The federal taxes collected in the first month of any fiscal year may not accurately represent either the actual quarterly or annual revenue growth trend but they do give some indication of the direction in which things are moving. The financial year starts in July with a lower collection which picks up momentum in the following two months of the first quarter.

The tax revenues raised by the Federal Board of Revenue (FBR) have reportedly gone up by 10.8 per cent to Rs278 billion in July, exceeding the collection of Rs251bn during the same period last year. However, when seen in the context of the quarterly target of Rs1,072bn, the figure is not impressive.

Similarly, the said collection as a percentage of the yearly target was 4.99, down from 5.66pc in July 2018. The annual target for 2019-2020 is estimated at Rs5,550bn, an increase of 45pc over the previous year’s actual collection of Rs3,832bn.

Officials are pinning hopes that the FBR collection will go up significantly as the number of tax filers has soared following the documentation drive and the amnesty scheme. A record 2.51 million tax returns were filed for the tax year 2018, jumping up 67pc from 1.49m in the previous year. And the FBR says it has met the target of 4m taxpayers for the tax year 2019.

The erratic and low spending on economic development and public welfare has dampened the spirit of voluntary tax compliance

However, the available data for the recent past shows that the bulk of the new tax filers have filed zero or paltry returns. The trend may become more pronounced as the business activity slows down and credit off-take by the private sector turns negative. Between July 1 and August 2, the private sector recorded a net credit retirement of Rs122.3bn as compared to Rs36.3bn in the same period of last fiscal year.

The PTI’s huge tax efforts have preceded the tax administration reforms and as such the FBR cannot be expected to deliver the unprecedented high annual revenue target. The heavy-handed tax measures have also been met with strong resistance from various segments of the business community.

Over the past several decades the erratic, generally low spending on economic development and public welfare, including the provision of civic facilities, have dampened the spirit of voluntary tax compliance. Corruption and waste have made matters worse.

Data released by the Planning Commission shows that similar to last last year no funds were disbursed in the first month of this fiscal year from the block allocation of Rs126bn for the prime minister’s special programmes. Much of the PTI’s first year performance has been marked by pledges and initiatives which have yet to take-off in a challenging environment.

The disbursed amount for the Public Sector Development Programme in July was Rs15.4bn, down from Rs22.784bn from the comparative period last year. Economic growth continues to suffer from the lack of sufficient spending on social and physical infrastructure. The success in reducing the trade and current account deficits has also come at the cost of a sharp decline in the growth rate.

A tax expert says that the FBR has too much on its plate and some of its responsibilities should be devolved as constitutionally mandated. That would enable the FBR to focus on its core functions and provide a much needed space for the sub-national governments to perform better.

Provincial tax authorities in Sindh complain that in recent years the federal government has encroached on various jurisdictions of the federating units, leading to over-taxation and erosion of provincial tax bases. To avoid double taxation, they say the federal excise duty should be withdrawn or drastically reduced following the transfer of sales tax to the provinces.

There is a component of services involved in imports, insurance and freight which are included in the value of imports and are taxed by the centre.

An independent economist says that the centre has developed revenues outside the National Finance Commission.

Petroleum levy is like the carbon tax. Gas Infrastructure Development Cess accrues completely to Islamabad. He stresses the need for the development of a national integrated tax system where federation draws its strength from unity in diversity.

The authority to tax needs to be dispersed among the three tiers of the government on the basis of rights and responsibilities, merit, efficiency and equity.

Local bodies are denied financial and administrative autonomy granted under article 140-A of the Constitution. Property taxes are collected by the provincial governments instead of local bodies, the space for which is being squeezed by the recent taxation measures by the federation.

In the realm of sub-national taxation, a leading sales tax expert with experience of working in both federal and provincial tax authorities argues that given the nature of the value-added tax system, “the general sales tax (GST) on goods and services should ideally be administered and collected by the same agency.”

In a presentation at a workshop on sub-national taxation, held some time ago, he elaborated that the integration of functions relating to the GST on goods and services will lower the cost of compliance for the taxpayers. The collection expense for the tax administrations will also lower since the proximity of taxpayers with the tax authority contributes to ease of doing business for the taxpayer.

And ambiguities/disputes regarding classification of economic activity as goods and services will wither away. This will result in a fewer litigations. He concludes with the observation that the success of sales tax on services collection by the provinces supports the case that the GST on goods should be devolved to the provinces.

Similarly, the problem of horizontal distribution of NFC’s divisible pool has also become more pronounced following the changes in the provincial population ratios recorded in the 2017 Census and the merger of Federally Administered Tribal Area with Khyber Pukhtunkhwa.

A fair horizontal distribution of resources helps remove disparity in development among the federating units. Currently, 82pc of the NFC pool is shared among the provinces based on their population ratios.

There are multiple dimensions to tax reforms that need to be addressed comprehensively to put government finances on a sound footing.

Published in Dawn, The Business and Finance Weekly, August 26th, 2019