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ARTICLE: 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.

The purpose of this article is to suggest the possible revenue target for the Federal Board of Revenue (FBR), in the next fiscal year (2020-21), based on scientific calculation. This is the method that I have always used to set revenue target for the FBR during my stay in the MoF. The same number we used to convey to the visiting IMF Missions during the period we were in the IMF Program.

It goes without saying that during the second lost decade (2008-18) for Pakistan, institutions were weakened to the core. The FBR was not an exception. Like other Institutions, the FBR also witnessed the erosion of technical capacity to even project their own revenue and therefore, their reliance on the donors increased heavily, particularly, to the IMF for setting their annual/medium term revenue target.

The importance of projecting FBR's revenue with fair degree of accuracy cannot be over emphasized. Setting unrealistic/irrelevant revenue target exacerbate fiscal indiscipline and affects the quality of spending. A classic example of setting unrealistic/irrelevant revenue target and how it has exacerbated fiscal indiscipline can be seen during the fiscal year 2019-20. Under the IMF programme, FBR's tax collection target was set at Rs 5,503 billion - a growth of 44% from the base of Rs 3,829 billion. The readers would recall that Rs 3,829 billion tax collection also contained Rs 70 billion of money collected by the FBR on account of tax amnesty. Barring the one-off transaction, the real base of 2018-19 FBR revenue was Rs 3,759 billion. With Rs 5,503 billion tax collection target, the IMF envisaged a growth of 46.4 percent in 2019-20. It was nothing but insane to set such an unrealistic revenue target for a slowing economy (real GDP grew by 1.9% in 2018-19). Theoretically, it was unrealistic as well because economic theory would suggest a reduction in tax burden in a slowing economy with a view to reviving it.

From day one, I was of the opinion that it will be a great effort on the part of the FBR if they collect Rs 4,400 billion or achieve a growth rate of 15 percent. Tax collection would have been very close to my calculation, had the Covid-19 not struck Pakistan's economy. By incorporating Covid-19 impact, my calculation suggest that the FBR would collect somewhere in the range of Rs 3,820-3,850 billion (as against IMF estimate of Rs 3,903 billion). For setting the FBR's revenue target for the next budget, it is advisable to take Rs 3,850 billion as a base.

Let me present my calculation for the FBR's tax collection target for the year 2020-21.


FBR Tax Target: 2020-21


Base Year

Revenue (2019-20) = Rs. 3850 billion

Real GDP growth = 2.5%

Average Inflation = 6.5%

Nominal GDP growth = 2.5%+6.5% = 9.0%

Nominal GDP growth

at market price = 9.5%

Tax Elasticity = 0.85

FBR revenue = 3850 x (1.081)

Rs. 4162 billion

Additional Efforts = Rs. 88 billion

FBR Tax Target for 2020-21 = Rs. 4250 billion


I am assuming that the FBR would collect, at best, Rs 3,850 billion in the year 2019-20. Following assumptions have been made to set FBR revenue target for the year 2020-21:

a. Real GDP growth for the year 2020-21 is estimated at 2.5% (taking into account the base effect of 2019-20).

b. Average CPI-based inflation is estimated at 6.5 percent;

c. Hence, the nominal GDP growth would be 9.0% (2.5% + 6.5% = 9.0%) at factor cost.

d. Converting nominal GDP growth at factor cost to market price, we add 0.5% to growth at factor cost. Therefore, nominal GDP growth at market price is estimated at 9.5%

e. Tax elasticity is estimated at 0.85. This number suggests that a 10% increase in nominal GDP at market price would increase tax revenue by 8.5%. If we do not take additional tax measures, then by definition, tax-to-GDP ratio would decline. That is why the government takes additional tax measures in every budget to keep tax-to-GDP ratio at previous year's level. Hence, we see a stagnant tax-to-GDP ratio.

We have now two critical numbers, nominal GDP growth at market price (9.5%) and tax elasticity (0.85). Using these two numbers, we calculate FBR revenue for the year 2020-21.

FBR Revenue for 2020-21 equal to Base Year Revenue multiplied by the product of nominal GDP growth rate and tax elasticity (9.5 x 0.85 = 8.1%). Therefore, FBR Revenue = Rs 3,850 x (1.081) = Rs 4,162 billion.

