Raising tax revenue

Ever since the new FBR Chairman, Tariq Bajwa, took over, tax revenue has shown a positive growth trend. According to the latest report, there has been a 25 percent increase in tax revenues since the beginning of the fiscal year thanks to a number of new tax collection initiatives taken by the Board. These measures, among others, include a hike in sales tax from 16 to 17 percent. In July, the first month of the fiscal year, the rise in tax collection is estimated at Rs 10 billion. Experts are of the opinion that the new measures have the potential to generate Rs207 billion during the current fiscal year. 

Pakistan has one of the lowest tax collection rates in the world and IMF and other international donors want the government to do more to tackle rampant tax evasion, particularly by its wealthy elite, to ensure long-term economic stability. Needless to say, in any drive to improve tax collection, FBR has the central role to play. But year after FBR has failed to deliver. The new Chairman has been trying hard to change the image of FBR by making it a transparent, corruption-free, efficient and effective organization.  While, on the one hand, he has come down hard on corruption at the operational levels, on the other, he has been bending his efforts to mop up more resources through better assessments, plugging of leakages and better supervision and management. In his numerous meetings with senior level officers he has made it clear that he will not tolerate corruption in FBR. At all key positions, he has appointed officers with a clean record.

But all FBR efforts will come to naught if at the policy level major loopholes are not plugged. Agriculture remaining out of the tax net means colossal loss to the national exchequer. It is also necessary to remove dichotomies, discretions and exemptions like SROs which distort the system and render it weak and unworkable. The rich don’t pay their taxes with no questions asked. According to a newspaper report, about 67 percent of our parliamentarians don’t pay taxes.

In order to remove the anomalies, it is important to re-examine the whole taxation machinery in its totality – its philosophy, objectives, operational mode and existing processes – in order to design and implement long-term remedial measures. A few years back, under the Tax Administration Reforms Programme, millions of dollars given by donor agencies were spent to reform the tax system but no improvements were seen. The effort was in vain. The time has come to make the taxation machinery pro-active, effective and people-friendly. Voluntary tax compliance needs to be encouraged but for this to happen an effective system of deterrence will have to be put in place. At present the privileged classes enjoy huge tax free benefits, with the burden mostly on the middle classes – businessmen and the salaried people. This imbalance should be corrected. Taxes due should be collected from all, whether big or small, and the system should be free of any kind of discrimination. Only then can we expect tax revenue to rise to the desired level.

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The SRO culture

Over the years much has been written and spoken against the SRO culture but it has continued to flourish regardless. As ordered by the government of the day and sometimes on its own, FBR keeps issuing SROs to cover specific cases and sectors. An abbreviation for Statutory Regulatory Order, SRO is simply an instrument of financial governance to regulate the import regime. But knowledgeable quarters are of the opinion that it is excessively used and, sometimes, without any justification.

The Public Accounts Committee (PAC) was informed last year that the SRO culture had cost the national exchequer about Rs650 billion in the form of exemptions and concessions granted to various parties.  According to the latest economic survey, the amount lost through exemptions and concessions totalled around Rs900 billion in the last five years. It has been pointed out that in most cases the SROs are company specific rather sector-specific, which violates the principle of justice and fair play. For instance, SRO 57(I)/2012 issued in January 2012 reduced the turnover tax by 50 percent — from 1 percent to 0.5 percent — for Pakistan International Airlines, giving it  an unfair advantage of about Rs500 million over other airlines.

Tax experts are of the opinion that there are hundreds of iniquitous and lop-sided SROs which need to be reviewed for their inconsistencies with previous tax laws and orders and for infringing the principle of fair competition. According to one estimate, more than 4,500 SROs have been issued over the last few decades, the bulk of them during the Musharraf era. These SROs relate to income tax, sales tax and FED. It has been noted that the number of SROs goes up during the military regimes which rule by fiat and authoritative orders. But records show that hundreds of SROs have also been issued by FBR under elected governments.

Given the fast pace of economic changes around the world and their impact on economies of developing countries, a resort to SROs  sometimes becomes necessary to protect specific sectors. But, having said this, their indiscriminate use cannot be condoned, especially when they are designed to benefit a particular firm or group. To ensure that SROs are issued in a transparent manner and are not misused, it is important that clear rules and regulations are made and objective criteria and strict conditions are laid down governing their application. As a further safeguard, a special committee comprising representatives from the Ministries of Finance and Commerce should be formed to scrutinize each case in detail before giving its approval for the issuance of an SRO. The committee can also be tasked to undertake a comprehensive review of the existing corpus of SROs to verify their legitimacy and need.

