Taxation targets

It seems the government is quite satisfied with its tax collection efforts during the first two months of the current fiscal year. The numbers of the July-August collection have come out at Rs580 billion, which is significantly higher than last year, but still short of the target. With a two-month target of Rs644 billion, the FBR has come out Rs64 billion short. This means that the FBR is currently meeting around 90 percent of its target, which tabulated over the full year would mean a shortfall of Rs500 billion when the final numbers are tabulated. The increase has come purely through a 30 percent increase in taxation on the domestic economy, including inland sales and income tax. While the biggest shortfall lies in customs duty collection, which is Rs23 billion less than the target.

With around 40 percent of revenue collected through imports and exports, the planned reduction of imports is causing major issues for the FBR’s plan to meet its taxation targets. What is also bizarre is that officials have tried to give the impression that the shortfall in customs duty is a good thing. In itself, the import reduction is certainly a positive. But the planned import reduction should have shown in the FBR targets.

Did the government commit to setting an import taxation target that was higher than actual imports? FBR Chairman Shabbar Zaidi has agreed that the government cannot use the fall in imports as an excuse for not meeting the target. However, to questions over whether the FBR would meet its Rs5,500 billion revenue target, Zaidi has promised to offer more clarity after September – the end of the first quarter. The good thing about the new FBR chairman has been candidness, but one must worry about statements that imply that the high taxation target was to create ‘high motivation’ within the FBR. Taxation targets should be realistic, without getting into the question of whether the current targets are even fair in a stumbling economy. Since it seems unlikely that the FBR will manage to collect Rs450 billion in September to meet its target, it is likely to push for a mini-budget or a reduction in target revenue. The latter would be the better choice, but it could lead to a situation where the budget deficit could hit 9 percent of GDP.

This would be embarrassing for a government that has claimed that its policies aim to reduce budget deficit and lending, not increase it massively. This is why the government could rely heavily on the FBR to cover the shortfall – which could mean more taxes in the near future. Profitability in major economic sectors, including manufacturing, has fallen. This would not make it the right time to increase taxation further. While the FBR chairman has continued to insist that the focus needs to be on sorting basic issues, such as documentation, instead of meeting taxation targets, the government and the revenue board are still pursuing high targets. It should not be a surprise when questions are asked when the targets are not hit.