ISLAMABAD: As the lawmakers expressed serious concern over an unusual increase in fiscal deficit and a rare decline in revenue collection in the first half of the current fiscal year despite a major cut in development spending, the government on Wednesday disclosed plans to introduce research-based taxation for at least six sectors of high revenue potential in the coming budget.

This was the crux of a meeting of the National Assembly’s Standing Committee on Finance and Revenue presided over by its chairman Faizullah of the ruling Pakistan Tehreek-i-Insaf.

Federal Board of Revenue chairman Dr Jehanzeb Khan reported that a comprehensive reform process was being pushed for implementation before the coming budget (2019-20). He said sector-specific research papers with the assistance of best available international experts were being prepared to analyse their true tax potential to ensure effective taxation, adding that tobacco, steel and sugar sectors had been selected in the first phase during the current year for taxation based on sector-specific research and this would be extended in the coming budget to beverages, ghee, cement and property.

Also, the next year budget proposals would be based on a research paper to ensure taxation on the basis of evidence and potential so that policymakers could take a well-informed decision for the sector and the economy instead of just the revenue yield, the FBR chairman said, adding that an ICT development programme was almost ready for hardware, software, training and related aspects support with the help of the World Bank.

Dr Aysha Ghous Pasha said the state of public finance was at its worst at present as evident from the results of the first six months of the current fiscal year, adding that resource availability was grim and with the existing situation, the country’s fiscal deficit could go beyond seven per cent of GDP by the end of the year.

She expressed concern over the difficult fiscal situation despite a big cut of 36pc in the development programme and believed that the reduction in revenue collection, compared to the last year, was the key reason.

She said it was a rare thing to note that the revenue collection in absolute terms was also lower than that of last year and the Rs170bn shortfall was very significant despite a massive depreciation that should have generated higher revenues coupled with higher inflation and economic growth.

Dr Aysha said the lower collection in sales tax was also alarming and even though customs and excise duties were relatively better, it was difficult to fathom how the runaway deficit would be addressed when the government had already resorted to an unprecedented borrowing in the first seven months of the year. She said that over Rs1 trillion deficit in the first six months was unprecedented.

Dr Jehanzeb said the FBR contribution to Rs1tr deficit accounted for almost 17pc as its shortfall that stood at Rs170 billion caused Rs30bn loss in income tax and tax from information technology and about Rs70bn because of the government’s decision to keep petroleum prices on the lower side.

Hina Rabbani Khar said the World Bank-supported reform programmes unfortunately did not show positive results because the revenue machinery faced serious integrity-related issues in the field which should be a key aspect of any reform. She said the policy reform also lacked depth as the government continued to bank on indirect taxation, making almost everybody as agent of the FBR to collect taxes in the form of withholding taxes, salaries and utility bills instead of efforts by the revenue machinery.

The FBR chief said the existing tax policies targeting higher tax collection had affected business, but the policy was now being changed to ensure that economic conditions improved, resulting in revenue growth for which innovative approaches were being adopted.

Published in Dawn, February 28th, 2019