EDITORIAL: The Chairman Federal Board of Revenue (FBR) reportedly shared a detailed plan with Finance Minister Ishaq Dar over the Eid holidays designed to meet the assigned revenue collection target of 586 billion rupees in April 2023.

With less than a week remaining for the end of this month the shortfall for April, as per a Business Recorder exclusive, is 105.9 billion rupees. And, even more disturbingly, the provisional shortfall July-March 2022-23 is estimated at 276 billion rupees with collections at 5.157 trillion rupees against the target of 5.433 trillion rupees.

In other words, there is a major deficit in FBR collections against the target that would, without doubt, be a source of serious concern to the International Monetary Fund (IMF) that, in turn, may impede the success of the ninth review.

Any further delay in the success of the ninth review would lead to the possibility of default looming large on the horizon yet again – a prospect that may not be focused on the country’s ability to clear its international debts due within the next two to three months but would certainly make it too expensive to borrow from the commercial banking sector abroad, which was budgeted at a whopping 7.5 billion dollars for the current year against only 900 million dollars borrowed from the commercial sector abroad till end March 2023 as a consequence of the country’s downgrading by international rating agencies.

It is unfortunate that the meeting between the Finance Minister and the FBR Chairman focused on ways to raise revenue, a focus that has been visible in the past, particularly during times when the country was on an IMF programme, with no attention paid to reforming the tax structure itself which relies heavily on indirect taxes whose incidence on the poor is greater than on the rich.

The budget for the current year envisages reliance on indirect taxes to the tune of 63 percent while around 70 to 75 percent collections under direct ability to pay taxes are sourced to withholding taxes in the sales tax mode (an indirect tax).

The mini-budget envisaging 170 billion rupees revenue approved by parliament on 21 February 2023 was almost entirely reliant on raising indirect taxes that included a one percent increase in the standard sales tax, from 17 to 18 percent, federal excise duty on cement and 10 percent withholding tax on functions held in hotels, marriage halls.

The Finance Ministry, therefore, opted to levy more taxes on the general public rather than focus on reforming the tax structure by levying taxes on the ability to pay principle that is the root cause of its rising unpopularity amongst the general public - a rise that cannot be attributed to the agreement made by the previous government with the Fund but due to the incumbent government’s decision to burden the poor man rather than to tax the elite, including traders.

Be that as it may, the reasons for the decline in tax collections are three- fold: (i) the government’s deliberate policy to curtail imports in light of low foreign exchange reserves that are barely enough to cover two months of imports can be supported; however, given the heavy reliance on import tariffs to generate sizeable revenue (customs duties were budgeted to account for up to 21.5 percent of total indirect tax collections), it is little wonder that the target was missed; (ii) sales tax on imported items is not itemised separately and with the high rate of inflation - Consumer Price Index of 35.4 percent in March 2023 and Sensitive Price Index of 44.61 percent for week ending 13 April 2023, a rate that no doubt has risen during Eid - there is simply not enough disposable income for lower middle and middle income households to purchase items other than absolute necessities, notably food items; and (iii) the petroleum levy budgeted to generate 750 billion rupees this year, not part of the FBR tax collections, has already led to reduced demand for petrol and the delay in raising the levy to its maximum level, 50 rupees per litre, accounts for a serious shortfall from what was budgeted, thereby placing a heavier burden on FBR to raise collections.

The continued reliance on low-hanging fruit and taxing the already taxed while raising current expenditure by more than what was budgeted has led to the current economic impasse facing the country with an obvious fallout on the stalled ninth review.

It is time to think out of the box, which the current team appears unable or unwilling to do, and policies must focus not only on raising revenue but on raising the revenue from those elite who remain exempt from direct taxes while at the same time massively reducing current expenditure that would require major sacrifices by the elite recipients.

Copyright Business Recorder, 2023