Inside Financial Markets

Tax collection drops 4.3% in May

TaxesTax collection plunged 4.3% to a mere Rs174 billion in the previous month, thanks to the malfunctioning tax machinery, which observers claim is plagued by rampant corruption and infighting.

Collections in May totaled about Rs8 billion less than receipts in the same month of the previous year, according to Federal Board of Revenue (FBR) officials. This was despite the fact that the FBR withheld billions of rupees worth of tax refunds to artificially enlarge the collection figure.

Income tax collection dropped over 18% in the month of May to total only Rs59 billion, while collections on account of customs and federal excise duties remained stagnant. Growth in sales tax collections was less than 8% and totaled Rs81 billion over the month.

Analysts term the shortfall in collection an alarming development: they argue that the fall in collection suggests that the machinery has become dysfunctional to the extent that it cannot even sustain a growth rate equal to prevailing inflation rates, which requires no extra effort.

Cumulative tax collection for the first eleven months of the current fiscal year (July 2012-May 2013) clocked in at Rs1.682 trillion. “The results indicate that we may not be able to even cross the psychological barrier of Rs2 trillion by June 30,” an FBR official admitted.

The previous parliament had initially set the tax collection target at Rs2.381 trillion for the current fiscal year. It was later revised to Rs2.193 trillion, then cut further to slightly over Rs2 trillion. These revisions were, however, informal – officially, the FBR is still supposed to collect at least Rs2.381 trillion.

To achieve the official target, the FBR now needs to collect Rs700 billion in one month. For perspective, consider that the FBR collected only Rs275 billion in the same month last year, according to data available with the State Bank of Pakistan. If the FBR manages to match the collections figure for June last year (chances for which are very slim), the FBR will close this year at Rs1.957 trillion. That is the best case scenario.

Meanwhile, the shortfall in collection will widen the already out-of-control budget deficit by another 1.8% of Gross Domestic Product. The shortfall is simultaneously widening due to another factor: extensive government borrowing from commercial banks.

The shortfall in collection has affected both federal and provincial fiscal operations. The provinces’ shares in federal taxes were determined on the basis of the Rs2.381 trillion target set out for the FBR. The shortfall will cause a massive shortfall in their share of funds, as all provinces except Baluchistan receive revenues on the basis of actual collections.

Insiders say that within the FBR, top officials are divided in the Inland Revenue (IR) and Customs groups; with the IR group sidelining customs officials, courtesy FBR Chairman Ansar Javed, who is from IR. More worryingly, sources said that transfers and postings in the FBR over the last couple of years were auctioned in return for commissions.

Ali Nawaz

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Inside Financial Markets was a joint publication of Pakistan Stock Exchange (PSX)and Society of Technical Analysts Pakistan (STAP)