Shortfall in tax collections

Tax collections continue to show sings of stagnating despite a lot of efforts generally claimed by the Federal Board of Revenue (FBR). According to the latest available data, it had collected Rs 1,027 billion during July-January, 2013 as against Rs 974 billion in the same period last year, showing an increase of mere Rs 53 billion or about 5 percent. This means a substantial decline in real terms because of rate of inflation of around 8 percent.
Tax collection effort was also found to be dismal compared to the earlier target of Rs 2,381 billion and subsequent slashed target of Rs 2,190 billion fixed later due to a continuous fall in tax collection during the course of the year. Simply put, FBR has to collect Rs 1,163 billion in the remaining part of 2012-13 even to reach the revised target on a monthly average of Rs 232.6 billion as against the monthly average of only Rs 146.8 billion in the earlier part of the year, which appears to be an extremely difficult, if not an impossible, task. With so much shortfall in revenue collection, it is certain that the tax-to-GDP ratio would be much lower than 10 percent projected in the beginning of the year. Last year, it was only 9.1 percent, much below 15 percent or so which is the norm in comparable economies.
It would be interesting to remember that the FBR usually has a set of excuses for the shortfall and pins its hopes on certain initiatives to accelerate the flow of tax revenue receipts during the remainder part of the year. A "rather convincing" argument could easily be made this year that tax receipts had fallen short of the target because of frequent holidays, law and order situation and a slowdown in manufacturing activity, etc. Of course, economic analysts cannot buy such an argument because nominal GDP would grow by about 12 percent during FY13 despite all these odds which means that it was mainly the lack of proper efforts by the FBR which had contributed to a slowdown in tax revenues.
There is also no shortage of initiatives to pretend that many measures could still be taken and the situation is not out of control, at least as yet. For instance, the FBR is still reported to believe that tax amnesty scheme could be introduced, probably through a presidential ordinance sometime in March, 2013, despite the refusal of the government's two coalition partners to support it. FBR has also evolved "plan B" which includes issuing notices to the large group of non-filers identified for the tax year 2012. Similarly, FBR has worked out other administrative and revenue measures which are expected to increase tax revenues by a substantial margin. These include amendments to Alternate Dispute Resolution Laws and other administrative arrangements. Although, we would very much like the FBR to succeed in its efforts but past experience suggests that such initiatives do not usually yield the desired results and prove a kind of smoke-screen for the prevailing inefficiency in the FBR.
The expected shortfall in tax revenues and that too by a big margin would have very negative consequences for the economy. With rising expenditures in an election year and lower-than-expected external inflows for budgetary support, overall fiscal deficit of the country could reach or even surpass last year's level of 8.5 percent of GDP, which would certainly be unsustainable. Price pressures in the economy would accentuate, PKR would continue to depreciate in the foreign exchange market, external sector would come under renewed pressure, indebtedness of the country would increase to almost unmanageable levels and private sector credit would be further crowded out to accommodate the budgetary requirements of the government sector. Lower tax receipts could also destabilise other areas of the economy. As such, there is an urgent need for broad-based tax regime, removing exemptions etc and deepen the tax net in order to ensure equity and uniformity in the tax system. With such a regime in place, people would be encouraged to pay their due taxes.
While the political leadership should provide the necessary support for such an effort, the FBR needs to remain on its reform course. This involves unwinding of the presumptive tax regime and moving to a regime of determination of tax liability after filing of returns, eliminating exemptions in sales tax and strengthening enforcement and audit of sales tax as well as in withholding tax. Both are significant areas of tax leakage. Refunds and under-invoicing and mis-declaration need to be undertaken by a third party-prescribed automation solutions. Tax compliance has to be improved at all levels through greater use of technology. Capturing expenditures and then examining carefully or at length the citizens to substantiate their lifestyle if not conforming to their returns field lie at the core. Nobody pays taxes willingly. They pay out of fear of being caught - penalised and shamed. While the process of shaming has begun with elected officials - one hopes that penalising them by banning them from participating in elections will follow. Public focus on its leaders is important. However, the needs of the economy requires a tax policy built around the principle of all sources of income be taxed without discrimination. This needs a rethink about constitutional provisions and removing anomalies in the tax structure. Manufacturing sector's contribution is 20 percent of GDP while it pays 66 percent of taxes. Service sector contributes 56 percent of GDP and pays 33 percent of taxes, while agriculture contributes 24 percent towards GDP and pays less than one percent in taxes. Provinces tax collection is only 0.52 percent. Without facing these facts and adopting a corrective course and the political leadership showing a demonstrating effect Pakistan is destined to lag behind in tax collection.