Reforming FBR

The reform process in FBR initiated by the new Chairman, Tariq Bajwa, was long overdue. FBR is the source of the lifeblood needed by the national economy for sustenance and growth. But, because of the loopholes and gaps in the working of FBR, the government is not getting the revenue it needs to run its affairs. FBR has continuously failed to meet the target of revenue collection set by the government. The result of this failure is that the government has to resort to deficit financing which accentuates inflationary pressures. Last year, the revenue collection target, to start with, was set at around Rs 2.3 trillion, but later due to the sluggish performance of the taxation machinery in the first six months, it was revised downward to a little over Rs 2.1 trillion. But even this target was not met.

Due to the lackadaisical performance of FBR, the tax-to-GDP ratio in Pakistan is around 9 percent, which is one of the lowest in the world. In India this ratio is around 15 percent and in other countries as high as 25-28 percent. There are many reasons why our tax income is so deplorably low. There is no culture of paying tax here. According a recent media report, two-thirds of the elected representatives pay no taxes. There is no tax on agricultural income while exemptions and relaxation in rules for various sectors and special interests deprive the exchequer of billions of rupees every year.

The element of corruption that permeates all layers of the taxation system makes matters worse.  According to an estimate, the unholy alliance between dishonest tax collectors and cheating tax payers results in the loss of Rs 500-600 billion to the national exchequer every year.  The virus runs through all parts of the machinery, including income tax, sales tax, customs duty, etc.

As against the supine attitude of the previous government, the new PML-N government has adopted a pro-active attitude in the matter. It has started the process of reform by selecting Tariq Bajwa, a senior bureaucrat, to head FBR. The appointment of Tariq Bajwa, an upright and honest officer with a distinguished record of service, has been widely hailed as the right choice for the challenging assignment. He has the requisite professional expertise and experience to tackle the difficult job of putting a new life into FBR.

As a dynamic officer, he has promptly launched a drive to ginger up the organization, starting off with large scale transfers and postings to put the right person in the right position. All his decisions are merit based, with an eye to producing quick results. He has chosen Nisar Muhammad Khan for the vital post of Member  Customs, while the former Member Customs Muhammad Riaz  has been posted as DG Customs Intelligence.

The task ahead is not easy.  The target is to increase revenue by over 27 percent to reach the figure of Rs 2475 billion during the current financial year as compared to Rs 1942 billion collected last year. This will require strict monitoring of progress in revenue collection from day to day and initiation of a process of accountability to reward hard working and honest officers and penalize the incompetent and the corrupt.

Govt imposing strict discipline to rescue economy

NASIM AHMED

LAHORE: Budget making was a difficult assignment for the economic team of the newly installed PML-N government. Not only was the time short, but the choices before the budget makers were also limited. The numerous acts of omission and commission by the previous government cast a long shadow over the economy and it was not easy to find a way out of the quagmire of rising debt, falling revenue and uncontrolled expenditure. The fiscal year was nearing its end, the national kitty was empty and all major economic indicators were touching rock bottom.

It was in these daunting circumstances that the PML-N team of economic managers was called upon to provide a road map for the coming year. The choice was between presenting a populist budget affording some immediate relief to the common man through fiscal adjustments and tightening the belt by imposing strict discipline to rescue a bleeding economy. After much deliberation, the government chose the latter course. Taxes have been raised and subsidies are to be slashed. In the days ahead, there will be a slow, painful rise in prices.

Keeping in view the larger picture, the PML-N’s economic managers have tried to do the best they could, although at some places they unnecessarily overplayed their hand. For instance, they could have easily avoided upping the GST by one percent which will touch off a new wave of inflationary pressures and make life more expensive for the common man. Similarly, the budget makers did not allow even a nominal increase in the salaries of government employees who are out in the streets agitating.

On the issue of raising revenue, the government has shied away from direct taxation like wealth tax, capital gain tax, agricultural income tax, etc. and relied more on indirect ones. New taxation measures announced by the government include an increase in the general sales tax rate from 16 to 17 percent and withholding tax from 0.2 to 0.3 percent on cash withdrawals from banks. There is also no explanation why the government has imposed the Federal Excise Duty at the rate of 40 paisa per kg on imported seeds and Re1 per kg on locally produced oil.

