The Economic Survey 2008-09 has said that the Federal Board of Revenue (FBR) had shown very poor performance during 2008-09, which was evident from the substantial downward adjustment of FBR tax revenue-to-GDP ratio.
The economic survey said that average growth of FBR tax collections was calculated at around 16 percent during 2000-09 as compared to the growth rate of 12 percent during the preceding decade of the 1990s. If this increase is seen in isolation of the nominal GDP growth rate, the growth rate from 12 to 16 percent shows the positive impact of tax reforms. However, the falling tax-to-GDP ratio implies that nominal GDP grew at a faster pace than tax growth.
With excise comprising 9 percent of total FBR revenues, Pakistan's tax revenue-to-GDP stood at around 9 percent of GDP during 2008-09. The indirect tax-to-GDP ratio stood at around 5 percent, and direct tax-to-GDP ratio at around 4 percent during 2008-09. This indicates that substantial tax policy measures are still needed to broaden the tax base and strengthen tax administration. To achieve a tax-to-GDP ratio of around 15 percent, it is important to extend coverage of the tax net to the under-taxed and un-taxed sectors of the economy to promote judicious distribution of tax burden among various sectors.
The survey says that FBR taxes in relation to GDP need serious review, and efforts must be made to extend the tax base to unexplored areas. The current fiscal year is yet another reflection of the dismal performance of the FBR. The target of Rs 1250 billion was consistent with a nominal GDP growth rate of 17.5 percent. However, notwithstanding nominal GDP growth rate of around 24 percent, the FBR revenue grew by just 19 percent, thus leading to substantial downward adjustment of FBR tax revenue-to-GDP.
The share of direct taxes in federal tax receipts increased from 18 percent in the early 1990s to 32 percent in 2000-01. The share further increased to 39.6 percent in 2008-09. However, direct tax-to-GDP accounted for only 4 percent, in comparison with 7 percent for other developing countries at the same level of development.
The indirect taxes currently account for 60 percent of total revenues, but in terms of percent of GDP they compare poorly with peer countries. General sales tax accounts for more than 60 percent of the indirect taxes, which makes it the second major source of federal tax revenues after direct taxes accounts for 38 percent of total tax collections. This indicates that there is enormous potential for GST to convert it to full value-added tax.
On the other hand, customs collection reduced sharply over the past decade, mostly induced by trade liberalisation. It increased sharply from 2002-03 as a result of tremendous surge in imports owing to spike in aggregate demand. Customs collection as percentage of GDP declined from 3.4 percent in 1993-94 to 1.2 percent in 2008-09.
Customs duties accounted for 22.5 percent of the total indirect taxes as compared to 25 percent of last year. The current year has unique distinction as it witnessed massive fall in imports in response to demand compression measures as well as fall in international oil and commodity prices.
The FBR revenue collection for the fiscal year 2008-09 was targeted at Rs 1250 billion at the time of presentation of the 2008-09 Federal Budget. Tax collection during first ten months (July-April) of the current fiscal year amounted to Rs 898.6 billion, which was 17.7 percent higher than the net collection of Rs 763.6 billion in the corresponding period of last year. Net and gross collections have increased by 17.7 and 17.1 percent respectively. The overall refund/rebate payments during first ten months of the current fiscal year have been Rs 61.3 billion as compared to Rs 55.8 billion paid back during the corresponding period of last year.
Tax collection performance felt the heat of the slowing economy and falling imports. Customs duty collection deviated from its recent past track record of high growth mainly because of the fact that dutiable imports underwent negative growth. Notwithstanding its meagre share even in indirect taxes, federal excise duty collections registered a vibrant growth of 27.6 percent. Sales tax collections also rely heavily on imports and the sales tax at import stage witnessed marginal growth. On the other hand, a 47 percent growth in sales tax on domestic economic activity helped it to grow overall by 22.2 percent.
When viewed in the backdrop of 23 percent growth in national income, the growth of 16.9 percent in direct tax looks dismal. The overall FBR tax collection remained less than satisfactory, and actually witnessed deceleration in real terms. Consequently, the FBR tax collection to GDP ratio is likely to deteriorate to around 9 percent of GDP against the target of bringing it into the vicinity of 10 percent of GDP. Apart from FBR revenue, total tax revenue growth also lagged behind growth in nominal GDP; it exhibits a decline in tax-GDP ratio from 10.3 percent in 2007-08 to around 10 percent in 2008-09.
Direct tax as a major source of FBR tax revenues for the last two years contributed 37 percent of total FBR receipts during Jul-April 2008-09. Net collection was estimated at Rs 332.5 billion, against the target of Rs 496 billion. Hence, gross and net collection registered a growth of 19.3 percent and 16.9 percent during Jul-April 2008-09.
The current fiscal year witnessed a shortfall in collection of direct taxes for the second consecutive year. The entire shortfall will be difficult to replenish in the remaining months of 2008-09 due to a likely fall in corporate earnings, on account of a realisation of impairment losses arising from a decline in the value of financial assets.
Improved tax efforts and effective implementation of tax policy and tax administrative reforms have resulted in higher tax collection over the years. The share of direct taxes in federal tax receipts has increased from 15 percent in the early 1990s to around 37 percent in 2008-09.
Indirect taxes grew by 18.2 percent during July-April 2008-09 and accounted for 62 percent of the stake in overall tax revenue. Within indirect taxes, sales tax increased by 22.2 percent. The gross and net collection of sales tax stood at Rs 380.0 billion and Rs 358.9 billion, respectively. Sales tax on domestic production and sales contributes to 54.2 percent of net collection, while the rest originates from imports.
Within net domestic sales tax collection major contribution came from POL products, telecom services, natural gas, sugar and cigarettes. On the other hand, POL products, edible oil, plastic resins, vehicles, iron and steel and machinery and mechanical appliances had major contribution at the import stage collection of sales tax.
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