EDITORIAL: The Federal Board of Revenue (FBR) has clearly impressed by overshooting the July-August tax collection target of Rs 926 billion by a good Rs 22 billion. This is all the more surprising, and impressive, because it happened when the Board faced the double whammy of the finance ministry driven squeeze on imports to sanitise the current account and also logistical problems caused by the floods.
Customs duties on imports account for more than 50 percent of net collection, yet imports had to be held down to keep the economy from falling over a cliff, which is why provisional collection figures for the first two months were expected to disappoint.
It’s a good thing that they didn’t because the surplus will give us a nice head start for the stiffer target next month, according to press reports. Tax authorities need to collect about Rs 7.5 trillion in the current fiscal year; a 21 percent jump over taxes received last year.
That will force FBR to diversify away from customs duties, not the least because the expected bulge in imports over the next couple of months is going to be of no use to it. It will owe to relief goods for flood victims, which the government has exempted from all duties.
And it doesn’t make things any easier that the wreckage from the floods will compromise both the ability of a very large number of people to pay taxes and FBR’s ability to collect them. And then there’s also the issue of a decline in sales tax receipts, which recorded negative 3 percent growth for the second month running despite an inflation rate of about 25 percent. That’s mainly because the government has replaced GST on petroleum products with a very high petroleum levy. Also, GST is shared with the provinces whereas the petroleum levy is not, so there are all sorts of distortions.
Given these speed breakers, especially the breakdown in production as well as consumption in the wake of the floods, FBR has its work cut out for it regardless of the good start to the fiscal. These floods are sure to scratch a percentage point or two off the GDP growth rate, and tax collection is going to be one of the first casualties. And that brings us right back to the issue of tax reforms.
The old practice of setting ambitious targets but never achieving them will not work anymore because it will run afoul of arrangements with the IMF (International Monetary Fund) and compromise the Extended Fund Facility (EFF) all over again. Yet on the other hand a monumental natural disaster just when the post-Covid recovery was threatened by an impending global recession will make keeping tax promises in return for aid money very difficult.
Such things never happen in isolation, of course, so an overall conducive political and economic atmosphere would be of great help. Let’s not forget that the country is going through its worst political, economic and natural crises ever, all at once. And the long-drawn process of crucial tax reforms — the machinery that puts money in the state kitty — especially at the provincial level, has not even properly begun so far.
This, then, would be the most desperate time for all stakeholders to go to the drawing board, work out everything that is needed, and forward a summary to the prime minister’s office for approval and subsequent allocation of funds.
The pleasant, though rare, surprise from FBR shows that it can adapt to changing requirements, which is going to be needed. With exports doing very little for revenue even after a historic, epic collapse of the rupee, and the abnormal rise in remittances threatening the plateau, we will just have to put more eggs in the tax basket.
Copyright Business Recorder, 2022