EDITORIAL: The government has decided to set up a refund fund for payment of 232 billion rupee pending income tax refunds of up to 50 million rupees each within one week. A technical committee with representation from the business community would be established in the Finance Division to fast track resolution of issues as well as the creation of facilitation committees at the level of field formations.
Refunds have been a source of a tug of war between the business community and administrations - the business community considers refunds as its cash flow that is unrealized for long periods creating severe liquidity issues; and administrations face perennial revenue shortfall that account for piling of refunds and/or inordinate delays in clearing pending applications for refunds and instead counting the refund dues as revenue (a consideration that is all the more acute during an International Monetary Fund programme where budget deficit targets are monitored during the quarterly reviews and a tranche release may be withheld if the structural benchmarks and/or quantitative time bound targets are unmet).
The solution, so argued the erudite pundits in the Ministry of Finance last year, is to take away the refund payment from the Federal Board of Revenue (FBR), so that refunds do not impact FBR revenue collection figures and instead for the Ministry of Finance to release payments for refunds to be made. This would eliminate the natural tendency by the FBR to withhold refunds to protect their collection figures. Under the new procedure refunds would not impact FBR's gross collecition of revenue. The FBR operates under the Ministry and, more often than not, refunds were withheld by the FBR on instructions from the ministry to enable the government to contain the fiscal deficit number. As in previous years, this year too, the tax revenue target is patently unrealistic, at 4.9 trillion rupees, and is unlikely to be met given the projected and more realistic one percent growth rate by the IMF though the budget, again over optimistically and unrealistically, envisages a growth rate of 2.1 percent.
Thus the latest decision to set up a refund fund under the auspices of the Ministry of Finance is unlikely to be any more successful than previous years for three reasons: (i) the FBR target is unlikely to be met which in turn would put pressure on the government not to pay or delay the income tax refunds to show a lower budget deficit; (ii) the IMF programme that had focused on the primary deficit last year is reportedly now focused on the budget deficit given the fact that the government increased its reliance on borrowing (domestic and external) during the last fiscal year and cited a budget deficit of 9.1 percent against 2018-19's 8.9 percent which is widely regarded as understated and analysts are awaiting the release of actual data, instead of a projection in the budget, due sometime this month or early next month; and (iii) use of computers, business representation and facilitation committees notwithstanding to administer the refund fund the Ministry of Finance's priority would be on meeting IMF conditions or else face the prospect of suspension of the programme with its associated issues relating to foreign exchange reserves.
The ideal solution is for the tax system design to have minimal refunds. In this context it is relevant to note that lending agency after lending agency has urged successive Pakistani governments to reform the tax structure by (i) increasing reliance on direct as opposed to indirect taxes (and not to impose withholding tax in the sales tax mode while misleading the people through crediting the amount under direct taxes), (ii) have a non-anomalous system whereby tax is payable at the same rate for all similar units operating in the country irrespective of whether it has government ownership or not, and (iii) be in synch with the objective of allowing local industry/productive units to compete in the domestic and international markets.
Copyright Business Recorder, 2020
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