A mini budget in sight?

“Domestic tax collection increased by 28 per cent”. This was how many newspapers reported the tax collection figures for the first two months of the current fiscal year. Reportedly, this came out of a presentation made by the Adviser on Finance to the Prime Minister.

Such cherry-picking of data, whether done by the newspapers or bureaucrats surrounding the Finance Adviser, was not a stroke of genius. It does not take much time to realise that this unreal increase happened only on account of sales tax collection, because of withdrawal of the zero-rating regime. But it in no way reflects that our tax collection situation isn’t worrisome.

The same news stories reported that overall revenues registered an increase of 14% compared to the same period last year. Only a few highlighted that the Rs579 billion collected in July and August fell short of the target by about Rs64 billion. And none of them calculated that even this target was grossly understated.

Let’s try to unpack these confusing numbers.

Considering that we are in the midst of an IMF programme which hinges on enhancing our revenues, the only real benchmark of revenue performance should be how we are faring against the targets agreed with the IMF. Our total revenue collection last year stood at Rs3,832 billion, while the target that we agreed with the IMF for this year is an ambitious Rs5,550 billion. This reflects a 45% year-on-year increase and it means that if we have to achieve this target, we have to collect 45% more each month compared to the same month last year.

But surprisingly, the target of Rs643 billion set for the first two months reflected only a 27% increase. This means that not only did we stop short of the target by Rs64 billion, but that the target was deliberately set lower than where it should have been by another Rs90 billion. It also means that if we keep this pace of 14-15% increase over last year, we will end the year somewhere around Rs4,406 billion, more than Rs1.1 trillion below the target.

This is not counter-intuitive. We could expect about Rs300-350 billion additional revenues because of inflation and modest expected growth and about Rs350-400 billion through restoration of the mobile tax by the court, withdrawal of SRO 1125 and revision of income tax slabs. These back-of-the-envelope calculations provide an estimate of around Rs4,500-4,600 billion for the year.

Also, we should not expect any significant enforcement or documentation dividends. Despite the fact that 783,039 new tax returns were filed last year, these filers merely contributed Rs2.5 billion in terms of revenues. This is partly because the number of tax payers in this country is already very high, whether they file their returns or not.

Ironically, the FBR is not to be blamed here. The problem instead lies in the unrealistic target. Tax collection after all is a function of overall economic performance and it is no secret that sudden devaluation and exponential increase in interest rates have significantly suppressed demand and slowed down economic activity. In this situation, even achieving the target of Rs4.5 trillion would be miraculous.

IMF has already taken notice of this and is reportedly dispatching a technical team to Pakistan later this month. It seems that the only option to make up for the shortfall is through a mini-budget, with measures like increase in sales tax.

And even this will not mark the end of it. We might need yet another mini-budget within the same fiscal year, which along with some downward revision in the agreed target, might help in reaching a middle ground with the IMF.

Published in The Express Tribune, September 10^th, 2019.

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