ARTICLE: The performance of the tax collecting wing of the Ministry of Finance, Federal Board of Revenue (FBR), remains a source of serious concern to not only development partners and independent domestic economists but also finance ministers (Shaukat Tarin during his tenure as the finance minister publicly expressed his concern at the poor performance of FBR and estimated around 500 billion rupees of lost revenue due to corruption and/or inefficiencies within the Board) with the incumbent Dr Hafeez Sheikh recently expressing his dissatisfaction at the Board's performance.
On 24 August 2020, during a meeting with senior FBR officials Dr Hafeez Sheikh reportedly directed senior officials of the FBR to transfer 50 "corrupt" officials back to headquarters, give the power to appoint and to root out corruption from its ranks to two distinct office bearers (at present the two functions are under Member Administration), and to appoint a spokesperson to ensure the FBR's outreach to the public. One would assume that Dr Hafeez Sheikh issued similar instructions to previous two FBR chairpersons during his less than 16-month tenure without producing the results that he expected.
That the problem of performance is acute in FBR is reflected by the fact that nearly all multilateral/bilateral programme loans have focused on improving its performance which is under the administrative control of the Ministry of Finance. Pakistan is currently on the 23rd International Monetary Fund (IMF) programme in its 73-year history, this one for thirtynine months against the usual period of thirty six months, justifying the label attached to Pakistan by the staff of multilaterals as a "perennial borrower;" and unsurprisingly the ongoing programme also focuses on improving FBR performance.
FBR has received multilateral funding to identify issues that beset the tax system with appropriate recommendations that have remained unimplemented (assistance rated unsuccessful by the lending agency) and a national tax reform commission was established which compiled a very comprehensive reform agenda. However, implementation remains poor and the tax structure continues to be labeled as unfair, inequitable and anomalous. The FBR argues with a degree of veracity that the focus of administrations, including the incumbent, is on revenue generation rather than on reforms and that it can only suggest reforms/changes which have to be approved first by the cabinet and then by parliament.
Tax collection remains a major source of concern today notwithstanding Dr Hafeez Sheikh's claim on the two-year anniversary of the Khan administration that collections in July rose to 300 billion rupees exceeding the target of 243 billion rupees by 23 percent. The 53 billion rupee additional collections by Inland Revenue (income tax, sales tax and federal excise duty) and 5 billion rupees more by Customs wing (sourced to unprecedented crackdown on corruption with a dozen officers dismissed or suspended in July) was as per Sheikh in spite of no new taxes imposed in the budget for the current year implying that FBR's performance has improved. However, as per a Finance Ministry official the rise was due to: (i) 20 percent disbursement of Public Sector Development Programme (PSDP) in the first month of the fiscal year, or 130 billion rupees out of total budgeted PSDP of 650 billion rupees, with associated taxes; (ii) higher sales of cement but with a reduction in the rate of cement from 2 to 1.75 rupees per kg collections under this head may not rise appreciably (though the government has also granted amnesty to the construction industry to jump-start the economy till end December this year); and (iii) higher car sales due to the postponement of purchases by households during the lockdown months - March to June.
Expediently, Dr Sheikh did not mention the agreement with the IMF on 12 May 2019 that he signed off on that the government would generate the highly unrealistic amount of 5.5 trillion rupees based on the flawed assumption that: (i) widening the tax net would somehow be achieved in a year's time even though Dr Sheikh's previous three-year stint as the finance minister (2010-2013) should have enabled him to better assess that such a pledge would be resisted by influentials and may therefore need to be phased out; disturbingly, the tax target for the current fiscal year of 4.96 trillion rupees against the revised estimates of 3.9 trillion rupees for 209-20 is expected to be just as unrealistic as the one last year; (ii) with a growth rate of 1.5 percent projected by the IMF, and noted in the budget documents for 2019-20 (inexplicably raised to the erroneous claim of a budgeted 2.4 percent for 2019-20 in the budget documents for 2020-21) there was no expectation by the independent economists that the 5.5 trillion rupee revenue target would be achieved. In this context it is relevant to note that the budget documents project a growth rate of 2.1 percent in the current year however projection by multilaterals is one percent or less than half the over-optimistic target set in the budget documents; and (iii) raising taxes on existing payers during last fiscal year to try to contain the shortfall to a level acceptable to the IMF coupled with a contractionary monetary policy resulted in output contraction with a consequent negative impact on tax collections.
To add insult to injury what must be a source of very serious concern for the cabinet is Dr Hafeez Sheikh's agreement with the IMF on revisiting the revenue distribution formula between the federal government and the provinces (which would require a constitutional amendment that is not possible with the ruling party's numbers in parliament) and unfairly placing the onus of failure to achieve the revenue target on the head of FBR.
Copyright Business Recorder, 2020
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