Revenue shortfall and FBR

The revenue shortfall for the first four months of 2020 has been acknowledged at 164 billion rupees with total collection of 1.28 trillion rupees against the target of 1.44 trillion rupees. If this trend continues, a shortfall of 26 percent against the 5.5 trillion rupee year-end target is being projected. That the target set by the revenue division, no doubt in complicity with the International Monetary Fund (IMF), and accepted by the newly-appointed Federal Board of Revenue (FBR) Chairman Shabbar Zaidi, was unrealistic to start off with for two major reasons that have never formed the basis of any of the government's economic managers' narrative. These two reasons are: (i) the rupee depreciation as a consequence of adopting the market-based exchange rate mechanism that discouraged imports that are a significant source of FBR's revenue. The actual decline in imports has been around 31 percent between July-October 2019 whose impact on total revenue so far has been 125 billion rupees. That leaves around 39 billion rupees loss of revenue from other sources; and (ii) the drop in projected growth rate to 2.4 percent, a rate that is not only noted in the IMF documents but also in our budget for the current year, implies that the natural growth in tax collections as the economy grows is likely to be minimal, if at all.

A Business Recorder exclusive, citing a senior Ministry of Finance official, notes that the growth in revenue would come from services, wholesale and retail trade sectors with the condition of mandatory use of CNIC for all transactions in excess of 50,000 rupees envisaged to widen the tax net. In this context, it is relevant to note that the CNIC condition has been postponed for the second time this year and is to be now implemented from 1 February 2020 onwards. It is not yet known whether the traders would again be successful in deferring the implementation of the CNIC condition before the expiry of the second extension.

The economic team is also focused on attracting hot money which accounts for the 13.25 percent unsustainable discount rate - unsustainable not only from the perspective of a commensurate rise in government's annual debt repayments but also to a massive decline in growth of large-scale manufacturing sector (to the tune of 7 percent at last count) with negative implications on downstream industries associated with LSM sector and therefore a general across the board lower collections from sales tax.

There are reports that the government is considering combining all indirect taxes including provincial taxes into a single tax perhaps on similar lines as done in India. Such a scheme cannot come about without the consent of the provinces concerned and would require a lot of spade work to address the abrasive environment that pervades between the provinces and the federation as regards tax collections. The recent unilateral move by the FBR to collect sales tax from restaurants by claiming that it is sale of goods instead of the settled principle that it is sale of service, reflects the arbitrariness with which, the provinces feel, the federal government treats them. Unless it is reversed, the issue is likely to be taken to the courts by the provinces. What is required is to change the culture within the federal government that includes the FBR that would do away with the dismissive attitude which the provinces feel they are treated.