The country’s tax-to-GDP ratio fell to 8.5 percent during fiscal year 2013- 2014 from 9.1 percent in the previous fiscal year

By Haris Zamir The growth in revenue collected by the Federal Board of Revenue (FBR) during FY13 hit a 13-year low as the tax-to-GDP ratio fell to 8.5 percent from 9.1 percent in the last fiscal year. In its latest report, the FBR said that the last fiscal year remained challenging for the economy, as well as for the revenue board. The FBR blamed the lower growth in revenue collection to severe energy crisis and the poor law and order situation in the country. The target was linked with the expected growth in GDP, the rate of inflation, tax buoyancy and other key economic indicators, such as growth in the large scale manufacturing (LSM) sector and imports. The original target assigned to the FBR during FY13 was Rs2,381 billion, which was revised downward to Rs2,007 billion. However, the revenue body failed to achieve it and settled the tally at Rs1,939 billion. The FBR, however, admitted its failure to achieve the target and said: “There were three major factors behind the dismal performance of the FBR, including external, internal and leadership/HRM factors.” Explaining the external factors, the FBR said that the assumption for setting the target for the fiscal year was too ambitious. At the time of fixing the target, it was estimated that the nominal GDP growth would be 16 percent during the year, i.e. real GDP was estimated to grow by four percent and inflation by 12 percent. Similarly, total as well as dutiable imports were estimated to grow by 14.5 percent and LSM by 17.2 percent in nominal terms. On the other hand, the actual macroeconomic indicators remained below expectations during FY13, the FBR said, adding that the real GDP growth was 3.6 percent and inflation was 7.8 percent. Consequently, real GDP growth stood at 11.4 percent during FY13. Similarly, projections for total imports and dutiable imports stood at 14.5 percent but imports grew by only 8.4 percent, whereas dutiable imports grew only by 3.3 percent. Moreover, LSM grew by 11.2 percent in nominal terms against the estimates of 17.2 percent. “Electricity and gas outages and the poor law and order situation also affected the economic growth adversely. Thus, the assumptions on which the whole edifice of revenue collection was based remained much below expectations,” said the FBR report. With regard to internal factors, the FBR said that the revenue body had to bear a deficit of Rs34 billion due to shifting of sales tax on services from the FBR to the Punjab Revenue Authority, which was an integral part of FBR’s target of Rs2,381 billion. “Pakistan’s meagre tax-to-GDP ratio for FY13 was significantly less than the average tax-to-GDP ratio of 17 percent during the same period,” said Yawar Uz Zaman, senior research analyst at Alternate Research. “Low tax revenue and increased subsidies have exacerbated an already large fiscal deficit.” He added that significant consolidation is required to ensure fiscal sustainability. “A small number of taxpayers in the country reflect the inability of the FBR to provide presumptive measures to broaden the tax base,” said Zaman, adding that the country’s survival depends on its own resources rather than relying on funds from donors or domestic borrowings. “The country had used 54 percent of its resources in FY13 to pay interest on foreign and domestic debts. Foreign exchange liabilities currently stand at $50 billion, while the domestic debt has swelled to Rs9.5 trillion,” he said. “The tax revenue can only be increased by making a proper framework to document the undocumented economic sectors. Apart from imposing tax on agricultural income, increasing the tax on non-essential luxury items and imported goods can also enhance the total revenue collection and restrict unnecessary imports to save precious foreign exchange reserves.” He suggested that the government should make the national tax number mandatory for any transaction to take place. “This will help increase revenue collection, reduce fiscal deficit and curtail the black economy.” Over the years, the FBR has failed to explore new avenues of revenue or introduce innovative taxation measures that could be supported by all the stakeholders. The amnesty schemes have also failed to achieve the desired results and have further widened the trust deficit between the government and taxpayers. According to a few conservative estimates, Karachi consists of various small shops and business enterprises. The FBR can easily collect Rs20 billion per annum if a token tax amounting to Rs1,000 is imposed on these enterprises. Moreover, these business owners should be directed to pay tax directly at any branch of the National Bank of Pakistan and get a token from the bank, just like in the case of vehicle tax or car licence. Meanwhile, the websites of Sui Southern Gas and Sui Northern Gas reveal that almost 2.5 million and four million consumers are listed. After deducting two million small consumers, the registered consumers stand at 4.5 million, while the country has registered taxpayers of 2.9 million. The tax officials should merge individuals’ national identity card numbers with their tax returns. Those who fail to file their returns must pay additional taxes. Further, consumers using electricity in excess of Rs25,000 per month should pay 10 percent tax, i.e. Rs2,500 per month. Similarly, gas bills exceeding Rs5,000 per month should get a similar tax levy. The writer is the head of the business desk at GEO TV