FBR’s July 2019 report card

FBR has missed its tax collection target for July 2019 by Rs14 billion. So went the headlines last week. Is that a huge miss - enough to invite criticism by econ watchers? Let’s take a look!

First things first. Anyone who has followed FBR’s tax collection history knows very well that the tax body has never really met its targets – not in recent memory at least. This means the shortfall of Rs14 billion ought to be contextualized.

Writing in this newspaper, Dr Waqar Masood offered the following context. FBR’s quarterly target for FY20 is Rs1067 billion. “This represents 32 percent increase over the first quarter of 2017-18. There are two possibilities of comparison. We can ask for 32 percent growth every month or divide the quarterly target equally in three months. In the former case, the target would have been Rs333 billion and in the latter Rs356 billion. The July performance, therefore, was only 83 percent of the former target and 78 percent of the latter,” he wrote in his piece titled off to a slow start — II.

With due respect, however, the approach to divide the quarterly target equally across three months is not suitable. That’s because tax collection during the year fiscal year follows a seasonal trend each fiscal year, as is evident in the graph, where July has the lowest tax collection of all the months in any given fiscal year. In fact, if average month-on-month growth in tax collection in August and September for the last three years is any guide, then tax collection for the first quarter may land at around Rs1015 billion, which would be about 5 percent short of the first quarter target. And that won’t be too bad a shortfall, given FBR’s history of shortfalls and the current state of economy.

Now let’s take a look from another perspective. Average collection in July for the last three fiscal years has been around 5.06 percent of the full year target budgeted for that year. By that account the collection in July 2019 is only a tad lower – 4.99 percent. Considering the huge growth in target this fiscal year, slowing GDP growth – slowest in the last several years – and the fact that the removal of sales tax zero rating and the withholding tax collection on salaries will impact August numbers rather than July, FBR’s tax collection performance in July 2019 can in fact be labelled as much better than expected.

Then again, historical trends may not be the best guide for this fiscal year. That’s because of the myriad set of unprecedented measures being taken by the FBR – roping in retailers, CNIC for transactions, removal of zero rating, getting data from banks and triangulating other datasets including electricity, roping in doctors, hospitals and so forth - nature and full range of consequence of which are a great unknown.

This is why one should not expect 32 percent growth every month. The growth - if it is to come - will not be in equal percentage each month since the impact of the ongoing measures isn’t very clear. Quite frankly, while both sides - the protagonists and antagonists – claim their forecasts are right, the fact of the matter is that neither has yet presented a well-researched thesis on the impact of myriad tax measures currently being rolled out.

There is no doubt, as earlier flagged at the time of the release of budget FY20, the target of Rs5.5 trillion set for this year looks impossibly difficult – especially in the absence of detailed breakdown that should have been provided by the FBR. That said, the report card so far is rather satisfactory, in line with historical performance of normal level of shortfalls. (See Does Shabbar have a magic spell? June 12, 2019) .