The Federal Finance Minister, Mohammad Ishaq Dar, said the budgetary revenue collection target for the current financial year has been reduced by Rs 130 billion and the bulk of this cut (Rs 115bn) will be met by slashing the Public Sector Development Programme since Rs 115bn in blocked expenditure in PSDP was linked to revenue collection and was not allocated to any programme. Furthermore, the provinces are already aware of this. So in effect the provinces will bear the brunt of the slashing. Since provinces are responsible for delivery of social sector services, the net result will be the same, ie, the traditional way: to contain the rising fiscal deficit by axing the social sector spending.
The FBR had been pressing all along for reduction in revenue collection target as they felt that the target fixed was too steep despite the 17 percent increase in revenue collection in the first six months of the current fiscal year (FY14). Expectation of a Rs 529 billion rise in annual collection over FY2013 was neither realistic nor possible. Dar had been resisting the downward revision of the target but finally realism prevailed and FBR's reasoning accepted. Therefore he now has to try to contain the expenditure side. The finance minister, however, needs to keep an eye on the rise in direct tax collection because that would reflect the expansion in the tax base in a true sense. Rise in indirect tax collection has host of other extraneous reasons such as: one percent hike in sales tax rate and impact of change in rupee parity on sales tax collection at the import stage. In no way should we become lax in our revenue collection effort and shirk from undertaking structural reforms at FBR.
Unfortunately, however, the PML-N leadership has continued to play popular politics. Instead of ignoring its voter base at least in the initial years (shopkeepers and chamber of commerce infested with traders) the FBR has been forced to roll back on the documentation drive. Doing away with submission of wealth tax statement for taxpayer below the threshold of one million rupees income was the first anti-documentation move. The PML-N needs to remember that it has been voted into power for a five-year period. It has the luxury (after obtaining a big mandate) to ignore retailers and traders at least in the first two years of their term in office. Unfortunately, it has chosen not to do so after losing a couple of seats in the bye-elections. With the kind of comfortable majority that it enjoys in Parliament, it can easily sacrifice a few seats and also ruffle some feathers of its rank and file. The party can opt not to be mere tax facilitator and act as real revenue collectors because a manageable fiscal deficit will lower inflation. High inflation too hurts their electoral base as it spares nobody and is a greater burden on the poor masses. Lower inflation may well help PML-N in garnering more votes in 2018.
The FBR needs to re-evaluate income tax credits, exemptions and Statutory Regulatory Orders (SROs) for sales tax, income tax and customs duties with a view to removing the regressive distortion in the tax code. FBR also needs to streamline its data management system for income tax to remove duplications, create greater systematic integration between different tax systems (sales, individual income, business income, corporate income, customs, federal excise duty). Audit and re-engineering of tax filing portal is needed to ensure data validation that prevents the input of inaccurate data. The software FBR uses needs to be redesigned for income tax collection with in-built process to ensure reconciliation between filed and deposited amounts, as well as reconciliation between salary statements and filing interface. It also needs to have a monitoring mechanism within database that flags inactive and new taxpayers, to ensure tracking of entry, exit and non-compliance. Restructuring and revival of income tax audit process that benefits from systems generated risk-profiting of potential non-compliance will ensure a credible deterrent for existing and potential tax evaders. The name of the game is to bridge the tax gap with effective usage of technology linked to a data warehouse.
The Prime Minister's tax incentive scheme is not an amnesty scheme in a true sense, although it does not require filing of asset (wealth) statement. Taxpayers of income up to Rs 25,000 per month are exempt from filing of wealth tax statement. Now, those above threshold will remain shy of availing the option available under the scheme as they could be caught with declared assets not reconciled with their income tax return. We therefore fear that this scheme would not attract additional tax payers and also is a non-starter in enhanced revenue collection even though the deadline has been extended by a month. The previous government's amnesty scheme sought to block CNICs and passports, in order to force individuals to approach the tax authorities for clearance instead of tax collectors chasing and unearthing hidden income and wealth. This approach could have led to more corruption and undue harassment but would been more effective. Instead, this government has chosen to go after bank account holders. This could lead to disintermediation in the banking system due to withdrawal of deposits and that would be disastrous. A mere 12 percent rise in deposits (inclusive of interest paid/earned) and shifting of non-tax-paid money into real estate as well as into equities is a logical outcome of the present policy. It is quite apparent to everyone except the government which is acting like a partridge closing its eyes on being approached by a cat with killer instinct.