The budget with a total outlay of Rs 3,591 billion envisages raising the revenue collection by Rs 455 billion and increasing the public sector development spending to Rs 540 billion. The fiscal deficit is to be reduced from 8.8 percent to 4 percent, and the GDP growth rate is to be raised to 4.5 percent, besides increasing the investment-to-GDP ratio to 20 per cent in the medium term. These are ambitious targets and economists doubt if they are achievable in the present circumstances.

Given the severity of the power crisis, the budget specially focuses on solving the problem of circular debt which is to be eliminated in 60 days. An amount of Rs 225 billion would be invested in the energy sector with Rs 107 billion from the PSDP and the remaining amount by Pepco/Wapda through government support to complete Neelum-Jhelum Hydro Power Project (1,000 MW), DiamirBhasha Dam and Hydropower Project (4,500MW), Tarbela Fourth Extension Project (1,410MW), Thar Coal Gasification Project (100MW), Chashma Civil Nuclear Power project (600MW). With Pakistan losing 2-3 percent of GDP annually due to the energy shortfall, the focus on these projects is justified and point in the right direction.

Given the fact that there is too much leakage and wastage in government expenditure, it is a welcome decision to abolish the Prime Minister’s and other ministers’ discretionary funds and put a ban on the import of duty-free vehicles by VVIPs. Other austerity measures include considerable reduction in the expenditure incurred on PM Office and PM House. Against the revised expenditure of Rs725 million incurred during 2012-13, the budget for the Prime Minister’s Office for 2013-14 is only Rs396 million, showing a decrease of 45 percent. Similarly, the budget for the Prime Minister’s House has been reduced by 44 percent. There will also be a complete ban on the purchase of new cars for the Prime Minister’s Office. But the austerity regime should not remain confined to the highest level. It should be applied all across the board, especially with regard to the use of government vehicles and local and foreign travel by ministers and bureaucrats.

 

Hard times ahead

Budget documents are curious concoctions. They please some people and disappoint others. Although they can be read and deciphered only by financial analysts and economic wizards, through their policy impact they affect the humblest households in the farthest corners of the country.

In the case of the federal budget for fiscal 2013-14, the general public had nursed special hopes and fears. The policies of the previous government had created serious economic distortions, and disparities in the economy.  With fiscal deficit widening beyond control, bank borrowing ballooned dangerously, severely squeezing credit for the private sector and retarding economic growth. On the other hand, unremitting gas and power shortages brought the wheels of industry in various parts of the country to a grinding halt, besides disrupting the daily life of the common people.

The fact of the matter is that the people had looked forward to the new budget in expectation of instant relief from load-shedding, price spiral and other economic miseries, little realizing that there is no magic wand to wave off deep-rooted economic ills. The result is that the new budget has come as a great climb-down for a majority of the people. The kind of relief they expected has not been provided. Prices, instead of coming down, will rise further because GST has been raised from 16 to 17 percent.  On the other hand, withholding tax on withdrawals from banks has been raised from 0.2 to 0.3 percent.

There is also no explanation why the government has imposed the Federal Excise Duty at the rate of 40 paisa per kg on imported seeds and Re1 per kg on locally produced oil.  Adjustments in customs duty and sales tax will further add to the general cost of living. Apart from the articles of daily use, building materials and housing will also become more expensive.

Whether by design or default, the government has spared the rich and the super-rich. Luxury cars and luxury houses have not attracted the kind of punitive tax one expected. Once again the tax net has not been widened to cover agricultural income. Similarly, while tax rates for salaried people and business individuals have been upped, the corporate sector has been left largely untouched. The government has also imposed 2 percent ‘further tax’ on supplies to unregistered persons and 16 percent Federal Excise Duty (FED) on all financial services whose effects will percolate down to lower levels. The opposition parties in the National Assembly have unanimously rejected the new budget. PTI has described it as a bureaucratic exercise, while MQM has called it a traditional budget.

The opposition leader in the National Assembly has raised the issue of increase in the salaries of government employees who are agitating in the streets. Industrial workers are also protesting against non-provision of any budgetary relief to them. In a feeble response, Federal Finance Minister Ishaq Dar has promised to look into the matter. It seems the PML-N government will have a hard time matching its political goals and objectives with the economic realities on the ground.