Huzaima Bukhari and Dr Ikramul Haq
Federal Board of Revenue (FBR) for the last many years has been facing continuous criticism at home and abroad for not collecting taxes due, especially from the rich and mighty. For fiscal year 2013-14, the apex revenue authority missed original target of Rs 2474 by a huge margin of Rs 219.5 billion - it collected only Rs 2254.5 billion and that too by blocking bona fide refunds and taking advances of billions. Voice against issue of fudging of figures has been raised in these columns repeatedly but it has been falling on deaf ears.
In fiscal year 2012-13, FBR collected only Rs 1939.4 billion against original target of Rs 2381 billion-showing huge shortfall of Rs 441 billion. The original target was revised to Rs 2007 billion, yet FBR failed to meet it. This is now a recurrent pattern. In 2012-13, in absolute terms an additional amount of Rs. 57 billion was collected over the collection of past fiscal year. The growth in net revenue collection was 3.0 percent over the collection of fiscal year 2011-12. This was the lowest during the last 13 years. Similarly the tax-GDP ratio dropped from 9.4% in the preceding year to 8.5% in 2012-13 as admitted officially in FBR Year Book 2012-13.
Failure of FBR to meet the assigned target, what to speak of tapping the real tax potential, which is not less than Rs 8 trillion, adversely affects the provinces. In fiscal year 2012-13, due to massive revenue shortfall of Rs 441 billion on the part of FBR, all the four provinces could not get the promised amounts from 7th NFC Award. Huge shortfalls in FBR's revenues due to exemptions through statutory regulatory orders (SROs) and otherwise given by Parliament jeopardise projection of revenue collection and fiscal deficit every year (Federal Budget FY 15: Tale of fiscal stabilisation, Muhammad Sabir, Business Recorder, September 17, 2014).
FBR has been persistently failing to meet budgetary targets for the last many years what to speak of realising the real revenue potential, which is not less than Rs. 7 trillion (FBR: new chairman, old challenges, Business Recorder, August 2, 2013). In 2013-14, it even failed to collect Rs. 2300 billion though the target was revised downward twice. The failure to tap real tax potential poses a tough challenge to both the federal and provincial governments.
Poor performance of FBR adversely affects the provinces as they are overwhelmingly dependent on whatever is collected and transferred to them from the divisible pool. The size of the cake-divisible pool-is so small that nothing substantial can be done to come out of debt enslavement and to spend adequately for the welfare of the people, no matter to which part of the country they belong. Provinces are also not ready to collect taxes due from the rich landowners and generate their own resources after establishment of local governments as envisaged under Article 140A of the Constitution.
FBR's Inland Revenue Wing has a workforce of over 20,000 persons, yet in 2013-14, income tax collection through own efforts of officers (by creating demand) was only Rs. 80.58 billion. It was Rs. 89.4 billion in 2012-13. This exposes the efficacy of IRS as collection on demand fell to 8.7% against 11.5% in the previous year. In 2013, FBR received only 840,000 returns against 3.2 million holders of National Tax Numbers (NTNs). The number is even lower for 2014.
According to National Database and Registration Authority (NADRA) there are more than three million rich people who do not even have NTNs although they live in posh areas, have multiple bank accounts and frequently visit foreign countries. Amongst the non-filers, there were 1020 FBR's officials, vast majority of government servants, elected representatives and even judges and generals. It is worth mentioning that in 2009 as many as 1,282,118 filed returns/statements. In other words, there has been annual decrease of 7% in filing of income tax returns. In sales tax regime, the position is equally pathetic. FBR has about 100,000 registered taxpayers, out of which less than 30,000 pay any tax. Out of 2.5 million retailers, it has managed to register only 8,000 outlets.
Over 90% of FBR's collections comes from withholding provisions, advance tax and voluntary payments. It has made little efforts to force the rich and mighty to file returns, which proves beyond any doubt its unproductiveness. FBR is facing serious issues of inefficiency. Shahid Javed Burki in Provincial Rights and Responsibilities [Journal of Economics, September 2010] opines that "about 40 million out of 170 million people in Pakistan have now succeeded in keeping their living standards from falling. Of these, about 15 million have improved their economic situation in spite of the sluggish economy." FBR is not taxing these rich 15 million.
Pakistan's tax potential at federal level alone is about Rs 7 trillion. According to Household Integrated Economic Survey (HIES) 2011-12 conducted by Pakistan Bureau of Statistics, 5 million individuals have annual taxable income of Rs 1.5 million. If all of them file tax returns, income tax collection from them at the prevalent tax rates would be Rs 1650 billion. If income tax collected from corporate bodies, other than non-individual taxpayers and individuals having income between Rs 400,000 to Rs 1,000,000 is added, the gross figure would not be less than Rs 4500 billion-FBR collected only Rs 880 billion in 2013-2014. Similarly, due to leakages in sales tax, federal excise and custom duties, the total collection is not more than 50% of actual potential [joint study of Andrew Young School of Policy Studies at Georgia State University and World Bank]. FBR in 2013-14 collected Rs 1002 billion as sales tax, Rs 139 billion as federal excise and Rs. 241 billion as customs duties. Collection under these heads should have been at least Rs 2500 billion. Target of Rs 7 trillion is achievable provided the mighty segments are properly taxed, tax machinery is overhauled, leakages are plugged and all exemptions to the privileged classes are withdrawn.
At enforcement level, the biggest challenge is how to bridge the tax gap-collection by FBR is one-fourth of actual tax potential. Issues of documentation and tax compliance are lingering on for years even after completion of a costly $100 million World Bank funded Tax Administration Reforms Programme (TARP).
