FBR failure

This year during the 10-month period from July to April, the Federal Board of Revenue (FBR) has increased its tax collection by 14 per cent to Rs3.8 trillion. This is compared to Rs3.3tr a year ago. However, this amount is not enough. At the current pace, it will not be possible for the board to meet even the revised tax target of Rs4.7tr for the entire year.

The poor performance of the FBR remains a source of concern for every stakeholder- government, multilateral lenders and the public at large. Year after year, the FBR has failed to meet its tax targets although millions have been spent on restructuring the board and 'reforming' tax administration over the last two decades or so.

Little wonder then that Pakistan's tax-to-GDP ratio remains one of the lowest in the world. But it would be unfair to lay the entire blame on the tax collectors. Successive governments - civil and military - have also contributed to the current state of affairs by postponing tax reforms to broaden the base of taxpayers, as well as allowing exemptions to the wealthy out of political expediency.

As a result, less than 1pc of the population files income tax returns. This is in spite of the official claims that the board has credible data of more than 7m people whose withholding taxes are deducted, but who do not file their returns. They also include over 3m people who, according to the FBR, frequently travel abroad, live in large homes in posh localities and drive luxury cars but do not pay income tax.

The narrow tax base means that the share of direct taxes, especially income tax, would shrink in the total tax revenue, which is worrying given the established relationship between poverty and the high incidence of indirect taxation. Even the bulk of direct taxes is collected 'indirectly' through imposition of withholding and presumptive levies, which shifts the burden of the wealthy onto the poor and middle-income segments of the population, while powerful lobbies such as big farmers and retailers/wholesalers get away without paying their share of taxes.

A narrow tax net also restrains the government's ability to reduce the burden of taxes on the organised sector at the expense of new investment and jobs. Raising the ratio of tax revenues to the size of the economy will remain a pipe dream without meaningful restructuring of the FBR to plug leakages, reduce inefficiencies and eliminate corruption in addition to reforming the entire taxation regime to make it equitable and fair.