Can the state collect Rs108b in 5 days?

Occasional riots in Karachi and economic mismanagement at the Centre adversely affects revenue collection efforts.

ISLAMABAD: Occasional riots in Karachi and economic mismanagement at the Centre has adversely affected revenue collection efforts and left authorities facing the gigantic task of collecting Rs108 billion in less than a week to achieve an “overambitious” quarterly target.

Official statistics show that, till September 22, the Federal Board of Revenue collected only Rs227.5 billon against the first quarter (July-September) target of Rs335.9 billion – a gap of over Rs108 billion.

In the current month, the collection is also Rs93 billion under the monthly target. The authorities could only collect Rs50.5 billion in 22 days – an  average Rs2.2 billion per day. The task at hand, if the authorities want to hit the quarter goal, now requires an average collection of Rs18 billion per day.

It will be the third consecutive month that the authorities miss the monthly collection target. In July, against a target of Rs90.1 billion, the FBR collected Rs77 billion; whereas in August, against the target of Rs102.4 billion, Rs87 billion was collected.

Any shortfall in collection is either covered by cutting development spending or borrowing from the banking sector, which is not only inflationary but also crowds out private sector credit. It would also be another factor for the overall fiscal framework in the wake of the devastating floods.

An FBR official said that the tax authorities were expecting to collect another Rs30 billion in one week, as the major corporations are likely to pay due taxes after the 25th , and income tax returns were also due on September 30th. He said that Karachi’s closure for one day costs the exchequer Rs2 to 3 billion on account of revenue, and the FBR has no solution or alternative for this loss.

“The likely shortfall is on account of FBR’s administrative weakness and disruption of business activities in the commercial hub of the country”, said Dr Athar Maqsood, former member of FBR’s Fiscal Research and Statistics. He said that the annual tax target of Rs1.667 trillion was inflated and against ground realities.

Dr Maqsood said that, even after implementing the reformed general sales tax from October 1, which is the ideal situation, the government would not be able to achieve its annual target due to administrative weaknesses and the unpreparedness of the FBR. The government overstates the revenues in order to understate the budget deficit.

The IMF assessment shows that the floods would not adversely affect the revenue collection as the sector worst hit by the deluge does not contribute much in the kitty. Tax collection is likely to be lower owing to disruptions in economic activity – though the hardest hit sector, that of agriculture, is not a significant taxpayer – and possibly weak compliance. The IMF has estimated the shortfall over three months at 0.3 per cent of the total size of the economy, or Rs 51.4 billion.

Last year, too, the FBR could not achieve its annual target of Rs1.38 trillion and ended up collecting Rs1.329 trillion, which then meant that the annual budget deficit target was also missed.

The collection on account of sales tax is witnessing negative growth on the domestic stage in September. Despite a one per cent increase in the tax rate, the sales tax collection over 22 days saw negative growth of 8.8 per cent.

Independent economists criticised the government in June for increasing the sales tax rate from 16 to 17 per cent, arguing it would encourage tax evasion.

Similarly, collection on account of federal excise duty has declined by over half. During the ongoing month, Rs2 billion have thus far been collected against Rs4.2 billion during the first 22 days of September 2009. The government has informed the IMF that the federal excise duty annual target is likely to be missed by Rs12 billion and sales tax target by Rs36 billion.

Income tax collection has seen a marginal growth of 3.2 per cent during the ongoing month against September last.

Published in The Express Tribune, September 26^th, 2010.