Slow growth in FBR revenues

The figures on tax revenues collected by FBR in the first five months of 2020-21 have been released. The overall growth achieved during this period is only 4 percent. In fact, the growth rate was close to 5 percent in the first quarter, but has fallen below 3 percent in October and November.

However, FBR has proudly claimed that the revenue target for the period has been met and even exceeded by Rs 40 billion, despite payment of a somewhat larger quantum of refunds. It is indeed bizarre that the target set for the period required a growth rate of even less than 4 percent.

The Federal budget of 2020-21 was based on the growth of FBR revenues to Rs 4963 billion, from the level attained in 2019-20 of Rs 3997 billion. This requires a growth rate in revenues of over 24 percent. Why then was the target growth rate set at less than 4 percent for the first five months of the financial year? Is it because of the expectation that initially there would be the continued negative impact of COVID-19? If so, then does the Ministry of Finance expect FBR now to show an unbelievably high growth rate of almost 40 percent in the last seven months of the year from December 2020 to June 2021 so as to achieve the annual target?

The growth rate of FBR revenues of only 4 percent raises a number of fundamental questions. Has the post-COVID-19 recovery of the economy been slow and slower than consistently claimed by the Government? What steps are proposed to keep the Budget of 2020-21 close to the original expectations? How will the emerging large shortfall in FBR revenues be worked out with the IMF as part of the process of restoration of the Extended Fund Facility to Pakistan?

An initial exercise is to look at the growth in the two primary tax bases in the economy, viz, imports and value added in the large-scale manufacturing sector. According to the PBS, the rupee value of imports was up by almost 7 percent in the first quarter. However, there was no increase in revenues from the customs duty during this quarter. In October, the growth in the rupee value of imports has, however, come down 1 percent.

The large-scale manufacturing sector has apparently performed relatively well in the first quarter with a growth rate in output of almost 5 percent. The average inflation rate in manufactured goods is close to 5 percent. Therefore, the increase in the value of production is 10 percent. However, the growth overall in indirect taxes in the first quarter was lower at 6 percent.

There is need, therefore, to look deeper at the trends in the economy to find explanations for the low growth in FBR revenues. The primary concern is with the lack of any increase in income tax revenues. Is this due partly to a fall incorporate profitability contrary to claims here also by the Government that profits have gone up sharply?

A specific case is that of the Oil and Gas Development Corporation (OGDC). This is the largest corporate taxpayer in Pakistan. Profits before taxation of OGDC have declined by 14 percent in the first quarter. Consequently, the income tax paid is down correspondingly.

Turning to the withholding tax component of income tax, the primary sources are levies on contracts, services, imports and unearned capital income like interest and dividends. The volume of development work undertaken in the public sector has shown no real increase. Many services were also disrupted by COVID-19. Further, interest income is down because of the big drop in interest rates from March 2020 onwards. Therefore, tax bases of withholding income tax have not shown much buoyancy or have even contracted.

Turning to the sales tax, both domestic and on imports, the largest share, almost 40 percent, is due to the import and sale of POL products. Here, in rupee value terms, imports have declined by 13 percent, primarily due to the precipitate fall in the international oil price. Another significant contributor to sales tax is the automobile sector. Here again the sale of cars is down by 21 percent in the first quarter. The only industries which have shown buoyancy are cement and cigarettes with high growth rates in output of 23 percent and 31 percent respectively. This explains the relatively fast growth in excise duty revenues of 14 percent.

Turning to the issue of the potential revenue shortfall and how it is to be bridged, the prospects have worsened due to the emerging second wave of COVID-19. If the present growth rate in FBR revenues remains at close to 4 percent in the coming months then the revenue shortfall by June 2021 will be as large as Rs 800 billion, equivalent to almost 1.7 percent of the GDP. This will render extremely difficult attainment of the budget deficit target of 7 percent of the GDP in 2020-21.

Clearly, there is a need to bring down the target for 2020-21 of FBR revenues to a more credible level. Prospects for a mini-budget have been dimmed by the return of COVID-19. Any further imposition of taxes at this stage could take the economy down further and aggravate the problems of high unemployment and poverty.

How will the Ministry of Finance negotiate with the IMF in this extremely difficult situation? If the IMF continues to insist on new taxation proposals to yield substantial additional revenues then, given the prevailing political situation, the Government may be forced to abandon the Program. We hope that better sense will prevail on both sides of the negotiating table.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2020