Institutional shortcomings behind mini-budget
Bringing money into tax net requires proper restructuring of tax machinery
On the income tax side, under-assessment of taxable money and slippage of undeclared profits into the ever-swelling mountain of black money are major problems. PHOTO: FILE
ISLAMABAD:
Prime Minister Nawaz Sharif recently approved a bureaucratic move to impose regulatory duty on a range of goods to meet a Rs40-billion gap in the federal revenue collection for the first quarter of fiscal year 2015-16.
Why this mini-budget and why couldn’t the gap be met by means other than new taxes?
The gap in the tax target and actual collection normally occurs on account of two factors: either because of over-estimation of the receipt of money in national coffers from taxable activity or because of under-performance of the tax machinery.
In the current fiscal scenario, the under-performance side is more to blame. According to tax expert Azhar Majid Khalid, the panic at work behind the mini-budget notification has largely been caused by projections that import duties and taxes, income tax and sales tax departments of the Federal Board of Revenue (FBR) would fail to meet the targets of revenue collection.
The government did not attribute the panic to miscalculations of the projected revenue and under-performance on the part of relevant departments. “The scourge of allowing evasion and under-assessment of taxes and duties too is responsible for the failure, and that is a perennial problem,” said Khalid.
The weak structure of tax collection has been exposed on a number of counts, chiefly in the backdrop of a slump in prices of imported petroleum products. The government has yet to come up with a policy on how to respond to a drop or upswing in revenues on account of petroleum prices.
Khalid suggested that the government should fix revenue on per-litre of crude oil rather than on the price to cope with the fluctuating prices on a sustainable footing.
“That is one way of avoiding the panic and the mini-budget,” he said, adding another way is the proper and realistic assessment of profits generating from the sale of property, from import of steel material through an updated evaluation of imports, checking under-invoicing on a wide range of imports, and avoiding delays in clearance of import consignments.
Weak assessment
On the income tax side, under-assessment of taxable money and slippage of undeclared profits into the ever-swelling mountain of black money are major problems. While, on the sales tax side, the value-addition assessment is a problem that defies all corrective measures as the very structure of assessing the added value in production and marketing is weak.
Three IMF programmes were in operation for removing the structural weaknesses in the customs, income tax and sales tax regimes over the past two decades, but to little avail.
Most of the money taken in reform-assisting loans was spent on administrative sides rather than on technical sides.
Under-invoicing, according to Khalid, could be blocked by the dual process of improving the price survey and exporter’s invoice checks. The invoices carried by the shipping lines should be examined for a double check of declarations for reconciliation that could defeat attempts to underpay duties and taxes.
Numerous importers of materials and finished goods mis-declare and under-declare the value of consignments and also suppress the amounts of value-addition, helping them to keep their taxable incomes as black money.
This money does not get into the arteries of production and marketing, keeping Pakistan in a constant want of business capital.
The Federal Board of Revenue (FBR) operates with a customs and sales tax intelligence organ, but it remains dormant in monitoring these areas.
It does not require rocket science to readjust duties and taxes on petroleum products, on materials that need proper valuation, on value-addition assessment and on defeating the practices that add to the black money persistently getting out of the taxation ambit.
Mini-budgets can be avoided by restructuring the tax machinery into a better organ of the state. There is no alternative to institutional correction.
The writer has worked with major newspapers and specialises in analysis of public finance and geo-economics of terrorism
Published in The Express Tribune, November 30th, 2015.
Prime Minister Nawaz Sharif recently approved a bureaucratic move to impose regulatory duty on a range of goods to meet a Rs40-billion gap in the federal revenue collection for the first quarter of fiscal year 2015-16.
Why this mini-budget and why couldn’t the gap be met by means other than new taxes?
The gap in the tax target and actual collection normally occurs on account of two factors: either because of over-estimation of the receipt of money in national coffers from taxable activity or because of under-performance of the tax machinery.
In the current fiscal scenario, the under-performance side is more to blame. According to tax expert Azhar Majid Khalid, the panic at work behind the mini-budget notification has largely been caused by projections that import duties and taxes, income tax and sales tax departments of the Federal Board of Revenue (FBR) would fail to meet the targets of revenue collection.
The government did not attribute the panic to miscalculations of the projected revenue and under-performance on the part of relevant departments. “The scourge of allowing evasion and under-assessment of taxes and duties too is responsible for the failure, and that is a perennial problem,” said Khalid.
The weak structure of tax collection has been exposed on a number of counts, chiefly in the backdrop of a slump in prices of imported petroleum products. The government has yet to come up with a policy on how to respond to a drop or upswing in revenues on account of petroleum prices.
Khalid suggested that the government should fix revenue on per-litre of crude oil rather than on the price to cope with the fluctuating prices on a sustainable footing.
“That is one way of avoiding the panic and the mini-budget,” he said, adding another way is the proper and realistic assessment of profits generating from the sale of property, from import of steel material through an updated evaluation of imports, checking under-invoicing on a wide range of imports, and avoiding delays in clearance of import consignments.
Weak assessment
On the income tax side, under-assessment of taxable money and slippage of undeclared profits into the ever-swelling mountain of black money are major problems. While, on the sales tax side, the value-addition assessment is a problem that defies all corrective measures as the very structure of assessing the added value in production and marketing is weak.
Three IMF programmes were in operation for removing the structural weaknesses in the customs, income tax and sales tax regimes over the past two decades, but to little avail.
Most of the money taken in reform-assisting loans was spent on administrative sides rather than on technical sides.
Under-invoicing, according to Khalid, could be blocked by the dual process of improving the price survey and exporter’s invoice checks. The invoices carried by the shipping lines should be examined for a double check of declarations for reconciliation that could defeat attempts to underpay duties and taxes.
Numerous importers of materials and finished goods mis-declare and under-declare the value of consignments and also suppress the amounts of value-addition, helping them to keep their taxable incomes as black money.
This money does not get into the arteries of production and marketing, keeping Pakistan in a constant want of business capital.
The Federal Board of Revenue (FBR) operates with a customs and sales tax intelligence organ, but it remains dormant in monitoring these areas.
It does not require rocket science to readjust duties and taxes on petroleum products, on materials that need proper valuation, on value-addition assessment and on defeating the practices that add to the black money persistently getting out of the taxation ambit.
Mini-budgets can be avoided by restructuring the tax machinery into a better organ of the state. There is no alternative to institutional correction.
The writer has worked with major newspapers and specialises in analysis of public finance and geo-economics of terrorism
Published in The Express Tribune, November 30th, 2015.