Tax collection in FY09

Tax collection efforts have certainly faltered during 2008-09. According to the provisional figures released by the Federal Board of Revenue (FBR) on 2nd July, tax authorities were able to raise only Rs 1152.8 billion during the outgoing fiscal year, as against the revised target of Rs 1179 billion, leaving a shortfall of more than Rs 26 billion.
The target for 2008-09, it may be mentioned, had been revised a number of times, keeping in view factors like global economic recession, fluctuations in POL prices, low profitability of the corporate sector, considerable slowdown in manufacturing activities, import trends and law and order situation prevailing in the country.
At the start of the financial year, government had fixed revenue collection target at Rs 1250 billion, then revised it upwards to Rs 1360 billion in November, 2008 and finally brought it down to Rs 1179 billion due to the country's deteriorating economic situation. Compared to last year's level of Rs 1007 billion, tax collections during 2008-09 were, however, higher by 14 percent.
An official statement issued by the FBR said that a part of the revenues collected during June, 2009 was still in the pipeline and final figures were likely to be settled by this weekend, but this was not likely to make much difference to the overall picture. Tax-wise data showed that the FBR raised Rs 443 billion from direct taxes, as against the downward revised target of Rs 447.2 billion.
The amount collected from GST was Rs 448 billion, as against the target of Rs 443.4 billion, from FED Rs 113.7 billion, as compared to the target of Rs 117.6 billion, and from customs duty Rs 148.1 billion as against the target of Rs 144.6 billion. The refunds/rebates paid out to tax payers amounted to Rs 70.8 billion, as against Rs 66.4 billion last year, showing an increase of 6 percent during 2008-09.
Judged by any criteria, tax collection performance of the FBR was poor during 2008-09. Not only did it fail to meet the given target, it was not even able to mobilise an equivalent percentage of the incremental GDP in the form of tax receipts, resulting in further reduction of tax-to-GDP ratio, which was already dismally low. Such a depressing performance was not even expected at the time of release of Economic Survey on 11th June, 2009 when tax revenues collected by the FBR were estimated at Rs 1250 billion, yielding a tax-to-GDP ratio of 9.5 percent for FY09.
Actual tax collections at Rs 1152.8 billion would mean a sharp reduction of this ratio to 8.8 percent, compared to 10 percent during the previous year and 12 percent in 1996-97. The authorities could give a number of reasons for their inability to perform to the required level. Imports were down, manufacturing activity in the country suffered a huge setback, profitability of the corporate sector was low and the law and order situation deteriorated further. According to some reports, large amounts of tax arrears that the government organisations like Wapda, PIA and Pakistan Railways owed, could not be realised or collected from them.
However, such explanations or pretexts cannot hide the fact that fiscal consolidation efforts of the government during the last few years have not yielded the desired results. In fact, vulnerabilities on this account have increased and the country has moved further away from the goal of fiscal prudence.
The low level of tax receipts has already resulted in a growing debt burden, withdrawal of subsidies, high interest rates, crowding out of private sector credit, slashing of development spending and lower allocations for social sectors of the economy. Most of these measures are extremely harmful for the growth of the economy and the welfare of people. Going forward, Pakistan needs a substantial increase in its resource base to augment its development efforts and meet current expenditure needs, but such an effort appears to be a huge challenge at the moment.
The resistance to the imposition of carbon surcharge and the uproar against the withdrawal of certain subsidies in the last few days, is an indication that it is going to be an extremely rough ride for the FBR to mount the needed effort. To extend the tax base to the unexplored sectors also appears to be difficult. The universal self-assessment scheme of the government is also not yielding the desired results.
In developed countries, such schemes are supported by strong audit mechanisms, which are still to be implemented in Pakistan. On the other hand, expenditures of the government are rising consistently due to reasons which are obvious to everybody. To rise to the occasion and meet the expectations of the nation, undoubtedly, appears to be a huge challenge for the FBR at this critical juncture. Financial stability and the overall health of the economy would depend crucially on the success of its endeavours for which we can only pray and then hope for the best.