Tax collection shortfall widens to Rs440 billion

Published: June 1, 2019


ISLAMABAD: The shortfall in tax collection has widened to Rs440 billion in the first eleven months of this fiscal year with only 1% growth rate, which may push the total collection at the end of the year even below the level left behind by the Pakistan Muslim League-Nawaz (PML-N) government.

The steep shortfall in tax collection has also made the next fiscal year 2019-20’s proposed target of Rs5.550 trillion unrealistic – even before the start of the fiscal year, which will begin from July.

From July through May of fiscal year 2018-19, the Federal Board of Revenue (FBR) has provisionally collected Rs3.31 trillion in taxes as against the target of Rs3.75 trillion for July-May period, according to the FBR officials. It missed the eleven-month target with a record margin of Rs440 billion.

Overall, the revenue collection during the first eleven months was higher by only Rs36 billion or 1%, which also places a serious question mark over the credibility of the government of Prime Minister Imran Khan. The PM Khan used to blame his arch-rival Nawaz Sharif for poor tax collection.

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Due to poor revenue performance, the FBR’s tax-to-GDP ratio is expected to fall close to 10% – far lower than the 11.6% of the GDP’s level left behind by the PML-N government.

In its last year in power, the PML-N government had collected Rs3.842 trillion in taxes, which now seems an uphill task for the Pakistan Tehreek-e-Insaf (PTI) government.

The PTI government has introduced two mini budgets in the past ten months to improve revenue collection and boost economic growth. However, neither the tax collection improved nor the economy picked the momentum.

The rate of increase in tax collection for July-May period was far below the nominal Gross Domestic Product (GDP) growth rate of 11%. The FBR was required to attain 14.5% growth rate to achieve the annual target of Rs4.4 trillion.  During the July-May period of last fiscal year, the FBR had collected Rs3.275 trillion, according to State Bank of Pakistan (SBP) data.

The eleven-month collection was equal to only 75% of the annual downward revised target of Rs4.4 trillion. Former finance minister Asad Umar told the International Monetary Fund (IMF) that the FBR may pool Rs4.1 trillion. It seems this too will be an uphill task now.

Now the FBR’s internal assessment is that the total collection by end of this fiscal year may slip below Rs3.9 trillion. This is despite the fact that the prime minister has given a tax amnesty scheme by going against his elections promise of even reversing the tax amnesties given by the last PML-N government.

The FBR has provisionally sustained Rs88 billion shortfalls in May alone. It could collect only Rs325 billion against the monthly target of Rs413.5 billion, according to the officials. The collection in May was negative Rs27 billion or 7.7% when compared with same month of the last year.

The monthly customs duties collection also dipped due to both steep reduction in dutiable imports and cargos. The PTI government as a policy discouraged the imports to overcome balance of payments crisis. The benefits of the steep currency devaluation during the outgoing fiscal year were also wasted due to 12% decline in dutiable goods’ imports. Against the monthly target of Rs66 billion, the FBR provisionally collected Rs56 billion in custom duties in May.

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As against the full year revised target of Rs735 billion, the Custom authorities are now projecting to collect only Rs685 billion by June. The FBR collects nearly 45% of its total revenues at the import stage and the import compression policies have adversely affected collection of income tax, sales tax at import stage and the custom duties.

The total import value in dollar terms also declined by 15% in May. The effective ban on import of vehicles, ban on import of furnace oil and non-tariff barriers on edibles goods also adversely affected the collection of custom duties.

Cumulatively, the FBR collected nearly Rs562 billion in custom duties from July through May – which was higher by Rs86 billion or 19%. But the Customs missed the eleven month target by Rs14 billion.

For the next fiscal year, the government has proposed Rs5.550 trillion tax collection target as part of a condition of the IMF’s $6 billion loan programme. The target has been set on the basis of projected Rs4.1 trillion tax collections in the outgoing fiscal year at an annual growth rate of 36%.

However, if the collection falls below Rs3.9 trillion, the FBR will be required to ensure over 40% growth in a single year, which at a time of economic stabilisation is not possible to achieve. The shortfall in tax collection may force the government to impose more taxes in the new fiscal year.

The tax authorities are of the view that all the policy measures may not yield the desired results, as has happened in the past. The IMF wanted a directional change in Pakistan’s tax policy with an aim to abolish all the concessionary income tax, sales tax and custom duties rates.

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