Need to redouble tax collection efforts

Tax collections in the first eight months (July-February 2009) of the current fiscal year would appear to be quite impressive in nominal terms but are woefully short of the expenditure requirements of the country and lag much behind the target fixed for 2008-09.
According to the provisional figures released by the Federal Bureau of Revenue (FBR) on 3rd March, tax collections during this period amounted to Rs 706.4 billion or 20.7 percent higher than Rs 585.3 billion in the corresponding period of 2007-08.
The details of the data reveal that direct tax collections rose by 20.1 percent to Rs 260.3 billion, sales tax by 24.3 percent to Rs 283.4 billion, federal excise duty by 29.1 percent to Rs 69.7 billion and withholding tax on imports by 7.3 percent to Rs 92.9 billion. The FBR paid refunds amounting to Rs 49.69 billion or about 10 percent more compared to Rs 45 billion paid during the same period last year.
Tax managers believe that monthly provisional collection of Rs 75 billion for February 2009 may cross Rs 80 billion on finalisation of updated figures which may push up the total tax collections during the year so far to about Rs 711 billion but such a small increase would not make much difference on the overall picture. Based on the above figures, fiscal authorities of the country may try to portray the rate of tax collections as satisfactory or justify the sluggish growth on the ground of lower growth rate of the economy and depressed level of imports and exports.
However, such arguments would not be convincing. In current rupee terms, tax collections as a percentage of GDP are likely to be lower than last year due mainly to excessive inflation. In other words, an increase of about 22.5 percent in nominal GDP during 2008-09 (real GDP growth estimated at 2.5 percent and inflation rate at 20.0 percent) as against the current rate of 20.7 percent increase in tax collections would naturally result in a lower tax to GDP ratio during the current year.
In fact, Advisor to the Prime Minister on Finance Shaukat Tarin, hinted at such a possibility on 2nd March, 2009 when he said in a press briefing that tax-to-GDP ratio of 10.2 percent fixed for the current fiscal is not likely to be achieved. This is a far cry from his earlier optimistic statements when he seemed confident to raise the tax-to-GDP ratio of the country to 15 percent in the next five years or so.
Also, as the year progresses, it is becoming increasingly clear that the tax target of Rs 1,360 billion fixed for 2008-09 is almost impossible to achieve. The monthly average of Rs 88 billion realised so far cannot be raised to Rs 162 billion, or almost the double of present level, in the remaining four months of the current fiscal year unless some revolutionary steps are taken in fiscal management of the country.
However, revolutionary steps are neither in the offing nor seem to be possible to undertake under the prevailing socio-economic conditions. The current political uncertainty in the country has also made the task of the tax managers much harder. Another difficulty is the commitment with the IMF to bring down the fiscal deficit of the country from 7.4 percent of GDP to 4.3 percent during the current year and further to 3.3 percent in 2009-10.
The overall fiscal situation has almost forced the government to rely increasingly on tariffs on POL products and slash the PSDP to keep the budget deficit within limits agreed with the Fund. Not only has this serious implications for inflation rate, infrastructure development, employment rate and poverty level, but has also distorted price signals in the economy.
Obviously, there is an urgent need to redouble the tax collection efforts by expanding the tax net and eradicate tax evasion from the system. The FBR has been claiming all along to make the needed moves but, as the data indicate, the results of such efforts have not been encouraging and tax elasticity continues to be very poor. With a tax-to-GDP ratio hovering around 10 percent, the country cannot expect to attain a reasonable degree of development and avoid debt accumulation.
Alas, everybody in the country is raising the roof about his patriotic credentials but hardly anybody is prepared to pay his taxes. The tax culture in the country obviously needs to be overhauled in a big way to get out of the present morass. This is all the more important when the frontiers of the country are facing a serious challenge and increasing level of poverty calls for more fiscal space to meet urgent requirements of the economy.