices of POL products at previous levels despite the fact that these have increased by almost 25 percent in the last few months or so.
As a last resort, the government is now considering the implementation of several other measures to improve the fiscal position of the country and bring back the IMF to the negotiating table to resume the suspended SBA. These measures include a 15 percent surcharge on income tax, increase in special excise duty on imports from one percent to 2.5 percent and a request to the provincial governments to provide Rs 100 billion cash surplus from Rs 300 billion additional transfers under the 7th NFC Award. In the absence of such measures and due to the weakening writ of the authorities to raise more resources, fiscal deficit could soar to more than 8 percent of GDP as compared to the original target of 4.7 percent. Simply put, the present position of fiscal accounts is deplorable and needs to be substantially improved at the earliest. We can only hope that the government and all the opposition parties would realise the gravity of the situation and rise above distasteful politics to resolve this profoundly profound issue with a view to ensuring macroeconomic stability in the country.