NationalVolume 14 Issue # 19

The massive revenue shortfall

According to the latest figures, the shortfall in tax collection has widened to Rs345 billion in the first ten months of this fiscal year.

According to a detailed analysis, from July to April, the Federal Board of Revenue collected Rs2.993 trillion in taxes as against the target of Rs3.35 trillion. Overall, the 10-month tax collection was higher by mere Rs70 billion or 2.4%. But the rate of increase in tax collection was far below the nominal Gross Domestic Product (GDP) growth rate of 12.5%.The FBR has sustained Rs52 billion shortfalls in April, collecting only Rs288 billion against the monthly target of Rs340 billion. The collection in April was negative Rs7 billion or 2% when compared with the same month in the corresponding period last year.

The FBR’s collection stood at Rs2060 billion in the first seven months and after adding Rs268 billion, the overall collection went up to Rs2328 billion in first eight months (July-Feb) of the current fiscal year. The FBR’s collection in the same period of the last fiscal year 2017-18 stood at Rs2259 billion. It indicates that the FBR collection increased only Rs79 billion so far in the current fiscal year.

In this context, it is relevant to point out here that during July-March of the last fiscal year, the FBR had collected Rs2.923 trillion. This year’s 10-month collection was equal to 68% of the annual downward revised target of Rs4.4 trillion. Former Finance Minister Asad Umar had told the IMF that the FBR may collect Rs4.1 trillion. But this now seems to be an uphill task.

Available data shows that for the second time in this fiscal year, the monthly collection target for customs duties has been missed. Against the monthly target of Rs61.7 billion, the FBR collected Rs55 billion in custom duties in April. Keeping in view the full year revised target of Rs735 billion, the customs department is now projecting to collect only Rs685 billion by June. This is despite the fact that the Pak rupee has undergone steep devaluation. The FBR collects nearly 45% of its total revenues at the import stage. As such, import restriction policies have adversely affected the collection of income tax, sales tax at the import stage and custom duties.

FBR authorities say the decline in collection is attributable to a drop in withholding taxes from contracts, mobile phones and salaries during the current fiscal year. The slowing economic activities are also hampering revenue growth. The share of withholding taxes is in the decline which is being compensated through direct taxes. According to latest reports, the sales tax on the domestic front is registering good growth.

Among other things, tax collection fell short of the target because of incentives provided by the last regime for salaried class as the taxable limit was increased from Rs0.4 million to Rs1.2 million per annum, massive reduction in utilization of Public Sector Development Program (PSDP), suspension of withholding tax on mobile phone usage and keeping sales tax on petroleum products on the lower side. The sales tax on petroleum products has now brought at the standard level of 17 percent. It may be added here that the sales tax collection on POL products at the import stage has decreased by Rs43 billion so far.

 

Experts have noted that the government is taking decisions that may further dent tax collection. Despite a steep shortfall in tax revenues, the federal government unexpectedly reduced the General Sales Tax (GST) rates on all petroleum products. Last month, the government cut the GST rate on petrol from 17% to 2%, on high speed diesel from 17% to 13%, on kerosene oil to 8%, and on light diesel oil to 9%. The step was taken after the federal cabinet referred the matter of increase in petroleum prices to its Economic Coordination Committee (ECC).Other factors affecting the FBR’s collection are non-payment of tax dues by the power distribution companies due to chronic circular debt.

The latest reports show that the FBR has formally asked the Finance Ministry to further revise its annual target to Rs4.1 trillion, although this figure also appears unrealistic. According to experts, the tax collection target could be as high as around Rs5.4 trillion. But this will require 36% growth in revenue collection over an estimated Rs4 trillion collection. Historically, the FBR has never posted more than 22% annual growth.

Analysts say the widening gap between tax collection and the target is likely to make Pakistan’s case difficult in the eyes of the IMF. So far, the IMF and Pakistani authorities have held four rounds of discussions on the tax issues. The IMF has been suggesting to the tax authorities to adopt necessary steps for achieve the next fiscal year’s tax collection target. It remains to be seen if the government succeeds in containing the revenue shortfall and how the IMF responds to the situation.

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