FY20 taxes: all set for contraction!

Pakistan’s federal revenue collection may have grown 10 percent in the first ten months of current fiscal year. But the pace of growth has been dismal, and in fact has turned negative over the last two months, raising question marks over the revised targets set for the Federal Board of Revenue.

Even before Covid-19 had hit Pakistan’s economy, FBR’s revenue growth was poor at 16 percent for 8MFY20, in a year that had initially budgeted a growth of 45 percent.

This lower-than-budgeted growth came about despite all the efforts in terms of widescale changes in tax rates and scope: from higher sales tax rates on various POL products, to abolishment of zero-rating regime for export-oriented sectors; and from upward revision of tax rates on various salary slabs, re-enactment of WHT on telecom services, and higher FED rates, to growth stemming from upward price adjustments in electricity tariffs and the abolishment of zero-rating regime for export oriented sectors.

Bear in mind that these were in addition to administrative measures such as FBR’s Tax Asaan mobile application; a trade enablement program Authorized Economic Operators and the introduction of Point of Sales (POS) system, aimed at integrating FBR with sales record.

Recognising the challenge of the original target of Rs5.5 trillion, FBR’s revenue target was first revised downward to Rs5.2 trillion and then to Rs4.8 trillion. Then struck Covid-19, which led to year-on-year contraction in FBR’s revenues in March and April 2020. In recognition of Covid’s impact on economy, the IMF has further revised the target to Rs3.9 trillion, although unconfirmed media reports inform that the target has been revised upward again to Rs4.017 trillion.

If the trends between FY10 and FY19 are any guide, the FBR manages to collect about 14.5 percent of the total annual collection in the last month (June) of every fiscal year. That’s because the FBR manages to squeeze filers in the last month, often collecting taxes in advance due next fiscal, just to be able to meet the targets.

But with the economy coming to a lockdown amid expectations of first GDP contraction in decades, businesses will neither have profits/sales to be taxed in May/June 2020 (or poor sales/profits), nor liquidity to fill FBR’s kitty on the implicit agreement that it will be adjusted in next fiscal.  Given these circumstances, nothing short of a miracle will help FBR meet its full year target of Rs3.9 trillion. (Read also BR Research’s FBR’s shortfall, Mar 3, 2020 FBR’s mid-term report card, Jan 3, 2020; How not to write FBR’s revenue yearbook?, Dec 2, 2019; and Does Shabbar has a magic spell? June 12, 2019)