On divisible pool deductions

It is quintessential of critics to question the credibility of every statistic released by incumbent Pakistani governments year after year. The fate of tax collection figures budgeted for the fiscal year ending June 2018 is not very different.

A look at the recent history of actual tax collected by the government shows that save for the custom duties, all other tax collection by the Federal Board of Revenue falls short of the budgeted amount every year. But it should also be understood well that not all statistics are hundred percent accurate at the time of their release. Most numbers are provisional estimates at first, and are finalised six months or a year, or even two years later.

In fact, except for the case of direct taxes, the gap between ‘actual tax collection’ reported by the Finance Ministry under Pakistan Fiscal Operations and the budgeted tax collection reported in its annual budget documents has been reducing in the last three years.

Ergo, it might be fashionable to dispute the credibility of the numbers, but tax collection is not always as much off the mark as it is widely touted (save for the case of direct tax collection). The quality of that tax collection, however – the holding back of refunds and other allegedly arm-twisting tactics by the revenue collecting agency – is another matter that has been discussed at length many times before in this space.

Today, this column would like to highlight two things. First, direct tax collection has been consistently lower than budgeted in the last three years and before. This comes as a surprise when most of the direct tax collection is in indirect mode.

The FBR’s yearbook for FY16 isn’t yet available but according to its FY15 yearbook, FBR’s on-demand collection was only 11 percent of the total direct tax collection in FY15 as against an average share of 14 percent in the preceding five years.

If the re-emergence of audits is any guide, the on-demand collection can be expected to post slightly better growth in FY16 and FY17. But that hope hangs on a weak straw. According to the latest Economic Survey, the number of notices issued by the FBR stood at 0.46 million by the end of June 2016. Of that, only 28 percent resulted in enforced income tax returns. The total tax demand raised was Rs36.4 billion. Of that, the tax demand recovered was Rs921 million. Just to put that Rs921 million in perspective, direct tax collection in FY16 was north of Rs1000 billion.

As for the notices, the citizens of this country are left in dark about the break-up of those notices – individuals, companies, firms, AoPs – and/or detailed annual progress of additional filers and the break-up of the tax collected under those heads. The latest Finance Bill has introduced a new department for broadening the tax base. That department has a big task on its hands.

The second thing this column would like to highlight today is proposed allocation of 3 percent of Gross Divisible Pool for spending on security, and additional 3 percent proposed allocation from the same pool for Kashmir, Gilgit Baltistan, and FATA.

In his budget speech last week, Finance Minister Ishaq Dar said that these proposed allocations are under discussion in the CCI and NFC, and that the delay in decision of these allocations is the cause for delay in finalising the NFC Award.

While it is true that Dar had brought up these allocations in the last NFC meeting held in December 2016, it is also true that back then the provinces told Dar that they will get back to the centre after consultations. But it is equally true that the Chairman NFC, Senator Ishaq Dar has not been interested in getting a new award since the very start, so much so that in one of the NFC meetings, the NFC agenda was not even taken up. The centre has been using delay tactics since the Zardari era award first expired (See BR Research column, “NFC negotiations,” published April 04, 2017).

Anyway, a look at latest budget documents suggests that these (3+3 percent) deductions haven’t been made from the divisible pool. In fact, the centre could not have done it without a nod from the provinces, which Dar couldn’t have obtained since there hasn’t been any other NFC meeting since December 2016. Sources say provinces are in no mood to allow the centre to make that deduction from their kitty.

What is uncertain is whether or not Dar has already budgeted those (3+3 percent) allocations, and what might be their implications on the budget deficit. The budget documents currently made available by the finance ministry do not suggest that those budgetary allocations have been made. If that is indeed the case, and if, as Dr Kaisar Bengali says, Dar is really caught between a rock and hard place forcing him to spend those 3+3 percent allocations, then the budget deficit may go up by about 0.4 percent of the GDP. More on that later!