Tax revenues collected by FBR showed a growth rate of 14% in 2017-18 to reach the level of Rs 3842 billion. This represents a shortfall of Rs 171 billion in relation to the original target of Rs 4013 billion.
The level of FBR revenues has reached 11.2% of the GDP during the tenure of the PML (N) government. This ratio was 8.7% of the GDP in 2012-13. Therefore, a relatively big increase of 2.5% of the GDP has been achieved in five years. In contrast, during the earlier five years of the PPP Government, the FBR tax to GDP ratio actually fell from 9.3% to 8.7% of the GDP.
There has also simultaneously been a move towards a somewhat more progressive tax regime. Over the five-year period, the average annual growth rate of direct taxes was over 14% as compared to under 13% in indirect taxes. Consequently, the share of income tax in FBR revenues has increased from 38% to 40%.
FBR’s improved performance has unfortunately not been given due recognition. No doubt, there is scope for doing more. The new government aims to double FBR revenues. If this target is achieved in three years then this will raise the FBR tax-to-GDP ratio to beyond 15% of the GDP. This should be a feasible though challenging target for the new Government to set for FBR in coming years.
The implied annual growth in FBR revenues from 2018-19 to 2020-21 for achieving the target of doubling revenues is close to 23 percent. However, the budgeted level of FBR revenues in 2018-19 is Rs 4435 billion, with a growth rate of 15%. The target should instead be set higher by the new government at Rs 4725 billion. This will be consistent with the commitment to double revenues well within the tenure of the Tehreek-e-Insaf government.
The basic question then is as follows: what is the prospect of the target of Rs 4725 billion being attained in 2018-19? Major changes will, no doubt, be required both in the realm of tax policy and tax administration.
The first step will be the presentation of a revised Finance Bill for 2018-19. The previous PML (N) government in its last days presented a sixth annual budget and gave away far too many tax reliefs and concessions. These were probably to garner more votes. The revenue loss due to these tax breaks has approached Rs 150 billion.
There is need, in particular, to at least partially withdraw the extraordinarily large reduction given in personal income tax liabilities. The exemption limit was trebled from Rs 400,000 to Rs 1,200,000 and the maximum income tax rate was halved from 30% to 15%. This should be revised to an exemption limit of Rs 800,000 with a maximum tax rate of 25%. The impact will be a reduction in the revenue loss of over Rs 50 billion.
The pivotal component of the revenue mobilization strategy must be to expand the tax base of different taxes, especially the income tax, and curb tax evasion. A number of proposals can be implemented in the short run. First, the elimination of evasion by the company sector can yield significant additional revenues. As such, the continuation of registration of a company with SECP must be made conditional on the filing of return. This could potentially double the number of companies paying taxes directly to FBR.
Second, the issuance and/or continuation of a debit/credit card to an individual by a bank should be conditional on being a return filer. Third, coverage of the largest sector, wholesale and trade, has to be improved. The advance tax levy on large commercial consumers of electricity needs to be enhanced to 15%.
Fourth, the super tax may be replaced by an excess profits tax. Any company declaring a profit exceeding 30% of its equity plus reserves may be made subject to the excess profits tax. The rate of taxation may be an additional 10% on the higher profit.
Fifth, the levy of a tax on bonus shares, on undistributed profits and the minimum tax on turnover may be withdrawn. Instead, the fiscal powers of the Federal Government allow the levy of a tax on the capital value of assets. This may be introduced at 0.5% of the value of fixed assets of companies and AOPs.
Sixth, there is considerable evasion in taxes due on property transactions. An effort is being made to update the assessed values and apply the law of pre-eminent domain. The tax base of the capital gains tax on property can be widened to include all transactions which take place, irrespective of the length of the holding period. However, only real capital gains should be taxed.
Seventh, the Inland Revenue Service (IRS) has to do a better job of the assessment process. The audit policy should be risk- based and if under declaration is identified then the tax payer should be made subject to compulsory audit for the next two years. This will serve to reduce the incentive for continued under declaration of income. At least 10% of the returns should be audited and the IRS given a target to raise current demands equivalent to at least 7.5% of the income tax revenue.
Overall, the above seven proposals in the domain of direct taxes have the potential of yielding up to Rs 200 billion in additional revenues. They will also render the tax system more progressive.
There is need to consider also a major taxation proposal which relates to the level of import tariffs. Under the pressure of the IMF, the maximum tariff was brought down from 30% to 20%. This reduction and a substantially overvalued exchange rate contributed to the high double-digit growth in imports since 2015-16. As part of the policy to contain imports urgently and to bring down the current account deficit it is essential that the maximum tariff be raised to 25%.
There should be four slabs – 5%, 10%, 15% and 25%. This will increase import duty revenues. In addition, the consequential effect on sales tax and presumptive income tax revenues will lead to additional revenues of over Rs 100 billion and make a significant dent on the level of imports.
The caretaker government took the decision during its tenure of bringing the sales tax rates down on petroleum products. The tax rate on HSD oil was brought down from 31% to 22% and that on motor spirit from 17% to 9.5%. Subsequently, the newly elected Government has kept these rates unchanged and allowed a significant reduction in prices.
There is need at this time to promote economy in the use of petroleum products, which add substantially to the import bill and increase the trade deficit. The policy ought to be to ensure that at the minimum the standard sales tax rate of 17% is charged on motor spirit, with the objective of promoting efficiency in its use by automobile owners. In the event international prices fall further then the tax rate could be further enhanced.
The price of motor spirit is significantly lower in Pakistan at 75 cents per liter as compared to 97 cents in Sri Lanka, 1 dollar and 6 cents in Bangladesh and 1 dollar and 15 cents in India. Clearly, motor spirit is subject to much higher taxation in other countries. Enhancement of the sales tax rate on motor spirit could yield an additional Rs 50 billion.
Given the top most priority for implementing projects and programmes to improve the water resources position of the country, more development funds need to be allocated to the water sector. As such, the proposal is for the levy of a special ’Water Resources Cess’ at the rate of 2 percent on all taxes paid by taxpayers to the federal government. This includes both direct and indirect taxes. Revenues from the Cess should be explicitly earmarked for transfer to the Prime Minister and Chief Justice of Pakistan Diamer-Bhasha and Mohmand Dam Fund. Over Rs 75 billion could accrue annually from the Cess to the Fund.
Overall, the taxation proposals highlighted above have the potential for generating additional revenues of close to Rs 425 billion for FBR. Normal growth in revenues should take FBR revenues up to Rs 4300 billion in 2018-19. Combined with the yield from taxation proposals, the revenue target of Rs 4725 billion begins to look feasible. It is essential that the new Government moves fast in presenting a revised Finance Bill for 2018-19 to the National Assembly.
(The writer is Professor Emeritus at BNU and former Federal Minister)
(This news/article originally appeared in Business Recorder on September 11th, 2018)