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EDITORIAL: Total tax collected by the Federal Board of Revenue (FBR), provisional figures, was 3.352 trillion rupees July-January this year against the target of 3.090 trillion rupees; however, there has been a shortfall in collections against the target during the last two months: (i) in December 2021 total revenue collections were 600 billion rupees while the target was 617 billion rupees, a shortfall that widened in the subsequent month; as (ii) in January total collections were 430 billion rupees against the target of 457 billion rupees and this decline is in spite of the implementation of the 343 billion rupee Finance Supplementary Bill from 16 January 2022 which should have raised revenue collections by more than the target.

The FBR/Finance Ministry’s claim that 280 billion rupees out of the total 343 billion rupees would be revenue neutral (though it was referred to as fiscal consolidation by the Governor State Bank of Pakistan as well as in the Monetary Policy Statement dated 24 January 2022) as it would be refunded, however, with refunds due subsequent to the implementation of the supplementary finance bill not yet disbursed, the collections should have been higher.

These two months show a disturbing trend and while the FBR is focused on total revenue collection July-January this fiscal year as being much higher than the target and against the comparable period of the year before yet clearly there is a need to acknowledge that the first five months of the current year when imports were high reflect a situation that is no longer current.

This data reflects fault lines due to the very structure of our tax system which requires urgent reforms — an urgency that has not been heeded for the past three decades as no administration, including the incumbent one, has tackled it though there have been pledges to do so during the past three governments. The fault lines are two-fold.

First, the heavy reliance on taxes at the import stage (sales tax and customs duties) automatically reduces collections as the country’s trade deficit widens — a cyclical phenomenon that has plagued this country for decades wherein growth is accompanied by higher imports and higher revenue collections as well as a widening of the trade deficit that begins to put pressure on the current account deficit requiring mitigating contractionary monetary and fiscal policies.

These, as and when implemented, contract imports with a consequent negative impact on revenue. In addition, reliance on sales tax has increased from 60.3 percent of total taxes in 2007, to 64.4 percent in 2018; it is budgeted at 68.7 percent for the current year.

And second, the heavy reliance on indirect taxes as a source of revenue has burdened the common man more than the rich, as their incidence on the poor is greater than on the rich. In this context, the heavy reliance on taxing imports and domestically produced petroleum products, accounting for a quarter of all revenue collections, as per the then finance minister during the PML-N rule, Ishaq Dar, fuels inflation that erodes the income of the poor and the large number of lower middle income earners in this country.

To substantiate this claim, it is relevant to note that direct tax collections (in spite of the levy of withholding tax in the sales tax mode during 2013-18 by the PML-N government and crediting it under direct taxes) peaked at 39.4 percent in 2007, declined to 38.2 percent in 2010, registered at 38.1 percent in 2020 and budgeted at an inexplicable 37.4 percent in the current year in spite of decisions taken with respect to issuing notices to high net worth individuals (based on data procured from Nadra though there is no mention of the penalty on officials if FBR claim is wrong), if these individuals disagree with the assessment then to undertake third-party audit which, if FBR’s claim is proved right, would lead to the levy of heavy penalties.

Taxpayer’s failure to still comply with would lead to cutting off electricity/gas and access to bank accounts as well as criminal proceedings that may lead to a prison sentence. There is, therefore, an urgent need to address these fault lines purposefully. Unfortunately, however, this is not reflected in the budget for the ongoing fiscal year — a document that should have reflected an intent for tax reforms.

Copyright Business Recorder, 2022

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