Tax receipts during 2006-07

Tax collection efforts of the Central Board of Revenue (CBR) have yielded handsome gains during the last few years. (CBR has been replaced by Federal Board of Revenue (FBR) through the Finance Bill 2007-08 which came into force on July 1, 2007).
According to its chairman, M. Abdullah Yousuf, total taxes collected by his organisation during 2006-07 amounted to Rs 838.5 billion, surpassing the target of Rs 835 billion by Rs 3.5 billion. Provisional tax receipts during the year were also higher by 17.5 percent compared to the tax collection of Rs 713.4 billion during FY06.
Explaining the category-wise tax performance, Abdullah Yousuf revealed that direct taxes maintained their marvellous growth throughout the year and amounted to Rs 327.6 billion as against Rs 225 billion during 2005-06, depicting a steep increase of 45.6 percent. The collection from this source was even higher than the upward revised target of Rs 318 billion.
As a result of this healthy shift, the share of direct taxes in total tax collections increased to 39 percent compared to 30 percent last year and this was the first time that the income and corporate tax had become the leading source of revenue. The share of withholding tax declined from over 55 percent in FY06 to 45 percent in FY07 though it maintained a steady growth of over 20 percent.
Indirect taxes, however, showed a marginal increase. Sales tax collection at Rs 309 billion was up by only 4.7 percent over last year. Federal excise duty reflected a reasonable growth of 26.7 percent from Rs 55 billion to Rs 70 billion. Receipts from customs duty were, however, lower by 4.5 percent, declining from Rs 138 billion to Rs 132 billion during 2006-07. The CBR paid refunds and rebates amounting to Rs 80 billion to the exporters, while the income tax refund was Rs 30 billion, sales tax refund was Rs 37 billion and customs duty rebate stood at Rs 13 billion.
According to the FBR chairman, if the existing pace of economic growth was maintained in the new fiscal year, the ambitious revenue collection target of Rs 1.025 trillion was likely to be achieved during 2007-08. The target of customs duty would, however, be revised keeping in view the withdrawal of one percent special surcharge on the import of goods.
The fact that taxes collected by the CBR have shown a healthy growth during the outgoing year and surpassed the target is, in our view, a positive development. More encouraging is the fact that direct taxes have contributed greatly to this growth, while indirect taxes have been, more or less, stagnant. There is no doubt that a sound fiscal position is an essential pre-requisite for achieving macro-economic stability and Pakistan has made considerable progress in recent years in this important area of economic policy.
The efficiency of the CBR could be gauged from the fact that during the last six years from 2000-01 to 2006-07, taxes collected by it have increased by nearly 113 percent. Partly as a result of this, the overall fiscal deficit of the country, which averaged nearly 7.0 percent of the GDP during 1990s, has come down to about 4.0 percent. However, while eulogising the efforts of CBR (now FBR), it needs to be remembered that much more still needs to done to improve the fiscal position of the country.
To start with, it must be mentioned that tax collection efforts of the CBR are actually not as impressive as it looks on paper or generally claimed by its officials. The all pervasive withholding tax regime has converted this direct tax into an indirect tax as almost all business and trade is factoring in the withholding tax element in its costing.
It is high time that all corporates are exempted, as done for the banks last year, from the withholding tax regime since this tax would be coming any way in the form of advance tax with their returns. The tax collection from non-corporates remains dismal, major delinquents being the wholesalers and retailers.
The tax contribution from construction and transport sectors is also nothing to write home about. Since GDP at market prices rose by about 15 percent during 2006-07, the increase of 17.5 percent in tax collection means a very low elasticity of tax receipts and only a moderate effort by the CBR to mobilise a higher level of resources from the growing GDP. We are not oblivious of the fact that nearly a quarter of the GDP, because of the constitutional constraints, remains outside the pale of direct tax on income.
However, with better mobilisation of tax from the delinquent sectors as highlighted here, a better tax to GDP ratio should be attainable. Despite considerable efforts by the government to reform the CBR and tax system of the country, tax revenues continue to be between 10-11 percent of GDP which is a very low level compared to other countries of the world. In fact, the tax-to-GDP or revenue-to-GDP ratio has exhibited a secular decline over the last one and a half decade.
This is a sad reflection on a country which is trying to increase its development expenditures to secure a better future for its population and clearly indicates the need to broaden and deepen its tax system on a top priority basis. Unfortunately, vested interests and powerful lobbies in the country are either exempt or do not want to pay their due taxes. There is still a lot of dependence on withholding or presumptive taxes. Provincial governments routinely announce "tax-free" budgets and then look to the Federal Government to finance a substantial part of their expenditures.
They need to do much more to enhance their tax-to-GDP ratio from the current stagnant level of 0.5 percent to at least one percent of the GDP in the medium-term. It is good that FBR is doing reasonably well but a lot of ground still needs to be covered to ensure fiscal stability and discipline in the economy.