FBR may hardly collect Rs2,250bn revenue: Pasha
SOHAIL SARFRAZ
ISLAMABAD: Renowned economist and former finance minister Dr Hafiz Pasha said on Wednesday that the lacklustre performance of the Federal Board of Revenue (FBR) is evident from the fact that netting non-filers was a total failure, tax-to-GDP ratio is going down while revenue growth is below 10 percent in April 2014. The FBR may hardly collect Rs 2,250 billion revenue against downward revised target of Rs 2,345 billion for 2013-14.
Giving a presentation on federal budget (2014-15) in an event organised by Institute of Policy Reforms, here on Wednesday, Pasha said something very unusual has happened during current fiscal year. The IMF told FBR to scale down ambitious revenue collection target from Rs 2,475 billion to Rs 2,345 billion. We would be lucky enough if we reach the figure of Rs 2,250 billion by the end of current fiscal year. In April the growth rate in revenue collection was below 10 percent. If the FBR is unable to raise tax revenue growth beyond the current rate, there is likely to be a shortfall of around Rs 90 billion in achieving even the revised target of Rs 2,345billion for 2013-14.
On the FBR’s drive to expand the tax-base, Pasha said over 3 million people are not filing income tax returns. In India, there are 32 million return filers. The FBR’s drive to net non-filers was a total failure. To enforce filing of returns by potential taxpayers is a key condition of the IMF. It is amazing that 42 percent of the returns in the tax directory have declared zero income.
To deal with non-filers, Dr Pasha proposed that the owners of property above a minimum size are expected to file income tax returns. However, this is not the case frequently. The FBR has sent notices to a large number of non-filers, but the response has been very poor. As one punitive step, property owners who are required to file returns may not be allowed to sell or transfer their property if they are unable to present the last three years income tax returns at the time of registration of the transaction.
Dr Pasha remarked that the level of tax compliance reflects total breakdown of the tax system. While opposing the proposal of the single digit sales tax, he said that single digit sales tax would result in more sales tax evasion under the Value Added Tax regime. The government must avoid any move to bring existing 17 percent sales tax to a single digit. The strategy should be to work towards improving the existing system rather to go back to a single-stage tax. The biggest drawback of the single-stage tax system is that it will lead to a cascading of the tax burden, that is, a tax on tax. If the nominal rate is 5 percent then due to cascading the effective tax rate could be as high as 8 percent.
Dr Pasha said that currently the type of sales tax regime is being debated for adopting the one which best suits the country. The GST is levied, more or less, in the VAT mode with multiple stages of taxation along the value chain and with input tax invoicing at each stage.
The growing disillusion with the GST is primarily due to two reasons. First, there is a perception of over-invoicing of inputs, arising from the so-called ‘flying invoices’ problem. Second, industry has been complaining vociferously about delays in the payment of refunds. This has arisen particularly at times when FBR is under pressure to achieve targets.
The alternative that has been suggested is the reversion to a single-stage scales tax, without input tax invoicing. This is the kind of tax which existed in Pakistan prior to the promulgation of the 1990 Sales Tax Act. As such, the GST will be levied on the value of sales/production and not on the value addition.
Pakistan has been one of the pioneers in the implementation of a VAT system in developing countries. It will be unfortunate if this system is abandoned now. In our view the strategy should be to work towards improving the existing system rather going back to a single-stage tax. Steps that need to be taken to improve the working of the existing GST are as follows:
The development of the CREST software has led to reduction in over invoicing of inputs. In addition, the capacity to audit sales tax returns is, more or less, non-existent in FBR currently. Such capacity should be built up quickly to facilitate a move towards composite audit (of income tax and GST simultaneously). This was the basic logic behind the setting up of IRS.
Refunds must be honoured expeditiously. Small refunds of opts, say, Rs. 1 million may be paid immediately. In the case of larger refunds, the policy may be to pay 60 percent immediately after the filing of a claim and the remaining 40 percent following assessment. A special refund cell was established in the office of the Chairman FBR, which ought to be reactivated, Pasha added.
