The final estimate of FBR’s revenues in 2016-17, as reported to the National Assembly Standing Committee, is Rs 3362 billion. Given the target at the start of the year of Rs 3461 billion, the shortfall is Rs 279 billion. This is the largest shortfall in the four years of the PML(N) Government. Bulk of the shortfall is in income tax and sales tax. However, the collection from customs duties has significantly exceeded the target.
The overall growth rate achieved in revenues in 2016-17 is only 8 percent. During the previous three years, significant double-digit growth was witnessed each year. In particular, FBR put in a stellar performance in 2015-16, when it not only exceeded the target but also managed an exceptionally high growth rate of 20 percent.
There is considerable variation in the growth rate among the individual taxes in 2016-17. Revenues from sales tax and excise duty have been, more or less, stagnant. Exceptional buoyancy has been shown by customs duties, with a growth rate of over 22 percent. Income tax revenues have exhibited moderate growth of almost 13 percent.
The basic question is why there has been such a precipitous decline in the growth rate of revenues after the strong performance in 2015-16? Is it due to less rapid growth in the relevant tax bases? Is it because the budget of 2016-17 was ‘soft’ with few taxation proposals? Is it as a consequence of reliefs announced in the budget and during the year? Further, for various reasons, FBR may have slackened its fiscal effort in 2016-17.
Contrary to expectations, the various tax bases have shown much more rapid growth in 2016-17 than in 2015-16. For indirect taxes, the principal tax bases are the value of imports and value added in manufacturing. Both these tax bases have increased much rapidly in 2016-17. During the year the rupee value of imports increased by as much as 19 percent, as compared to less than 1 percent in 2015-16. This should have provided for rapid growth in revenues from the import sales tax and customs duties. Similarly, the value added in manufacturing rose by 8 percent, while there was actually a decline of 2 percent in 2015-16. The broad tax base for the income tax is the non-agricultural GDP. It demonstrated a higher growth rate in 2016-17 of 10 percent versus 6 percent in the previous year.
The obvious conclusion is that FBR revenues should have been substantially higher in 2016-17, given the relatively rapid growth in all the tax bases. As such, explanations for the relatively poor performance have to be found elsewhere.
The Chairman, FBR, has testified to the Committee that a number of tax reliefs were given in 2016-17. These included the reduction in sales tax on fertilizer, the revenue loss due to the textile package, zero-rating of the five export sectors and some relief from taxation on pesticides. Apparently, the total revenue foregone in 2016-17 due to these measures was approximately Rs 59 billion.
However, against this revenue loss there is a need to identify the potential revenue from the taxation proposals announced in the Budget of 2016-17. In the domain of direct taxation, the Money Bill included broadened coverage of the minimum tax, enhancement of capital gains tax on shares and property, fixed tax on builders and developers, higher withholding tax on commercial consumers of electricity and continuation of the super tax.
Taxation proposals in indirect taxes included higher excise duty on cement and cigarettes, increase in sales tax on import of mobile phones, enhancement in the import duty on furnace oil, rise in the slabs in import duty from 2 percent to 3 percent and from 10 percent to 11 percent. In addition, regulatory duties have been enhanced on some items like iron and steel.
The impact of these taxation proposals is sizeable, especially those relating to import duties and income tax. The additional revenue from these measures has probably more than compensated for the revenue foregone due to the above-mentioned reliefs.
The likelihood of this is enhanced by the information provided by FBR to the Ministry of Finance regarding the revenue cost of exemptions, reliefs and concessions, generally referred to as ‘tax expenditure’. This information is summarized in an Annex to the Pakistan Economic Survey. The total tax expenditure, combined in all FBR taxes, is reported at 1.4 percent of the GDP in 2015-16 and somewhat less at 1.3 percent of the GDP in 2016-17. Therefore, this is additional evidence that reliefs have not cut proportionately more into the effective tax bases last year.
The Chairman, FBR, has taken the fall back position that some tax rates have been lowered. In particular, he has highlighted that prices of petroleum products were not increased in line with any increase in the international prices. This has apparently led to a decline in the sales tax (in rupees) per litre of major products like motor spirit, HSD oil and furnace oil. The consequential revenue loss is sizeable and estimated at Rs 111 billion.
This is true, especially in the case of HSD oil. However, the sales tax rate on furnace oil has remained unchanged at 20 percent. Moreover, the tax base has expanded rapidly in 2016-17, as compared to 2015-16. The consumption of POL products in volume terms has increased by over 11 percent in 2016-17 versus only 2 percent in 2015-16. Therefore, the larger tax base ought to have compensated at least partially for the lower tax rates. Further, additional revenues have been generated in 2016-17 by the increase in the rate of import duty on furnace oil from 5 percent to 11 percent and the rise in imports of LNG.
Overall, it is difficult to find an objective and quantitative explanation for the poor performance of FBR revenues in 2016-17. It is possible that there was very high growth in advance taxes collected towards the end of 2015-16 to further bolster revenues. This has probably cut into collections in 2016-17, as demonstrated by the fact that the revenue growth in the first quarter of the year was only 4 percent. Also, in line with government policy, a higher volume of refunds may have been paid in 2016-17. These were exceptionally low in 2015-16.
Overall, there is no other option but to focus on qualitative factors behind the disappointing performance. This may be the consequence of complacency after the exceptional performance in 2015-16 or loss of some motivation due to the likelihood of managerial changes at the top or perhaps due to some diversion of the top management to tasks other than collection of revenues.
FBR now has a new management team. It faces the formidable task of repeating the 2015-016 performance by showing a growth rate of over 19 percent this year and crossing the threshold of Rs 4 trillion. We wish the new Chairman and Members of FBR success in achieving this ambitious target.
(The writer is Professor Emeritus and former Federal Minister)