Higher revenues in midst of recession quite challenging

Increase in number of tax return filers will not push up revenue receipts

LAHORE: The economy is experiencing a recession which is manifested in the statistics.

By looking at import figures of July and August, one thing is clear which is that the economy is on a downhill path, though import compression is seen as positive for the economy. Similarly, the reduction in trade deficit is considered an achievement by the people who are at the helm of affairs.

The significance of imports cannot be played down in an economy where raw material and capital goods need to be imported to manufacture finished goods. These finished goods are either consumed or become an exportable surplus in some cases.

Under these set of conditions, the reduction in imports indicates that the economy is sliding down.

In FY18, the trade deficit ballooned since the economy expanded beyond the 5% mark. However, in FY19, the trade deficit remained high despite 3% growth since the current government started to adopt so-called austerity measures and monetary contraction.

When inflation is high, even an austere government can’t reduce current expenditures. However, an economic slowdown hit the tax base very hard.

Fiscal squeeze and monetary tightening together put brakes on the growing economy. Whenever an economy hits external financial constraint and its balance of payments gets into trouble, the government has to stabilise the economy. In addition, the governments in developing countries have to go to the International Monetary Fund (IMF). The IMF directs governments to reduce current expenditures and raise the discount rate in quick successions.

In order to balance the external front, the IMF recommends the governments to devalue the currency. This is a usual recipe proposed by well-trained macroeconomists who believe the external sector needs adjustment through devaluation.

The successive episodes of devaluation could not bring a brisk improvement in export figures as believed by the macroeconomists.

The impact of devaluation fell on food grains which become expensive with a lag. That is the reason flour prices have started to increase in the past couple of months.

The expensive food grains will impact the real income of the masses. This reduction in the real income will also slash aggregate demand in the economy.

The reduction in aggregate demand also affects business firms a great deal. These firms reduce their production by anticipating low demand for their products. The current capacity utilisation of business firms provides evidence in this regard.

The reduction in output plays a significant role in pushing down tax receipts for the government.

Here the timing of documentation drive is the key. Statistics of income tax returns shown by the Federal Board of Revenue (FBR) look promising apparently where it has been claimed that 0.75 million people has been added to the tax net.

When we look at the revenue figures, a paltry sum of Rs2.5 billion has been received out of this prolonged exercise. This shows that ticking the box of income tax returns will not increase the revenue automatically. In order to negotiate income tax notices, most of the people may have filed nil returns.

When most of the new filers contribute a paltry sum to government coffers, the task of the FBR becomes gigantic. Every now and then, media commentators and tax experts raise eyebrows over the performance of the FBR.

Some even argue that it doesn’t have the capacity to collect the desired amount of revenue and needs to be abolished.

In short, collecting and enhancing revenue in the midst of recession is quite challenging. By counting tax filers and removing SRO 1125 won’t increase the tax revenue. Here comes the question: Does the Pakistani state have the capacity to extract the desired amount of revenue?

The writer is the Assistant Professor of Economics at SDSB, Lahore University of Management Sciences (LUMS)

 

Published in The Express Tribune, September 16^th, 2019.

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