This is the second of a two-part series of articles focused on revenue particularly indirect tax collections as well as non tax revenue. The following table shows growth in collections under different heads.
Two observations are in order. First, the single largest increase in indirect tax collections has been in customs duty. Finance Minister Ishaq Dar levied a one percent customs duty across the board last year and raised it by one percent in the budget for the current financial year. An easy source of collection customs duty was raised yet again in the mini-budget announced in December 2015 because of the government's failure to achieve what was widely believed to be unrealistic budgetary targets; or in other words customs duty is at present 3 percent on a wide range of products that Dar insists are luxury items but whose incidence on the lower middle and middle income earners is much higher than the wealthy.
As matters stand today the trade deficit is widening due to rising non-oil imports, which are outpacing the gains from the dramatic fall in the international price of oil and products which previously had constituted the bulk of our imports, and falling exports (due to failure to control high costs of production including poor availability of energy, a major input, and an overvalued rupee). Thus ever-rising taxes on petroleum products, under the economically acceptable rationale of creating fiscal space, and higher regulatory duties on a wide range of imported items, is likely to lead to higher smuggling across our porous borders and misuse/abuse of the Afghan Transit Trade Agreement. Or in other words, these taxes may reflect a diminishing revenue source in months to come, and an increase in the illegal economy, especially if the international price of oil begins to rise again.
Secondly, sales tax is the major contributor to collections under indirect taxes. Like customs duty and withholding taxes this is an easy tax to collect. Several Western countries rely heavily on sales tax, whether in the value-added mode or not, to generate a substantial amount of their revenue. However, this tax is affordable in these countries due to (i) higher income levels prevalent in these countries; (ii) everyone has an income given their developed social security system; and (iii) a well developed social sector network that allows for free education and health for the poor and the vulnerable. In contrast, incomes in Pakistan are considerably lower, which implies that sales tax across a wide spectrum of goods and services erodes the value of each rupee earned by the vulnerable to middle income earners, and given that sales tax is regressive it is borne proportionately more by the poor than the rich. In addition, the small amount of 1,566.67 rupees per beneficiary family (say of around 4) released under the Benazir Income Support programme (BISP) would not enable purchase of basic necessities and Pakistan state-run social sectors are inadequate and poorly run to boot to provide even a minimum level of social sector services.
The table-2 shows that in 2014-15 the gap between the budgeted indirect taxes and the realised amount narrowed - from 238 billion rupees in 2013-14 to 134 billion rupees, a trend likely to continue this year. The reason: mini-budgets were announced in the two years to meet the targets agreed with the International Monetary Fund - the cost borne entirely by the general public for unrealistic budgetary estimates by the Dar-led Finance Ministry.
Table 2 also shows that non-tax revenue increased by more than budgeted during the first two years of the PML government. The reason cited in 2013-14 is (i) profits others (with no explanation) of 67.6 billion rupees under income from property and enterprises (an item not repeated since, leading skeptics to the conclusion that it may have been an accounting addition); (ii) 60 billion rupees more than budgeted surplus profit of State Bank of Pakistan in 2013-14 which reached a high of 399 billion rupees in 2014-15's revised estimates - again a claim that is not backed by supporting data; and (iii) non-tax revenue includes 65 billion rupees from sale of 3G/4G license in the current year which is unlikely given the lack of an enabling environment as per the relevant ministry.
The government claims tax to Gross Domestic Product (GDP) ratio has increased from 12.9 percent in the revised estimates of 2011-12 (the last full year of the PPP government) to 15.4 percent in the revised estimates for 2014-15. Economic theory dictates that a high tax to GDP ratio is desirable mainly because it ensures that as national output rises so does revenue. However in 2014-15 petroleum levy, gas development surcharge and cess regarded as non-tax revenue till 2013-14 amounting to 305 billion rupees were summarily shifted to other taxes giving a much higher tax-to-GDP ratio. This enabled the Finance Minister under the IMF programme to negotiate a lower mini-budget then would have otherwise been necessary given his unrealistic budgetary revenue targets.
What is unfortunate about the existing scenario is the penchant of the Finance Minister to add and/or juggle data to reflect an unrealistic picture that no one but the federal cabinet led by the Prime Minister accepts as the truth. The Fund in its ninth review noted the following: "the concepts and definitions used in compiling government finance statistics are broadly based on the GFSM 1986, except that privatisation proceeds are included below the line. The scope of central government data is further limited because it does not cover the activity of extra budgetary funds. Classification and sectorization in source data follow GFSM 1986 standards to a limited extent. The classification of expenditure deviates from GFSM 1986 methodology because the economic and functional classifications are mixed in reporting, in particular, with defense and government administration expenditures not clearly identified according to economic classification. The basis of recording GFS is on, or close to, a cash basis. Transactions are recorded on a gross basis. Corrective transactions are not necessarily made in the original period, as required by GFSM 1986. The authorities have indicated their intent to adopt the methodology of GFSM 2001 over the medium-term, and in line with the Board decision (No 14656 of October 2010) to strengthen fiscal analysis, they have compiled with staff assistance a fiscal table in the GFSM 2001 presentation. However, further improvements in government finance statistics are needed and the authorities are making progress toward that objective in the context of the Project for the Improvement of Financial Reporting and Auditing (PIFRA). Budgetary central government operations data are regularly reported for publication in the GFS Yearbook, and use the GFSM 2001 framework. However, no data are reported on transactions in nonfinancial and financial assets and liabilities. The authorities do not report higher frequency data for inclusion in the IFS".
To conclude, the need to present realistic data is rising with time and it is critical for parliament to begin the process of making Federal Bureau of Statistics autonomous in letter and spirit and not like the State Bank of Pakistan made autonomous in letter only and that too in response to the IMF insistence under the ongoing 6.64 billion dollar Extended Fund Facility. In addition, there is a need to revisit the entire tax structure and instead of focusing on ease of collection more focus is given on the fairness and equity of the structure itself.
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Table 1
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July-Jan July-Jan Growth
2015-16 2014-15
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Total tax collections 1577 1345 17.2
Direct taxes 597.49 524.6 13.9
Sales tax 684.7 586.4 16.8
Federal excise 84.9 75.5 12.3
Custom duty 209.8 158.6 32.3
Refund and rebates 51.2 64.68 (-) 20.8
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Table 2 (Rs million)
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Year Direct taxes Indirect taxes Total taxes Non tax revenue
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2012-13 932,000 (779,100) 1,571,575 (1,345,475) 2,503,575 (2,124,575) 730,331 (821,921)
2013-14 975,700 (891,000) 1,622,375 (1,384,000) 2,671,414 (2,513,945) 821,921 (1,083,197)
2014-15 1,180,000 (1,109,000) 1,630,000 (1,496,000) 3,129,210 (2,910,180) 816,294 (1,042,292)
2015-16 1,347,872 1,755,834 3,103,706 894,524
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