FBR claims loss of Rs330b due to import compression

Misses first-half tax collection target due to low economic activity

ISLAMABAD: Amid criticism over missing the revenue collection target by a wide margin, the Federal Board of Revenue (FBR) has claimed that it sustained losses of roughly Rs330 billion due to $6 billion worth of import compression in first half of the current fiscal year.

The tax shortfall due to import compression and low economic activity has also led to the missing of the indicative first-half tax collection target of Rs2.198 trillion, agreed with the International Monetary Fund (IMF). It is for the second time in a row that the FBR has missed the first-half indicative tax collection target, this time by a margin of Rs115 billion.

But the government has again managed to achieve the primary budget target for the first half that has again remained in surplus due to one-off non-tax payments and slow development spending.

“An estimated loss of Rs56 billion worth of taxes is incurred on every billion dollars of import compression,” stated the FBR in an official statement. The compression of over $5 billion (in five months) has, on the one hand, improved the current account situation but, on the other hand, has adversely affected the usual revenue resources of the government, it added.

During July-November of the current fiscal year, the current account deficit shrank 73% to $1.82 billion - an improvement of $4.9 billion. This caused roughly Rs280-billion shortfall in revenues, as per the FBR’s claim. The current account deficit is expected to improve to nearly $6 billion in six months, which will erode Rs336 billion worth of potential revenue for the FBR.

For the July-December period, the twice downward-revised target of the FBR was Rs2.367 trillion but provisional collection in the first half stood at Rs2.083 trillion, falling short of the target by a whopping Rs284 billion.

Owing to lower-than-agreed tax collection, Pakistan has also missed the indicative tax collection target of Rs2.198 trillion, given by the IMF. Nonetheless, the FBR has achieved another IMF target of releasing Rs53 billion in tax refunds. The IMF will vet these refund numbers during the next review talks.

A senior FBR official said on Saturday that even the IMF did not visualise implications of the import compression for tax revenues during programme talks held in May last year. He said the IMF had instead hoped that exchange rate depreciation and inflation would help the tax machinery to increase collection, as over half of the total revenues were collected at the import stage.

The FBR said on Saturday that tax collection in the first six months was still 16.3% higher than last year. It is the highest growth rate since 2015-16 and the FBR has made great efforts to achieve this growth despite rather subdued economic activity, according to the official statement.

The FBR said the original tax collection target of Rs2.367 trillion had now been revised to Rs2.197 trillion in view of import compression in the first quarter. However, the revised first-half target is only 41.2%, which is far lower than the historical average of around 44-45%.

The FBR believes that it can perform better in the second half of the year due to low to negative growth in the third and fourth quarters of the last fiscal year.

Yet, it is not confident to achieve the revised full-year target of Rs5.238 trillion without additional revenue measures. The FBR is working on a mini-budget that will be announced around the time Pakistan and the IMF would enter into talks for the second review of the $6-billion bailout package, tentatively scheduled for next month.

The FBR said it redoubled efforts on the domestic side and managed to shift its dependence on import taxes from 56% to a little above 40% this year. With expected uptick in economic activity in the last six months of FY20 and likely stabilisation of imports, it is expected that the FBR is going to collect an unprecedented amount of taxes this year without disrupting and distorting economic activity, claimed the FBR.

There is also criticism against the FBR for inflating revenues by blocking tax refunds of exporters. This issue was raised with Prime Minister Imran Khan by representatives of the All Pakistan Textile Mills Association this week.

But the FBR has rejected the criticism and said the total tax collection from the five export-oriented sectors stood at only Rs71 billion in the first half of current fiscal year.

The FBR officials said after analysing the tax returns data, it came to know that the exporters claimed only Rs39 billion worth of refunds.

As compared to these refund claims in tax returns, the exporters have claimed Rs19 billion in the Annexure-H and the FBR has already paid them Rs16 billion, according to senior officials.

They said the allegation that the FBR blocked over Rs100 billion worth of refunds did not have a base.

“We expect that gross receipts from the five export-oriented sectors will be around Rs190 billion this fiscal year and out of which the total refund claims for the full year will be around Rs103 billion,” according to the FBR.

In the budget 2019-20, the FBR had withdrawn the zero-rating facility from textile, carpet, surgical, sports and leather sectors and started charging 17% sales tax on their domestic sales.

Published in The Express Tribune, January 5^th, 2020.

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