Higher tax collection amidst widening trade gap

ByAsrar Raouf

Former Civil Servent


July 24, 2022

Higher tax collection

Asrar Raouf describes an uphill task

The Higher tax collection economy of the country is still in doldrums with exceedingly high level of inflation making life miserable for the common man and the IMF not finalising details of its renewed engagement with Pakistani authorities. The pressures on the financial manager are extremely telling and they are desperately trying to work out some credible formula for easing the financial situation. There is tremendous anxiety in the country about the deteriorating financial position and the government is gradually coming under fire for not been able to ease the situation and bring back normalcy. It has become quite obvious that the financial steps taken by the incumbent government have increased the discomfiture of the people and the new financial managers are facing the consequences of adding to the economic burden. It is opined that many other financial decisions will be taken that may certainly not be popular further eroding the political support basis of the incumbents.

Amidst the suffocating economic conditions the only encouraging news emanating from the financial circles is that the FBR has, for the first time in recent history, surpassed the annual tax collection target of Rs.6.1 trillion on the back of higher imports making the incumbent finance minister to propose rewarding the taxation functionaries. It is accordingly reported that the FBR collected Rs.6.125 trillion beating the estimates for the fiscal year that were Rs.5,829 trillion that were revised upwards after the previous government slapped Rs.360 billion new taxes in the mini budget. This collection level is about 29%, or Rs.1.38 trillion higher than the preceding year. Curiously, the FBR had missed at least six monthly targets during the past fiscal year but ended up achieving the upward revised annual target. Out of the Rs.6.12 trillion collection, the FBR pooled Rs.1.74 trillion or 28.4% of the total collection in the last quarter. It also paid Rs.105 billion refunds in the fourth quarter that was nearly one-third of the total Rs.335 billion refunds paid in the just ended fiscal year. Earlier in the last fiscal year the FBR had paid Rs.251 billion in tax refunds.

For the new fiscal year, the government has set the tax collection target at Rs.7.470 trillion on the IMF’s demand, which will require about 22% growth in collection. The target seems achievable given the high inflation rate. In the just ended fiscal year, the FBR’s performance remained largely dependent on imports that contributed 51% to the total tax collection, which throughout the fiscal year camouflaged the weaknesses in the domestic sales tax collection that remained negative. Out of Rs.6.12 trillion, the FBR collected Rs.3.12 trillion at the import stage on account of withholding taxes, sales tax at imports and the custom duties. It is essential to mention that the FBR collected slightly over 63%, or Rs.3.86 trillion, in regressive taxes comprising of general sales tax, customs duty and federal excise duty. The customs duty collection increased to Rs.1 trillion, showing an increase of Rs.245 billion or 33%. The FBR also recorded 27% growth in sales tax collection due to heavy reliance on import taxes. It collected over Rs.2.5 trillion in sales tax, up by Rs.540 billion.

It is also pointed out that the total increase in sales tax collection remained lower than the surge in sales tax receipts at the import stage due to the negative growth in domestic sales tax collection. The FBR collected around Rs.712 billion in domestic sales tax compared with Rs.824 billion in the previous year, a reduction of around 14%, which should be a serious concern for the government. The constant negative growth in domestic sales tax has challenged the traditional theory that revenue collection should increase proportionately to the nominal GDP growth rate. Contrary to that, the sales tax collection at the import stage stood at Rs.1.81 trillion against Rs.1.15 trillion in the previous year. There was an increase of over Rs.660 billion or 57% in sales tax collection at the import stage.

Despite the increase in the tax collection amount the tax gap has widened adding a substantial worry for the financial planners. More worrying is the fact that Pakistan’s trade deficit increased at an unsustainable pace of over 55% and skyrocketed to a record $48.3 billion in the just ended fiscal year due to an unmanageable increase in imports that beat all official estimates despite a temporary ban on certain goods. The international trade results for fiscal year 2021-22 have also made the targets of new fiscal year irrelevant, as the government needs to reduce imports drastically in order to achieve the targets. Exports surpassed the annual target and stood at $31.7 billion but the increase was not sufficient to bridge the yawning trade gap. Against the target of $55.3 billion, the imports surged to a record $80 billion. The resultant $48.3 billion trade deficit breached the official target by a wide margin of nearly $25 billion. It is reported that the deficit during the last fiscal year was $17.3 billion, or 55.3%, more than the previous fiscal year. In the preceding fiscal year, the country had booked $31 billion trade deficit.

Successive financial managers did try to contain the rising trend in exports but the unprecedented surge in global commodity prices has hampered their increase with the result that the higher trade deficit took a heavy toll on the foreign exchange reserves that dropped nearly half from their peak of $20 billion in August last year. Though the new coalition government imposed a temporary ban on the import of goods, including limits on the quantity of imports, yet the monthly import bill was recorded at $7.7 billion. Pakistan needs to start working on measures that may reverse the existing trend of importing everything – from consumption to manufacturing goods – that has exposed the country to serious financial risks.

On the other hand, Pakistan’s exports increased nearly 26% in the last fiscal year and stood at $31.7 billion against $25.3 billion in previous year. In absolute terms, there was an increase of $6.4 billion in the exports. The exports were nearly $5 billion higher than the target set by the last government. Consequently, the trade deficit widened over one-third year-on-year to $4.83 billion in June. On a month-on-month basis, the exports increased 10% to $2.9 billion in June 2022 over the preceding month, showing a surge of $261 million. As a result, the trade deficit widened to $4.8 billion in June, up nearly 17%, or $684 million.

Rather unrealistically the government has fixed a trade deficit target for the current fiscal year at just $27.8 billion entailing a reduction of 42% against last year’s deficit. Despite setting this optimistic target the government has simply not put in place policies that may reduce the trade deficit by $20.5 billion or an ambitious reduction of 42%. More importantly it is mentioned that import targets for the current fiscal year are even more unrealistic as they are estimated to be cut down by 22 per cent that is simply not possible in wake of the higher global commodity prices. TW


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