The Federal Board of Revenue (FBR) has roughly worked out Rs 130 billion as revenue impact of one percent decline in gross domestic product (GDP) growth from budgetary estimate of 4.5 percent to 3.5 percent. Sources told Business Recorder here on Friday that any decrease in the GDP growth would have a direct negative impact on the revenue collection of the FBR.
If the government misses the 4.5 percent GDP growth target this year, it would drastically reduce revenue collection. According to rough estimates, one percent decrease in GDP would result in revenue shortfall of over and above Rs 130 billion, a figure that takes into account the tax-to-GDP ratio and other economic factors.
If GDP growth is reduced by 1.5 percent, the revenue implications on revenue collection would be approximately Rs 195 billion in 2010-11. Officials said that the growth in revenue collection is based on two important factors. First, there is always a natural growth in taxes due to growth in the economy.
This automatic growth in taxes is based on growth in GDP, expansion of the manufacturing sector, increase in imports and key economic indicators particularly inflation. The natural growth in the revenue is evident from the fact that no increase in customs duty was made in budget 2010-11 on the import of any item, but the revenue target of customs duty is much higher as compared to previous fiscal year.
The target of customs duty has been projected at Rs 180.8 billion for 2010-11 against Rs 164.9 billion on assumed growth in imports and enforcement measures. The natural growth in the economy was based on factors like inflation, tax elasticity and GDP, etc.
Second, the taxation measures also contribute in overall revenue collection taking into account measures proposed in sales tax, federal excise duty, income tax and customs duty.
When the revenue collection target of Rs 1667 billion was finalised in budget (2010-11), it was presumed that 25.6 percent revenue growth would be witnessed, taking into account the taxation measures. The net impact of taxation measures and administrative/enforcement efforts of the FBR were estimated at Rs 133.232 billion for 2010-11. During 2009-10, the FBR was able to achieve only 14.5 percent growth in revenue.
It is very difficult to achieve growth of 25-26 percent in revenue collection under the current circumstances. The figure of Rs 1667 billion was based on the assumption that the FBR would be able to collect Rs 1380 in 2009-10 based on growth estimates in large scale manufacturing and imports etc.
Even if there were no floods, 25-26 percent growth in revenue would be an uphill task for the tax machinery in view of current economic situation of the county. At one stage it was considered to downward revise the revenue collection target from Rs 1667 billion to Rs 1605 billion or Rs 1600 billion due to slowdown in economy and other negative factors during current fiscal.
"The government is likely to make some realistic adjustments in the revenue collection target, and certain proposals have been submitted by the FBR to the Finance Ministry to generate additional revenue for flood victims" sources said.
Officials said that the situation of the entire country has suddenly changed due to devastating floods and now the need to generate additional revenue for the flood victims is greater. Different measures are under consideration including imposition of a 'surcharge'.
According to sources, the contribution of agriculture sector is around 21 percent in the total GDP, but its contribution in taxes in negligible. At the federal level, agriculture sector contributes nothing in the overall taxes. From tax point of view, agriculture has never been considered by the FBR as a priority area.
Even if the provincial taxes from agriculture have been included in the total revenue collection, it is not more than one percent of total collection. Total agriculture sector contributes approximately one percent in the total revenue collection of the government.
As agriculture is an exempt sector, it has no direct impact on revenue collection of the FBR during current situation of floods across the country. Agriculture contributes about one-fifth of GDP, yet gives no more than 1 percent in tax revenues.
Officials pointed out that the breakup of projected collection for 2010-11 has not set any specific target for the agriculture sector due to its exempted status. The FBR is taking measures to raise additional revenue in the coming years which will amount to increase the tax-to-GDP ratio by 2-3 percent.
The strengthening of customs controls at import stage and international borders, checking of under-invoicing, reactivation of audit functions and implementation of wide-ranging enforcement plan to identify and bring it to tax net non-compliant taxpayers are the other important measures of the FBR strategy.
Under the existing strategy to achieve target of Rs 1667 billion for 2010-11, 20 percent of total revenue collection target has to be achieved during the first quarter (July-September) of 2010-11. During the second quarter (October-December) of 2010-11, the tax machinery would have to collect 22.9 percent of the total revenue collection target. The FBR has to collect 26.8 percent of total revenue collection target during third quarter (January-March) of current fiscal year. Over and above, 30.2 percent of the total tax projections has to be collected during the fourth quarter (April-June) of 2010-11.
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