The Federal Board of Revenue (FBR) is facing a grim situation regarding achievement of revenue target fixed for fiscal year 2007-08 at Rs 1.025 trillion for its own inefficiency, corruption and lack of leadership. The tall claims to broaden tax base during the last 8 years are now falling apart.
The strategy devised by top managers at apex revenue body was faulty and isolated from ground realities. There has hardly been any effective coordination between policymakers and field formations. The issues of motivation, integrity and efficiency are still lingering on despite FBR has entered in its second last year of Tax Reform Administration Project (TARP), launched with borrowed funds without any public debate of support of stakeholders.
Though FBR stalwarts say that target fixed at Rs 1.025 trillion was ambitious, but in reality it is much lower as compared to our real tax potential. Our real tax potential at federal level is not less than Rs 2 trillion.
It is sheer lack of political will and incompetence on the part of FBR that we have failed to collect the revenues where these are actually due (unprecedented benefits are available to the rich and foreign companies are remitting huge untaxed profits through abusive transfer pricing transactions). For the last many years, the government has been extorting money from the people who are not supposed to pay any taxes and granting unprecedented concessions and exemptions to the rich (20-year tax exemption has been given to operators of Gwadar Port as if they will do some charitable work).
For tapping our actual potential, there is an urgent need to tax the rich, bring undocumented economy in the tax net and distribute the incidence of various taxes judiciously amongst all the segments of society. The tax loss due to one section alone [section 111(4) of Income Tax Ordinance, 2001] granting complete immunity from probe and taxation to untaxed money fictitiously remitted through normal banking channels by paying a very nominal commission to any money exchanger is in billions.
The Government of Pakistan, anticipating higher growth in economy, fixed the revenue target for fiscal year 2007-08 at Rs 1.025 trillion, showing an increase of 21% over the collection of Rs 841.4 billion for fiscal year 2006-07. The government projections anticipated that the share of direct taxes in total FBR collection for fiscal year 2007-08 will be Rs 408 billion ie 23.6% higher than last year.
However, the FBR Chairman claimed 45% growth in direct taxes during fiscal year 2006-07. The fixing of growth target at 25% for the next year was thus simply irreconcilable vis-à-vis statement made by the chief of FBR. The real potential of tax collection for fiscal year 2006-07 was not less than Rs 1.5 to 2 trillion. However, the FBR may fail to reach even Rs one trillion mark as generous exemptions and concessions to the wealthy segments of society are granted.
The cost of exemption under one head alone ie capital gains on stock markets during fiscal year 2006-07 was Rs 112.45 billion according to government's own admission at page 262 of Economic Survey 2006-07. Had it not been granted, the total collection for fiscal year 2006-07 would have been Rs 953.85 billion. This exemption continues for fiscal year 2007-08 having negative revenue impact of about Rs 250 billion.
The people of this country are accused of not paying income tax; whereas in reality even a petty shopkeeper in a village (whose total income is much below taxable limit of Rs 100,000) is paying tax as high as Rs 720 per annum along with electricity bills as a commercial user, whereas a rich absentee landlord of his area having agricultural income of million of rupees is not paying a single penny as income tax.
A person making million in speculative transactions (shares and property) is enjoying tax exemption, whereas a widow on her meagre income of Rs 60,000 from bank pays Rs 6000 as tax as full and final tax liability. Interestingly there is 0% tax on business or any other income falling under normal tax regime of Rs 100,000. In case of salary, the non-taxable limit is Rs 150,000 and where it is earned by a woman no tax up to Rs 200,000. Why a widow is being discriminated who is more deserving for tax concession.
The collection of taxes from speculative transactions, taxing income avoided by big foreign companies through transfer pricing (cost of revenue is about Rs 100 billion) and withdrawal of exemptions can easily increase our tax collection to Rs 2 trillion. However, this requires strong political will, which is completely lacking as those in power have vested interest to safeguard the landed classes, rich and the mighty.
The unwillingness to tax the rich and mighty reflects pathetic state of affairs vis-à-vis tax-to-GDP ratio from 1990-2000 to 2006-07, which is highlighted in the Table. The tax-to-GDP ratio of direct taxes is appallingly low. It may be noted that in these official figures huge amount of indirect taxes is shown under the head of income tax. The actual tax-to-GDP ratio of direct taxes for FY 2006-07 after excluding presumptive taxes will be around 2.4%, whereas officially it is projected at 3.02%.
