What factors facilitated the stellar performance in 2015-16?
First, the sharp fall in international prices of oil enabled the import duties and sales tax rates on POL products to be enhanced sharply, while still transferring about 40 percent of the price reduction to consumers. Overall, energy indirect taxes increased their revenue contribution to almost 30 percent of total Federal tax revenues. In December 2015, the largest POL product, High Speed Diesel oil, actually had a sales tax rate of as high as 51 percent, three times the standard rate. It is not surprising that indirect taxes of FBR as a whole showed growth of 23 percent in 2015-16.
Second, the buoyancy of direct taxes was also enhanced by some increase in withholding/advance tax rates and by new impositions of deductions at source, particularly in the case of non-filers. Consequently, income tax revenues expanded by 16 percent in 2015-16, but fell short of the original target by Rs 155 billion. In particular, the Inland Revenue Service (IRS) of FBR showed a decline in collection of demand following assessment, by as much as 24 percent. Consequently, withholding/advance taxes now constitute 70 percent of total income tax collection.
Third, some mechanisms were used to raise revenues somewhat artificially and achieve the target. Refunds/rebates fell by much as 38 percent in relation to the magnitude in 2014-15. Further, a large quantum of advance taxes may have been collected.
What is the FBR revenue target for 2016-17?
Based on the strong performance in 2015-16, an ambitious target has been set for FBR of Rs 3621 billion in the Federal budget of 2016-17. This implies that the growth rate to be achieved is over 16 percent. A conscious effort is being made to reduce the growing dependence on indirect taxes as happened last year. As such, the original growth target for income tax was almost 31 percent while that for indirect taxes is substantially less at only 7 percent, according to the Budget documents. Clearly, subsequently the former target has probably been revised closer to 16 percent and the latter target increased.
Examination of the taxation proposals in the Budget Speech of 2016-17 reveals few radical and large revenue-yielding reforms. The tax measures in income tax include the extension of the super tax, imposition of withholding tax on transfer of property based on enhancement of valuation rates, a tax on builders and developers and minor adjustments in other withholding taxes. In indirect taxes, the significant moves are rationalization of import duty rates and the levy of regulatory duties. A number of reliefs have also been given. The impression is that the budget strategy in 2016-17 is not so much the enhancement of rates as of broadening the tax bases in the domain of direct taxes.
What has been the revenue performance in the first nine months of 2016-17?
It is amazing how quickly FBR has veered off the path of buoyancy shown in 2016-17. As per the quarterly targets agreed with the IMF in the Twelfth Review, the shortfall in the first quarter alone was Rs 74 billion. As opposed to the growth target of 16 percent, the increase in the first quarter was only 4 percent. This tends to indicate that substantial advance taxes were taken in the fourth quarter of 2015-16.
The performance has improved somewhat in the second and third quarters with growth rates of 7 percent and 10 percent respectively. Overall, the nine-month growth rate is only 8 percent, half the annual target. Sales tax has performed very poorly with virtually zero growth. The other three taxes have shown moderate growth ranging from 10 to 14 percent. No tax has been able to achieve the target growth of 16 percent. By end-March 2017, the revenue shortfall by FBR has approached Rs 200 billion.
What factors explain this apparent debacle?
First, sales tax rates have been brought down in the case of POL products, following the rise in international prices. Second, import duty and sales tax have been reduced by the exemption given to CPEC related imports, especially of power generating machinery, and the export rebates along with zero duties announced in January 2017. Third, the revenues from cigarettes, the principal contributor to excise duties, have fallen sharply. Consequently, despite the big jump in imports, indirect taxes have not shown buoyancy.
Turning to income tax, a number of source of withholding taxes have been affected by limited growth of the tax bases. This includes levies on interest income from bank deposits and national savings schemes, electricity bills, telecom, exports and sales of agricultural items. Further, the growth of corporate tax revenues will be restricted by the sharp declines in profitability of commercial banks, OGDC and so on.
What is likely to be revenue outcome for the whole of 2016-17?
As of end-March, the total FBR collection is Rs 2,260 billion. A realistic estimate for the full year is Rs 3,400 billion, with growth in the last quarter of 13 percent. Of course, it could be somewhat higher if FBR engages more actively in holding back refunds and seeking more advance tax payments. A shortfall of up to Rs 250 billion is likely by the end of June 2017.
The loss of buoyancy of FBR revenues in 2016-17 implies that after the jump in the tax-to-GDP ratio by one percentage point in 2015-16, it will fall by almost 0.5 percentage point in 2016-17. Undoubtedly, this is one factor along with others contributing to the likelihood of the fiscal deficit approaching 5.5 percent of the GDP this year.
What is the likely level of FBR revenues next year?
This will hinge crucially on whether the Government goes for an election year budget with a wide range of reliefs and concessions or opts for the appropriate strategy of furthering the tax reform process, especially by expanding the tax bases and curbing evasion. In particular, IRS must improve its performance in the assessment of returns and collection following the placing of demand.
If history is any guide, the PPP government presented a very soft budget in 2012-13, its last year. The overall growth rate of FBR revenues fell drastically to below 2 percent. Hopefully, this will not happen again. Based on the projected nominal GDP growth in 2016-17 and the underlying elasticity of the tax system, a forecast of FBR revenues next year is close to Rs 3,800 billion.
(The writer is Professor Emeritus and former Federal Minister)
Copyright Business Recorder, 2017