When tailor becomes midwife....

It seems that IMF’s praise of Pakistan’s economy one day ago was a little too early. Actual collection of revenues for the year ending on June 30, 2010 remains far behind the target. The actual gap between resources and expenses has widened further indicating clearly that economic managers of the country have lost control of the economy. And this is a clear signal of what is in store for the future.

Our coffers seem to have become the coffers of last Moghal monarchs of India who had no control over their siblings, concubines, territory and the coffers. The English were not very smart traders to have walked in….they had found everything in such a chaos that they thrived on it. And this is no strange phenomenon. When maintainers of law and order are assigned to asses and collect taxes, it happens. Imagine what will happen when a tailor becomes a midwife.

Express Tribune has reported that the Federal Board of Revenue (FBR) has collected Rs1.28 trillion in taxes by June 28 against full-year target of Rs1.38 trillion. According to FBR statistics, it collected Rs1.276 trillion in taxes and is expected to net at least Rs54 billion more by June 30, the last day of the financial year 2009-10.

The FBR’s failure to achieve the target would adversely affect the budget deficit target for the fiscal year. On the assumption of Rs1.38 trillion collection, the government had fixed the budget deficit target at 5.1 per cent of gross domestic product or Rs769 billion. The government had already increased the target by 0.2 per cent from 4.9 per cent due to less-than-expected inflows from the Friends of Democratic Pakistan forum and higher security expenditures.

The tax shortfall of Rs50 billion will mean that the deficit target will be missed by at least 0.3 per cent of GDP and for that the government will have to seek a second waiver from the IMF in less than three months.

According to FBR, it had targeted to save Rs50 billion in taxes by improving the administration but that could not be done. Over Rs200 billion cut in the Public Sector Development Program will result in a shortfall of Rs15 billion in targeted tax collection. A 50 per cent reduction in sales tax on sale of sugar caused a loss of Rs22 billion and the relief package to businessmen and traders of Khyber-Pakhtunkhwa will cost the kitty Rs5 billion.

Break-up of Rs1.276 trillion tax collection showed that over 60 per cent or Rs787 billion was collected as indirect taxes. Among indirect taxes, sales tax collection stood at Rs512 billion, excise duty at Rs118 billion and customs duty at Rs157.1 billion.

The FBR managed to collect Rs512 billion on account of direct taxes, which in its nature is indirect as well, as two-third of it is being collected as withholding tax.

Experts are terming next financial year’s Rs1.667 trillion tax target ‘over-ambitious’ and the FBR is also skeptical about it. FBR Chief said certain developments will make it difficult to achieve even the next year’s target, adding Sindh was adamant on collecting sales tax on services. “If the Sindh government will not give collection rights to the FBR, it will result in a shortfall of over Rs70 billion.” The federal government has imposed sales tax on telecommunications services in excise mode, which is a federal subject. Nonetheless, tax on services is constitutionally a provincial matter.