Reduced revenue target

Shabbar Zaidi, the Chairman Federal Board of Revenue (FBR), while briefing the Senate Standing Committee on Finance acknowledged a shortfall of 200 billion rupees during the first five months of the current year. The main reason, he added was due to the import compression policy followed by the State Bank of Pakistan which led to an estimated decline in imports of 4 billion dollars (acclaimed by the Prime Minister and his economic team leaders as a remarkable achievement as it led to a decline in the current account deficit) directly impacted on revenue collections as 50 percent of FBR tax collections are from imports. And this is precisely what Business Recorder had pointed out in these columns when details of the staff-level agreement they reached with the International Monetary Fund (IMF) for a 6 billion dollar Extended Fund Facility programme on 12 May 2019 was revealed on the Fund website: that the 5.5 trillion rupees FBR target was grossly unrealistic given the import compression policy of an undervalued rupee, to the tune of over 5.5 percent today, though the Fund recommended a market-based exchange rate as a prior condition, and the high discount rate of 13.25 percent (the Fund specified a rate of 12.25 percent as a prior condition) would stifle business activity and to this day, large-scale manufacturing growth remains negative, with a consequent impact on taxes collected.

So why did the PTI government agree to a set of conditions that would compromise the achievement of other targets they agreed to? Were they unaware of the main revenue source when committing the revenue target? Can Hafeez Sheikh who held the portfolio of privatisation during Musharraf's dictatorship and finance for three years during the Zardari government be unaware of this fact? One would expect the signatories to the IMF agreement to enlighten the people of this country the basis on which the revenue target of 5.5 trillion rupees was decided.

The FBR chief also informed the standing committee that the tax rate for small companies has been reduced by 4 percent - from 25 percent in 2010 to 21 percent for 2022; and acknowledged that the Income Tax Ordinance, 2001 does not specifically mention small companies though there are several concessions/incentives that are applicable to small companies. Mian Atif, Prime Minister Imran Khan's original choice of an active member of the Economic Advisory Council later abandoned, in a recent article mentioned that before granting incentives, monetary and fiscal, to the productive sectors particularly to exporters, it would be appropriate to first ascertain the efficacy of these measures. No such study has been undertaken and the same incentives continue to be proposed and approved by administration after administration and perhaps it is time to undertake such a study especially given the current serious financial constraints that the government is operating under. Be that as it may, it is proposed that small manufacturing companies be offered at least the same concessions as wholesalers and retailers.

It is fairly evident that at the time when the programme was being negotiated with the IMF, the country's economy was in dire straits. Consequentially, our economic team was hard pressed and had to yield to IMF pressure that was ruthlessly applied through a long list of prior actions and heavily front loading the programme conditions but the conflicting metrics that the fund was insisting upon should and could have been pointed out to them.

Perhaps, the expectation at that time was that alternate sources of revenue would be available, be they realistic or not - the higher than budgeted SBP profits are deemed unrealistic and only on paper by independent economists while 300 billion rupees expected to be generated from the sale of two RLNG plants, first approved during the previous administration, and recently mentioned by Hafeez Sheikh, though not contained in the budget documents for the year, are considered doable, although technically they are not revenue.