ISLAMABAD: After dealing with the external sector deficit, the government’s attention is now being drawn to a growing shortfall in tax revenues that is beginning to bite.

In the first five months of the fiscal year, a shortfall of approximately Rs102 billion has been recorded in revenue collection, and this week officials from the Federal Board of Revenue (FBR) gave a briefing to the prime minister about the situation, with suggestions on how the shortfall can be reduced in coming months.

In the briefing, the FBR pointed to an erosion of the tax base due to the large tax cuts announced in the last budget of PML-N government in April, as well as the Supreme Court’s decision to suspend collection of tax on mobile phone cards. Also, the government’s decision to slash sales tax on petroleum products has cost the exchequer almost Rs35bn thus far.

In June this year, the Supreme Court of Pakistan suspended deduction of taxes on the top-up of prepaid cards by mobile phone service providers. “We have witnessed Rs16bn shortfall from the telecom sector in the first five months of the current fiscal year owing to the suspension of taxes on prepaid cards,” the FBR sources told Dawn.

Revenues hurting due to tax relief given to various parties

FBR has proposed that the federal government should approach the Supreme Court to find a way to restore these taxes. The annual revenue collection alone from these taxes on prepaid cards is around Rs80bn.

In another proposal, the FBR urged the federal government to fix sales tax on every litre of the petroleum products from January instead of charging sales tax on price, since the price fluctuates and throws off all revenue projections.

“We have urged the government to immediately take up these two issues to arrest the decline in revenue,” an official source said on condition of anonymity.

Due to the government’s reduction in the sales tax rates on petroleum products, FBR has recorded Rs35bn shortfall in the first five months of the year. To reverse this trend, FBR has suggested to the federal government to fix sales tax on each petroleum product irrespective of increase or decrease in prices.

The PML-N government had also used this mechanism of fixed sales tax rate on petroleum products in the year 2016, to prevent revenue collection from declining steeply when oil prices fell.

The tax base has eroded by about Rs90bn from beginning of the current fiscal year. The provisional revenue collection reached Rs3,844.5bn, which is lower than the target set at Rs3,935bn. The FBR had initially targeted a total collection of Rs4,103bn for the fiscal year.

And the target for the current fiscal year was set with 14pc growth in mind over the revised revenue target in the fiscal year 2017-18 which was missed by Rs90bn.

The prime minister was informed that the pre-election measures have additionally contributed to the revenue shortfall in the first five months of the fiscal year. The relief given to the salaried class has led to a decline of Rs18bn in shortfall in income tax collection followed by Rs13bn from contractions of development budgets at the federal and provincial levels during the months under review.

The other measures announced in the last budget that also contributed to the shortfall include a Rs3bn drop in income tax from dividends, and another Rs1bn from fixing the condition of return-filer for purchase of property effective from current fiscal year.

The lowering of sales tax rates on fertilisers also led to a shortfall of Rs4bn in the first five months, another Rs5bn by replacement of LNG imports with furnace oil (difference of tax rates), and another Rs1bn due to closing of some sugar mills in Sindh.

According to the sources, there are several other products on which duty rates were lowered in the last budget, leading to drop in revenue collection. The only area where revenues will be restored partially is the income tax for salaried class, the sources said, adding the impact would be visible by end of June 2019.

It is not unusual for new governments to face revenue shortfalls in their first few months. The PML-N government faced a Rs40bn shortfall in 2013, which was bridged through a minibudget.

Published in Dawn, December 9th, 2018