Tax targets

When facing the reality becomes too painful, it is better to take shelter behind wishful thinking. The government of Pakistan sometimes seems to follow such an easy approach while fixing fiscal targets, which hardly stand any chance of materialising.
According to a tax revenue policy paper approved by the government, revenue collection has been targeted to increase to Rs 2.47 trillion within the next three years to attain the tax-to-GDP ratio of 12 percent. Tax receipts for 2010-11 have been projected at Rs 1.71 trillion, as against the current year's target of Rs 1.38 trillion. Some major initiatives have been planned to achieve these targets.
The government will increase excise duty on a number of services, like banking and insurance, withholding tax on imports, excise duty on cigarettes and introduce capital value tax on real estate to boost revenue collection. There were also plans to phase out exemptions and bring the services sector under the tax net. Collection target of Rs 135 billion petroleum development levy would be fixed for the next year, which would be raised to Rs 145 billion by 2012-13. Non-tax receipts of the Federal Government would rise to Rs 495 billion in 2010-11.
This is income derived from government property and enterprises, interest receipts and dividends from government's investments, receipts from civil administration, State Bank profits and other miscellaneous receipts like royalties, passport fees etc. Although high hopes are also attached to the VAT, yet the FBR is reported to have cited certain factors like the improper implementation of value-added tax, from 1st July, as probable hurdles in achieving the ambitious revenue target. It was also estimated by the Ministry of Finance that the government's losses, in terms of subsidies, would gradually decline after the restructuring of eight public sector enterprises, while their dividend receipts would go up.
While there can be no argument about the desirability of jacking up tax receipts to targeted levels, to consolidate and improve the basic parameters of the economy, the ambitious targets planned by the government appear to be highly unrealistic, especially if viewed against past performance and the current outlook of the stakeholders likely to be affected by the dynamics of the new tax policy. It is highly regretful, but no secret that despite concerted efforts by the government, tax receipts as a percentage of GDP continue to be at a dismal level of under 10 percent for the last ten years or so.
The situation cannot be any better this year because actual tax receipts, up to February, 2010, indicate that the target of Rs 1.38 trillion is likely to be missed by a sizable margin. Keeping past experience in view, the government's plans to raise the revenue collection target to Rs 1.71 trillion in 2010-11 and further to Rs 2.47 trillion, or 12 percent of GDP, within the next three years appears to be highly over-optimistic or somewhat ill-conceived, especially when there are still apprehensions about the full implementation of the VAT with effect from 1st July, 2010. Other plans of the government to maximise tax revenues could also face tough resistance.
For instance, authorities have been talking about removing all kinds of tax exemptions for such a long time and then yielding consistently to the demands of powerful lobbies that such promises now appear to be no more than fantasies of the planners. That does not mean that we do not realise the need or urgency to undertake revenue maximising efforts, but we would only like to stress the fact that the authorities would have to resolve fully and proceed courageously to remove the impediments in realising the full potential of revenue generation in the country, before painting a rosy picture of the future. Such a shift in approach would, of course, be difficult but is not impossible.
Hopefully, a day would come when good sense would prevail and the potential for revenue generation would be fully exploited. In the meantime, however, it is very essential to fix only realistic/realisable tax targets to maintain the credibility of the government and ensure discipline in public expenditures. Overblown tax targets generally encourage the political leadership of the country to make commitments involving excessive expenditures, which subsequently result in higher budget deficits with all sorts of negative implications. All told, we would urge upon the authorities to try harder for increasing the tax-to-GDP ratio, but fix revenue targets rather conservatively, especially at a time when the economy is in a poor shape and the people of the country have no stomach to bear more taxes. Tightening of belts is easier when there is more room to do it.