Lull at the Finance Division

EDITORIAL: The Federal Board of Revenue (FBR) is at present the most visibly active department operating under the jurisdiction of the Ministry of Finance while there is a reported lull in activity relating to challenging policy reforms at the Finance Division - unusual given that the budget speech for next fiscal year is less than two and half months away.

FBR has recently taken several measures through notifications designed to widen the tax net, including documentation of small traders in six major cities through Tax Asaan App accompanied by a minimum tax payable on a monthly basis.

The response of the traders’ associations was to welcome the step though they added that modalities on collection of minimum advance tax would need to be finalised. Criticism that the selection of cities was on a political basis as Faisalabad, Gujranwala, Gujrat, Multan and Sialkot were excluded where economic activity is significantly more than in some of the six cities selected was countered by the FBR, claiming that these cities would be included in phase-two of the scheme. Concurrently, another notification was issued that would integrate professionals with point of sale system.

The 20 March 2024 press release uploaded on the International Monetary Fund (IMF) website declaring that the Staff-Level Agreement (SLA) was reached on the second and final review of the 9-month Stand-By Arrangement (SBA) specifically stated that “the strengthening of public finances, including; through gradual fiscal consolidation and broadening the tax base (especially in under-taxed sectors) and improving tax administration to improve debt sustainability.”

This lends credence to the general perception that the post-20 March notifications and decisions taken by the FBR may well be part of the prior conditions for the IMF Board’s approval that is a prerequisite for the release of the final tranche.

In addition, it is relevant to note that the caretaker cabinet had approved the reorganisation and digitisation of the FBR inclusive of: (i) establishing a Federal Policy Board in the Revenue Division under the Finance Minister responsible for formulation of tax policy and determination of tax targets and cooperation between stakeholders; and (ii) Customs and Inland Revenue to be headed separately by Directors General of their respective cadres with complete authority and would ensure the implementation of international best practices in terms of digitisation, grievance redressal and transparency with separate oversight boards for the two with the finance minister heading the boards.

Both these measures had been under debate for at least a decade, leading one to conclude that these measures were not authored by the caretakers and by end-January the public was informed that these measures would be operationalised by the elected government by the caretaker finance minister.

While these measures are a step in the right direction yet it is relevant to note that the inordinate focus on revenue target must go hand in hand with a focus on shifting the current reliance on indirect taxes whose incidence on the poor is greater than on the rich, to direct tax collections. At present, 75 to 80 percent of all direct taxes collected are under a withholding tax regimen as they are being levied in the sales tax mode.

The IMF press release noted the need to: “restoring the energy sector’s viability accelerating cost reducing reforms including through improving electricity transmission and distribution, moving captive power demand to the electricity grid, strengthening distribution company governance and management, and undertaking effective anti-theft efforts.”

It is little wonder that the newly appointed Minister for Power Awais Leghari emphasised during a video conference with chairmen and chief executives of power distribution companies that there is an urgent need to address electricity theft – a measure that has been ongoing since September last year though the actual recoveries have been an impressive around 86 billion rupees, though an infinitesimal amount compared to the 2.3 trillion-rupees circular debt.

Here too one would urge the government to revisit some long-standing flawed policies particularly tariff equalisation policy that requires massive annual budgeted subsidies that the country can ill afford and at the same time renders any privatisation plan rather dubious, given that this policy has implied heavy annual budgeted subsidies to the privatised K-Electric.

The lull in the Finance Division itself as June approaches, the month when the budget must be presented to parliament, can best be described as an indication that given the stated aim of the government to seek another IMF package the preferred tactic may be to implement its conditions that are by now well known.

If this is the case, then it is unfortunate because one would have hoped that alternate out of the box conditions would have been proposed by the Ministry, not as a rambling analysis but one backed by econometric models.

Copyright Business Recorder, 2024