Reforming the Federal Board of Revenue (FBR) with a view to maximising tax receipts is one of the major policy initiatives of the present government. This strategy is being implemented in the country through very close co-operation with the World Bank.
At a meeting with a World Bank review mission in Islamabad, FBR gave a detailed presentation on recent policy reforms with regard to sales tax, excise, customs and direct taxes. The reforms relating to sales tax included withdrawal of additional 3 percent sales tax on supplies made to the unregistered persons. The turnover threshold of Rs 5 million was linked with the utility bills exceeding Rs 0.6 million, and enlisting schemes were abolished.
The gradual phasing out of Federal Excise Duty (FED) on excisable commodities and taxation of service providers under the Value Added Tax (VAT) mode also were major reforms initiatives. On customs side, maximum tariff standard rate was reduced to 25 percent and the number of slabs reduced to only four, ie 5 percent, 10 percent, 20 percent and 25 percent.
Special incentives for capital goods included plant, machinery and equipment at reduced rate of duty from zero to 5 percent. Collection of direct taxes was made easier by reducing the contact between the assesses and tax collectors and simplifying the tax returns and procedures.
Giving their own point of view, the World Bank mission asked the FBR to chalk out a mid-term plan for broadening the tax base, and take measures to improve taxpayers' compliance through effective enforcement. The restructuring and re-allocation of the budgeted costs of Tax Administration Reforms Project (TARP) was also the prime focus of the review mission.
The three major components which needed extensive restructuring and re-allocation were technical assistance, training and information technology. Each member responsible for implementation would identify the future needs or re-appropriation of the original budgeted costs for making necessary changes and restructuring the TARP.
The assistance and advice of the World Bank to streamline and upgrade the tax collection machinery of the country in the recent years and the consequent reforms at the FBR definitely need to be appreciated. These efforts, of course, have yielded handsome dividends as is evident from the consistently rising tax revenues which have increased from less than four hundred billion rupees during 2000-01 to Rs 841.4 billion in 2006-07.
During 2007-08, these have been projected at a record level of over one trillion rupees. However, while appreciating such a healthy development, one cannot forget the fact that tax collections as a percentage of GDP still continue to be at a dismally low level of less than ten percent and are insufficient to meet the growing needs of the economy.
Particularly hard hit are the social sectors and projects for infrastructure development. The country continues to rely heavily on foreign funding for financing of the budget and this clearly indicates the need to redouble the efforts to raise the tax to GDP ratio to around 15 percent in the next few years.
Seen against this background, the advice of the World Bank to design a mid-term plan for broadening the tax base and improving tax payers' compliance appears to be timely and well considered. Technical assistance, training and improvement in information technology would definitely help the FBR in achieving the desired objectives more effectively and in an orderly fashion.
It needs to be pointed out, however, that the current fiscal year is particularly difficult so far as tax collections and overall fiscal strategy are concerned. In the last few years, privatisation proceeds have emerged as a major revenue item and Rs 75 billion are targeted to be collected from this source during 2007-08.
Keeping in view the recent set-backs in the area of privatisation process, it seems difficult to collect such a huge amount, which would necessitate extra revenue mobilisation efforts on other fronts in order to compensate for the loss arising from this source.
Uncertain political developments in the next few months are also bound to affect the overall efficiency of the FBR and test its ability to collect taxes in a challenging environment. Anticipating a shortfall in revenues, it would have been normal for the government to increase its dependence on bank borrowings to finance its budget deficit to avert fiscal difficulties.
However, given the price pressures in the economy at the moment and the urgent desire of the State Bank to contain inflation to 6.5 percent during 2007-08, such a course of action would be ill-timed.
Keeping these factors in view, we would urge the FBR to be more vigilant and try harder to maximise tax collections in the months ahead. Continued close collaboration with the World Bank could make its task somewhat easier.