The Federal Tax Ombudsman (FTO), Shoaib Suddle, has taken suo motu notice of the 2010-2011 revenue collection figures and accused the Federal Board of Revenue (FBR) of deliberately overstating revenue collections for the last fiscal year. This serious and disturbing charge levelled by the FTO focuses attention on FBR's practice to collect advance income tax on a quarterly basis, a legitimate action in practice in several countries, based on the assumption that the income earned by any taxpayer is likely to be the same or slightly more than in the previous year if the economy's growth rate is positive.
However, the critical aspect of the advance tax collection is that it be collected at the start of the quarter which implies advance payment be made in July, October, January and April. Pakistan's financial year ends on 30th June and the FBR is not legally empowered to collect the advance income tax for the next fiscal year and claim it in collection for June. It coerces and cajoles the large taxpayers, mainly banks, to lend to it the advance tax due or part thereof in the first quarter of next fiscal year to meet its revenue targets for the current fiscal year. The amount lent is refunded subsequently for the taxpayer to deposit it as advance tax. This malpractice has been in vogue for over two decades and the quantum has increased with the passage of time. The credit for bringing this fraudulent practice to surface goes to the State Bank of Pakistan, for not playing ball with FBR in this criminal mischief. Documentary evidence proves beyond a shadow of doubt that the FBR indeed indulged in this charade deliberately to hoodwink all and sundry to claim achievement of revenue targets which, in turn, presents a flawed picture that disables a policymaker to develop and implement policies effectively - policies that are designed to improve performance of key macroeconomic indicators.
The amount overstated last year under advance income tax collections was 43.51 billion rupees which was deposited by the National Bank of Pakistan, Habib Bank Limited, United Bank Ltd, Pakistan State Oil, and Pakistan Petroleum Limited to name a few and refunded a week later. Raising suspicions further, the FTO noted and queried FBR as to why the large taxpayers did not deposit the amount of the tax in their home town rather than in far-flung areas. Thus the question raised by the FTO as to why companies enrolled/registered with LTU Karachi deposited the amount in Tando Allah Yar Branch of NBP and companies enrolled in LTU Islamabad deposited huge sums in Fateh Jang Branch of NBP falling in the jurisdiction of RTO Attock.
Unfortunately, however, large as this amount is, it is not the whole extent of FBR's deliberate overstating of its revenue collections. The FBR is also held accountable by the FTO for another practice namely of overstating revenue collections by holding on to taxpayers refund/drawbacks: in June of 2009 drawbacks held by FBR were 53.2 billion rupees, next year the amount rose to 79 billion rupees while last year it rose even further to 143.8 billion rupees.
In sum total therefore, FBR overstated its collections by 43.51 billion rupees under advance tax collections and another 143.8 billion rupees under holding back refunds/drawbacks giving a grand total of 187 billion rupees in 2011; or 11 percent of the total revised tax revenue receipts of 2010-11. However, two interesting statistics contained in the budget documents need to be highlighted. First, the government's 2010-11 target for direct tax collections was 28.7 billion rupees less than budgeted at the start of the year - an amount that given new revelations was closer to 72 billion rupees; and, second, indirect tax collections shortfall was 68.5 billion rupees in comparison to what was budgeted, which gives the real figure as 212 billion rupees.
The question is: Why does FBR feel the need to engage in this illegal and morally reprehensible practice of manipulating revenue figures? The answer is fairly obvious: the Ministry of Finance under which the FBR operates needs to show higher tax collections and therefore lower budget deficit to successfully persuade stakeholders, both within the country as well as development partners abroad, that it is engaged in formulating responsible policies, including the discharge of fiscal responsibility. To fraudulently show higher revenue mobilisation than is the case leads to flawed data and distortions with their cascading effect leading to higher fixation of revenue targets for the next year thereby creating a further need to indulge in this malpractice. It is high time that a stop is put to this charade in which the ministry of finance appears fully complicit with FBR. Both Finance Ministry and its revenue collection arm FBR should stick to principles. It will not be good for the country if they are doing things like this.