The Federal Board of Revenue’s (FBR’s) narrative, irrespective of the many chairmen it has been subjected to - accountants, generalists bureaucrats, party loyalists and the very few promoted from within the Bureau - has remarkably not changed its modus operandi: boasting of any rise in revenue collection in any given year without assessing the impact of specific taxes on productivity, exports, the quality of life of the general public and the consequent rise in poverty levels which today stands at 41 percent, higher than that prevalent in Sub-Sahara Africa.
During the run-up to the finalization of the budget, the FBR meets mainly with very well-organised and politically influential elite groups (defined as stakeholders) – Trade associations, Industrial associations, other business groups, chambers of commerce and industry, etc.
Recommendations for the Finance Bill are then submitted to the Ministry of Finance for approval. In this context it is relevant to note that since 2008 all civilian administrations, led by the three national parties, have appointed finance ministers on a technocrat seat, irrespective of the lack of their qualification or abysmal past performance.
It is also the norm that our finance ministers, with the majority very recent converts to the ruling party and the incumbent is reportedly no exception, discuss and make changes, if any, to the FBR proposals with a very small group of their loyalists ranging from two to no more than three or four individuals, who may or may not be tax experts/economists.
The Finance Minister then submits the tax proposals agreed with his core group to the Cabinet and then to parliament which, in turn, sends the proposals to the relevant senate and national assembly committee with the Finance Minister accepting recommendations based on the ruling party’s strength in parliament.
And in the event that the country is on an International Monetary Fund (IMF) programme (as it is at present with the staff level agreement on a 7 billion dollars thirty-seven months Extended Fund Facility programme reached on 12 July 2024, and Board approval pending the implementation of all agreed prior conditions) the authorities share and seek Fund approval from the first FBR prepared draft till the approval of the Finance Bill by parliament.
Needless to add, the IMF insists on reaching the potential of revenue generation while the government seeks to minimise taxes or, failing that, to raise subsidies – both policies opposed by the Fund.
There are no reported meetings with consumer groups which no doubt does explain to some extent why the tax structure remains heavily reliant on indirect taxes (which are passed on in their entirety to the end consumers) accounting for more than 70 to 75 percent of total tax revenue collected by the FBR.
And the country continues to be subjected to raising existing taxes - the standard sales tax rate or bringing more items under its regimen (directly or indirectly through imposing a higher withholding tax on an increased number of items) though in the current budget taxes were raised on the overly burdened salaried.
Pledges to widen the tax net have been touted since 2008 due to data available with NADRA that, so far, have not been implemented due to continued organised resistance prompting the FBR to continue to rely on low-hanging fruit to increase revenue – low-hanging in terms of outsourcing collections to withholding agents operating in the private sector.
Sadly, administrations to this day continue to place petroleum levy, a sales tax on petroleum products, under other taxes so it does not have to share collections under the divisible pool.
Federal Finance Minister Muhammad Aurangzeb has repeatedly stated that registration of the 3.2 million small to medium traders will be ensured as a first step towards taxing them, though to-date over 50,000 have registered. What action if any can be taken in case of countrywide protests by the traders remains to be seen, as they successfully applied pressure on the previous three administrations to defer implementation of measures designed to bring them in the tax net.
Reports suggest that Rashid Mahmood Langrial, after his appointment as FBR Chair on 7 August 2024, noted the near impossibility of generating 50 billion rupees from the Taajir Dost Scheme in the current year, a realistic assumption though this would probably imply a mini-budget, read any budgeted revenue shortfall to be met by greater reliance on low-hanging fruit – a pledge that the government may have already made to the IMF as was the case in the recently concluded nine-month-long Stand By Arrangement.
Langrial’s appointment as Board Chairman may have been due to the Prime Minister’s greater confidence in his capacity to deliver, yet the main question is deliver precisely what? Is it to deliver on meeting the government’s revenue target of 12.97 trillion rupees for the current year - an impossible 40 percent higher than the revised estimates of last year and 37.75 percent higher than what was budgeted for last year, indicative of the over ambitious budgeted target set? He may succeed, but how much would his success imply a further rise in poverty levels with a widening gap with Sub-Sahara Africa.
So what can Langrial possibly do that is different from his predecessors? Can he overrule the political considerations of the administration? This is doubtful as much stronger governments, defined as those with a simple majority or led by a military dictator or supported by the establishment, failed to reduce the pervasive reliance on indirect taxes.
Additionally, provincial governments did not impose a tax on the income of rich landlords at a rate equivalent to that payable by the salaried as all provinces announced their budgets in June, less than two months ago, (though Khyber Pakhtunkhwa government announced its budget well before the federal budget on 25 May).
To conclude, the government needs to change the tax structure and this is what the task of the new Chairman must be. True that this would initially reduce revenue collections, but the way forward has to be to slash current expenditure through voluntary sacrifices by all major recipients that would reduce the pressure to raise revenue through taxing the already taxed. Once tax reforms that envision heavier reliance on direct (ability to pay) taxes, a two to three-year process, then the recipients of current expenditure can begin to receive higher outlays.
Copyright Business Recorder, 2024
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