In other words, given the parameters and assumptions, FBR would collect Rs 4,162 billion in the year 2020-21. 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 IMF, on the other hand is advocating for Rs 5,100 billion and the Ministry of Finance is suggesting Rs 4,900 billion; both the numbers are grossly unrealistic. 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. Let me highlight these implications.

Firstly, the FBR's revenue forms the divisible pool of taxes under the National Finance Commission (NFC) which have to be distributed between the federal and the provincial governments. Unrealistic revenue target would totally distort the provincial resource pictures. Since transfers to the provinces are based on actual collection with the exception of Baluchistan, the unrealistic revenue target would present inflated provincial revenues pictures. Provincial governments will prepare their expenditure plans on the basis of inflated revenue as projected by the federal government in the federal budget. Any shortfall in FBR's revenue would make the task of the provincial governments extremely difficult to scale down their expenditure plans. Such an eventuality would lead to fiscal slippages.

Secondly, the federal government, under the NFC Award, is required to transfer funds to Baluchistan on the basis of projected-revenue. In the event of shortfall in FBR revenue collection, the federal government would pay to Baluchistan from its own share, which has already shrunk in the ongoing NFC award.

Thirdly, it has been observed that the FBR in its attempt to achieve unrealistic revenue target, would indulge into holding back refunds and forcing commercial entities to pay taxes in advance. Such practices would have serious consequences for companies' or exporters' liquidity, forcing them to borrow from commercial banks to run their businesses, which, in turn, would add to their cost of production/doing businesses. It will hamper overall business activities.

Fourthly, it has been observed that in order to achieve budget deficit target set by the IMF, the federal government would release resources to the provinces in such a way that they are unable to spend the resources in time, affecting their spending on social sectors, in particular.

Fifthly, setting unrealistic revenue target under an IMF program is a deadly combination. It has been observed in the recent past (during the last IMF Program) that the federal government gave perverse incentive to provincial governments for not spending money by giving them a three-month treasury bill interest rate on their cash balances. Such perverse incentive simply adds to the federal government expenditure on the one hand and Provinces are encouraged not to spend money on the other, resulting in serious implications for human capital development and economic growth.

Sixthly, the unrealistic revenue target forces the government to cut development spending to achieve budgetary targets set by the IMF, thus compromising on the quality of fiscal adjustment.

Seventhly, the unrealistic revenue target could force the FBR's authority to give unrealistic revenue target to its field officers. Those field officers would make the lives of the businesses/companies/industries difficult, hampering business activities in the country. The government on the other hand would resort to additional tax measures with a view to achieving unrealistic tax target. In the process, they may create tax anomalies, adversely affecting industrial and business activities.

Based on the above consideration, it is suggested that any tax target beyond Rs 4250 billion has the potential to create above mentioned difficulties. The economy has contracted, the per capita income has declined, and Covid-19 has severely dampened domestic and global economic activities. This is the time for providing relief to the businesses and to the people to revive economy and not to indulge in setting unrealistic revenue target.

Budget 2020-21 will be a make-or-break budget. The aim of this budget should be to minimize the adverse effects of Covid-19. The government on its part should not treat this budget as a 'business as usual' budget. We must refrain from launching ribbon cutting projects. We have to prioritise our expenditure by spending more on health and education. No new projects be included in this Budget. Those projects which have been launched in the past but not much activity has taken place, should be shelved for a year. The slow moving projects should not be given resources in the next budget. Projects on which over 75-80% work has been completed, should be given more resources to complete them as soon as possible.

To reduce expenditure, it is necessary that we bring discount rate to 6 percent in July 2020. A one percent decline in discount rate would reduce interest payment by approximately Rs 160 billion in one year. Hence, a two percent cut in discount rate would reduce interest payment by over Rs 300 billion which can either be used to reduce budget deficit or be used to increase expenditure on health facilities in the country. I hope, sanity would prevail both in the IMF and in the Ministry of Finance. They would refrain from setting unrealistic revenue target for the FBR.

(The writer is Principal & Dean of the School of Social Sciences & Humanities (S3H), NUST, Islamabad and can be reached at [email protected])

Copyright Business Recorder, 2020


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