The only way to check massive evasion in customs, income tax and sales tax is implementing an integrated Tax Intelligence System, which is capable of recording, storing and cross-matching all inflows and outflows. All in-bound and out-bound containers should be scanned/x-rayed to check evasion of customs duties and taxes payable at source. However, no reform agenda can succeed unless FBR is insulated from outside political pressures. It should be made National Tax Collection Agency, responsible for collecting all federal and provincial taxes and should be run by an independent Board of Directors selected by National Finance Commission and/or Council of Common Interests. It would facilitate taxpayers to approach one agency only and data sharing for all taxes would help in increasing revenues for the federation as well as the federating units.
Track record of FBR [see Tables] shows remote possibility of collecting even Rs. 6 trillion in the next three years to give enough fiscal space both to the federal and provincial governments to come out of the present fiscal cul-de-sac.
*The actual collection in 2013-14 was Rs. 2254.5 as admitted by the Finance Minister while chairing a meeting of National Finance Commission (NFC) on December 9, 2014 held to monitor the pace of implementation for 2nd biannual period (January-June 2014) of financial year 2013-14. No reason is yet given for overstatement of tax figures by FBR to the extent of Rs. 11.8 billion, which is a huge amount. This figure fudging needs through probe by Auditor General of Pakistan and Public Accounts Committee.
(The writers, lawyers and partners in law firm HUZAIMA, IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences)
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Position under 7th NFC Award
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Salient features Who gets what?
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These shares are worked out on the basis
of a formula that covers population,
incidence of poverty, collection of
revenues, and generation of revenues.
Population is given a weight of 82 percent,
poverty 10.3 percent, revenue collection 2.5
percent, revenue generation 2.5 percent and
urea 2.7 percent.
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Vertical distribution
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Final share of provinces: 7th NFC 6th NFC Change
Punjab 51.74 percent, Sindh Centre 44% 52.5% -8.5
24.55 percent, Khyber Provinces 56% 47.5% +8.5
Pakhtunkhwa (KPK) 14.62
percent and Balochistan
9.09 percent.
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Horizontal distribution
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7th NFC 6th NFC Change
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Punjab 51.74% 53.01% -1.27%
* Federal collection charges to Sindh 24.55% 24.94% -0.39%
be reduced from 5% to 1% KPK 14.62% 14.88% -0.26%
Balochistan 9.09% 7.17% +1.92%
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* Sindh to receive additional
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Projected amount (in billions)
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2009 2010 2014
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transfer of Rs. 6 billion from
federal government Punjab 419 471 938
Provinces in agreement on Sindh 197 223 445
multiple indicators and KPK 118 133 265
respective weights Balochistan 53 83 165
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Sales tax acknowledged as
provincial subject KPK to
be given additional 1% from
federal divisible pool
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Comparison of Collection vis-a-vis Target 2013-14
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(Rs. Billion)
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Tax Head Original Revised Provisional Achievement of
Target Target Collection Target (%)
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Original Revised
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Direct Taxes 975 891 884.1 90.7 99.2
Sales Tax 1,054.1 1,005 1,002.1 95.1 99.7
Federal Excise 166.9 138 139.1 83.3 100.8
Customs duty 279 241 241 86.4 100.0
All Taxes 2,475 2,275 *2,266.3 91.6 99.6
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Source: FBR Biannual Review, January-June 2014
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Head-wise Performance of Direct Taxes
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A Comparison of FY: 13-14 & FY: 12-13 Collection
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(Rs Million)
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Heads 2013-14 2012-13 Growth (%) Share (%)
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2013-14 2012-13
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Collection on Demand 80,582 89,427 -9.9 8.7 11.5
Voluntary Payments 262,598 244,920 7.2 28.4 31.6
Deductions at Source (WHT) 578,413 436,087 32.6 62.5 56.2
Miscellaneous 4,016 5,574 -28.0 0.4 0.7
Gross Income Tax 925,609 776,008 19.3 100.0 100.0
Other DT 22103 20,797 6.3
Total Gross Direct Taxes 947,712 796,805 18.9
Refunds 63,711 53,397 19.3
Total Net Direct Taxes 884,001 743,408 18.9
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Source: FBR Data Bank quoted in FBR Biannual Review, January-June 2014
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Comparison of Net Revenue Collection (Rs. Billion)
FY: FY: Growth
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Revenue Heads
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2013-14 2012-13 Absolute (%)
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Direct Taxes 884.1 743.4 140.7 18.9
Sales Tax 1002.1 842.5 159.6 18.5
FED 139.1 121.0 18.1 15.0
Customs 241.0 239.5 1.5 0.6
TOTAL 2,266.3 1,946.4 319.9 16.4
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Source FBR Biannual Review, January-June 2014
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Sales Taxes Gross and Net Revenue Receipts
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(Rs. In Million)
Heads FY 2013-14 FY 2012-13 Growth (%)
Gross Net Gross Net Gross Net
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Sales Tax (Imports) 495,351 495,330 429,843 429,831 15.2 15.2
Sales Tax (Domestic) 539,143 506,780 442,372 412,697 21.9 22.8
Total 1,034,494 1,002,110 872,215 842,528 18.6 18.9
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Source: FBR Biannual Review
Tax GDP Ratio (2005-06 to 2013-14)
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Tax
Years Collection GDP (mp) Tax/
(Rs. Million) (Rs. Million) GDP Ratio
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2005-06 713,442 8,216,160 8.7
2006-07 847,236 9,239,786 9.2
2007-08 1,008,091 10,637,772 9.5
2008-09 1,161,150 13,199,707 8.8
2009-10 1,327,382 14,866,996 8.9
2010-11 1,558,014 18,284,860 8.5
2011-12 1,882,693 20,090,862 9.4
2012-13 1,946,360 22,909,079 8.5
2013-14 2,254,500 25,401,895 8.8
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Source: FBR Year Books & Economic Surveys of Pakistan
