NationalVOLUME 15 ISSUE # 08

FBR’s overhaul

The government has formed a committee to expedite the process of reforms for restructuring the tax machinery. The step was taken after Prime Minister Imran Khan proposed the creation of the Pakistan Revenue Authority to replace the Federal Board of Revenue (FBR). However, the government is facing a stiff resistance from the top tier of the revenue machinery to implement its plan.

Experts say the government cannot delay the reforms after it has given an undertaking to the lending community to achieve an increase of 4-5 per cent of GDP in tax revenues by the end of the IMF programme. The PTI government has signed agreements with international lending agencies under the umbrella of IMF’s three-year programme that promises about $38.6b foreign inflows in 39 months from all lenders. It means failure is not an option. Pakistan will not only have to meet FBR’s Rs5.503t revenue collection target, but also nearly double it to Rs10.51t by 2023-24. It means the authorities must increase federal revenues by 1.7pc of GDP during the current fiscal year to 13.1pc and then jack it up to16.2pc of GDP by 2023-24. This has to be achieved by improving the tax-to-GDP ratio from 10.8pc last year to 12.4pc during the current fiscal year.

The IMF’s refusal to a government’s request to reduce the annual tax collection target during the current fiscal year has also put pressure on Pakistan. It wanted to slash the target by Rs300 billion. The government had demanded the IMF to reduce the annual tax collection target of Rs5.55 trillion as the FBR is struggling to achieve the target due to reduction in imports of the country. The FBR has collected Rs1,280 billion in the first four months (July to October) of the ongoing fiscal year against the target of Rs1447 billion. It faces Rs167 billion shortfalls in four months. Tax collection had shown 16.3 percent growth in the July to October period of the current fiscal year.

Meanwhile, the World Bank (WB) has projected that the FBR’s tax revenues could go up to $82.4 billion (Rs12,788 billion) over the next nine years till fiscal year 2028-29, without any intervention under the Pakistan Raises Revenues project of $400 million loan. However, with intervention in shape of taxation measures, the revenue is projected to increase up to $96.6 billion (Rs14,992 billion). On the issue of tax gap analysis, the WB found that Pakistan’s tax revenue would reach 26 percent of GDP if tax compliance were raised to 75 percent, a realistic level for MICs (Middle Income Countries).

According to the State Bank of Pakistan (SBP), achieving the ambitious tax collection target in the middle of a broader economic slowdown is a real challenge. Even if things pan out more or less according to the plan, the fiscal deficit may be in the neighbourhood of 7pc. The growth in the industrial sector slowed down from 4.9pc in FY18 to 1.4pc in FY19. Major drag came from the manufacturing subsector, which carries the highest weight in the industrial sector. The report said that besides the tangible factors behind the economic moderation, a sense of unease remained a persistent theme for most of the year (FY19), stirred up by a number of underlying factors.

Experts say the existing system is a serious threat to the economy. The accumulation of untaxed wealth, flawed taxation policies and administrative loopholes have led to a situation where Pakistan finds it hard to put the economy on the path to recovery. Flaws in the tax system have led to substantial accumulation of untaxed wealth. Pakistan’s tax collection system generates less than 10 percent of GDP. Even that collection is made through indirect taxes, not being the real income.

According to estimates, only one percent people carry the burden of the entire state. Despite hectic efforts, less than two million people – out of the 220 million population – have so far been encouraged to file returns. Only three hundred companies in Pakistan pay 85pc of the tax. Over 90pc industrial consumers of electricity do not pay sales tax. Over 50pc companies registered with the Security and Exchange Commission of Pakistan (SECP) also do not pay sales tax. Over 100,000 companies are registered with the SECP but only 50,000 file returns. There are more than 3.1 million commercial electricity connections but more than 90pc of them are outside the tax net. The banking data shows that there are 50m account holders in the country but just 400,000 are paying taxes.

The government’s plan to increase the current fiscal’s revenue target to Rs5.550 trillion is almost 35.4pc or Rs1.450t higher than the last year’s revised estimate of Rs4.100tr. The government aims to bring fiscal consolidation, austerity and additional revenue mobilization.

The government believes the documentation of the economy, bringing untaxed sectors into the mainstream through various measures will help recover historic high revenue. It has launched a movement for increasing tax collection equitably on all the taxable income. It is acquiring data of economic transactions from third parties, including banks, excise and taxation departments and other offices to net tax evaders.

Undoubtedly, the present system is not sustainable for Pakistan and its people. Social services can only be provided when there is adequate collection of revenue. In the presence of the massive loopholes in the system and a large number of companies and individuals out of the tax net, there is no wonder Pakistan failed to gain self-reliance even after 70 years of its inception. Successive government relied on internal and foreign loans to run the affairs of the country. The tax collection figures are horrible but they also provide a huge opportunity to the government to collect record revenue by bringing all potential individuals and companies into the tax net. However, people should not be harassed for it.