Table: Tax-to-GDP Ratio-1999-00 to 2006-07:

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Year           Tax/GDP Ratio (%)
               Total Direct Taxes     Total Indirect Taxes     Total Taxes
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1999-00        2.98                   6.17                            9.15
2000-01        2.99                   6.43                            9.42
2001-02        3.24                   5.94                            9.18
2002-03        3.15                   6.40                            9.55
2003-04        3.02                   6.52                            9.54
2004-05        2.68                   6.22                            8.90
2005-06        2.90                   6.30                            9.20
2006-07        3.02                   6.48                            9.50
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Source: CBR YEAR BOOKS & ECONOMIC SURVEY 2006-07:
Presently, the high (sic) collection of taxes by FB is mainly based on imports and exports as well as extraordinary profits by banks (who claim they have profit sharing accounts yet deny due share to deposit-holders!).
Importers, contractors, retailers and even service providers are, in fact, passing on their tax burden to consumers and clients, courtesy presumptive tax regime introduced in income tax since 1991-92 and widened manifold since then. This erratic taxation is at the expense of equity and poor people are the real victims of this fiscal high-handedness.
It is an established fact that despite resorting to all kinds of highhandedness, illogical policies and unjust withholding taxes, FBR has failed to improve the tax-GDP ratio. The burden of a number of presumptive taxes levied under the income tax law (which are nothing but crude forms of indirect taxes) has been shifted from income earners to consumers and clients.
These presumptive taxes have not only distorted the whole tax system, destroyed economic growth and made the consumer/client the ultimate sufferers but these despotic, short-term, myopic and figure-oriented measures have even failed to bridge the fiscal deficit. Out of total collection of Rs 841.4 billion by FBR in fiscal year 2006-07, regressive taxes were to the tune of Rs 631 billion (after making adjustment of indirect taxes collected under the name of income tax!).The revenue deficit, despite record collection of Rs 841.4 billion, was monstrously high at Rs 200.5 billion and fiscal deficit touched the alarming figure of Rs 373.5 billion.
The rich and mighty who do not pay are the real culprits. Exemptions and concessions those are prevalent in our tax laws (the whole of Second Schedule in the Income Tax Ordinance, 2001, most of the items of Sixth Schedule of Sales Tax Act, 1990 and innumerable Statutory Regulatory Orders [SROs] relating to Customs and Excise) should be done away with.
There should be a level playground for everybody. If the government removes all these exemptions and concessions, brings big absentee feudal landlords into the tax net, manages to get taxes from the influential ones and succeeds in imposing GST across the board (preferably with a low rate of 3% at one single point), there will be a record collection of Rs 2 to 2.5 trillion. This goal can only be achieved if the government simultaneously tackles issues related to tax evasion and rampant corruption in the tax machinery.
PAKISTAN (AT FEDERAL AND PROVINCIAL LEVEL) CAN EASILY GENERATE AT LEAST RS. 3.5 TRILLION AS TAX REVENUE IN THE FISCAL YEAR 2008-09 PROVIDED THAT:
-- Tax-base is shifted from presumptive to real income.
-- Agricultural income tax on actual profit basis (presently it is an eye-wash levied on acreage basis) is collected from rich absentee landlords sitting in the Parliament.
-- Section 111(4) of the Income Tax Ordinance, 2001 giving amnesty to tax evaders should be withdrawn.
-- Rate of sales tax should be reduced to 3% and levied across the board.
-- Provinces should restore tax on gain of immovable property.
-- Profits generated through speculative transactions in shares at stock exchanges should be taxed and exemption given under the garb of capital gain should be withdrawn.
If new coalition government shows political will (Prime Minister himself is big landlord and top leadership has huge business empires!), there is no reason why we cannot achieve double the target fixed for fiscal year 2007-08. If mighty sections of society start paying taxes, Tax Intelligence System (TIS) is introduced to identify non-filers and evaders and mammoth black economy is brought into tax net, our tax-to-GDP ratio can jump to 20% in 2008-09 for which FBR want us to wait for another 20 years!