According to Federal Board of Revenue (FBR), Sales Tax and Federal Excise Duty collection has fallen sharply in the first 26 days of current financial year. Some kind of slowdown in economic activity is normal in Ramazan but certainly not to the extent the revenue collection figures indicate. Sales tax being the biggest contributor to the revenue stream has fallen by 32.61 percent. In July 2012, it was Rs 53.609 billion; now it's Rs 36.126 billion. Even if one was to add another Rs10 billion, on account of extension of sales tax filing date from July 15 to July 29, it is still short by a huge number. A further segregation shows that sales tax collection on the import stage did not exhibit such a sharp decline: Rs 28.701 billion (July 2012) versus Rs 28.055 billion (July 2013). It is on domestic supplies that one sees the real reason for such a sharp decline: Rs 8.071 billion compared to Rs 24.907 billion. A 67.59 percent decrease despite an increase in the rate from 16 to 17 percent.
Sales tax in GST mode is more or less in VAT mode even though FBR is unable to extend it to the retail stage. But on most items FBR collects sales tax from industry at the factory stage by applying the tax on the retail price. Therefore, the devil which needs to be checked is the adjustment of sales tax paid at the import stage. No one in his right mind would not seek a 17 percent adjustment of sales tax paid at the import stage as input tax. A cursory glance of sales tax data paid at imports vis-à-vis adjustment taken at the domestic stage shows that adjustment taken in sales tax paid on imported raw material exceeds the sales tax paid at the factory gate. How is this possible? Was there no value addition when an intermediary product is converted into a saleable item. Therefore, fraud on the exchequer is committed at import adjustment stage. A detailed sectoral analysis will also clearly explain this menace.
There are two ways to counter this fraud. Either lower the sales tax rate at import stage and disallow adjustment or else link the system of sales tax whereby an audit of balance sheet should show value of letter of credit opened, tax paid at the import stage with value of sales. Linkage of WEBoC with CREST is needed if sales tax is to be collected in GST mode. It should be apparent that domestic sales tax collection has shown a downward trend since May this year in comparison to higher collection in the January to March quarter. So, FBR appeared to on the right track but now has lost its way. If five percent depreciation of the rupee and one percent hike in rate is to be discounted, then the actual sales tax collection at import is also in the negative.
Budget is a sub-set of an economic strategy. Raising rates on a small base instead of broadening the base is wrong. We are now told that there is no institutional arrangement between FBR and Nadra to share the data. This is indeed shocking. It reverses the earlier strategy to go after consumption using a regression model. The problems that need to be surmounted are immense. Having a political heavyweight like Ishaq Dar as Finance Minister is a plus. The confidence of Prime Minister Nawaz Sharif in Dar can only accrue added benefits provided he is allowed to concentrate on economy and is not involved in matters generated by political heat. For example, Dar had to abruptly leave the meeting with exchange companies at SBP on Friday as he had to rush to MQM's 90 headquarter. Dar the chartered accountant can indeed be very useful in improving the tax-to-GDP ratio, although he has been out of the loop for quite some time. Dar's grip on the economy needs to be strengthened. He needs to be more open with economic agents and be in a listening mode before taking decisions to avoid backtracking later. Processed milk was placed in the exempt mode in Finance Bill 2013. It was zero-rated in the Finance Act. Now what will happen during the intervening period between the bill and the act. Similarly, items which are retailed were first put in and later withdrawn from the 3rd schedule. Businesses are caught in the conflicting demands of revenue collection authorities of Sindh and Punjab. Businesses should not feel harassed. A critical mass of taxpayers first needs to be created and the value of tax viewed over a life time not just for today. Processes need to be strengthened to capture transactions into a data base. The data of revenue for the first 26 days of the financial year indicates that revenue collection will not only be far short of the target given in the budget but may be lower than the last fiscal year's. The IMF Board of Directors is to meet on September 4. Pakistan has committed to taking prior actions before the Board meets. That needs to be Dar's top priority. The PM should himself tackle the political negotiations and leave Dar exclusively available for matters and issues that strictly fall within his ministerial jurisdiction because tough business of economy becomes tougher in tough economic times.
Monday, July 29, 2013
Pakistan: The hows and whys of low collection
According to Federal Board of Revenue (FBR), Sales Tax and Federal Excise Duty collection has fallen sharply in the first 26 days of current financial year. Some kind of slowdown in economic activity is normal in Ramazan but certainly not to the extent the revenue collection figures indicate. Sales tax being the biggest contributor to the revenue stream has fallen by 32.61 percent. In July 2012, it was Rs 53.609 billion; now it's Rs 36.126 billion. Even if one was to add another Rs10 billion, on account of extension of sales tax filing date from July 15 to July 29, it is still short by a huge number. A further segregation shows that sales tax collection on the import stage did not exhibit such a sharp decline: Rs 28.701 billion (July 2012) versus Rs 28.055 billion (July 2013). It is on domestic supplies that one sees the real reason for such a sharp decline: Rs 8.071 billion compared to Rs 24.907 billion. A 67.59 percent decrease despite an increase in the rate from 16 to 17 percent.
Sales tax in GST mode is more or less in VAT mode even though FBR is unable to extend it to the retail stage. But on most items FBR collects sales tax from industry at the factory stage by applying the tax on the retail price. Therefore, the devil which needs to be checked is the adjustment of sales tax paid at the import stage. No one in his right mind would not seek a 17 percent adjustment of sales tax paid at the import stage as input tax. A cursory glance of sales tax data paid at imports vis-à-vis adjustment taken at the domestic stage shows that adjustment taken in sales tax paid on imported raw material exceeds the sales tax paid at the factory gate. How is this possible? Was there no value addition when an intermediary product is converted into a saleable item. Therefore, fraud on the exchequer is committed at import adjustment stage. A detailed sectoral analysis will also clearly explain this menace.
There are two ways to counter this fraud. Either lower the sales tax rate at import stage and disallow adjustment or else link the system of sales tax whereby an audit of balance sheet should show value of letter of credit opened, tax paid at the import stage with value of sales. Linkage of WEBoC with CREST is needed if sales tax is to be collected in GST mode. It should be apparent that domestic sales tax collection has shown a downward trend since May this year in comparison to higher collection in the January to March quarter. So, FBR appeared to on the right track but now has lost its way. If five percent depreciation of the rupee and one percent hike in rate is to be discounted, then the actual sales tax collection at import is also in the negative.
Budget is a sub-set of an economic strategy. Raising rates on a small base instead of broadening the base is wrong. We are now told that there is no institutional arrangement between FBR and Nadra to share the data. This is indeed shocking. It reverses the earlier strategy to go after consumption using a regression model. The problems that need to be surmounted are immense. Having a political heavyweight like Ishaq Dar as Finance Minister is a plus. The confidence of Prime Minister Nawaz Sharif in Dar can only accrue added benefits provided he is allowed to concentrate on economy and is not involved in matters generated by political heat. For example, Dar had to abruptly leave the meeting with exchange companies at SBP on Friday as he had to rush to MQM's 90 headquarter. Dar the chartered accountant can indeed be very useful in improving the tax-to-GDP ratio, although he has been out of the loop for quite some time. Dar's grip on the economy needs to be strengthened. He needs to be more open with economic agents and be in a listening mode before taking decisions to avoid backtracking later. Processed milk was placed in the exempt mode in Finance Bill 2013. It was zero-rated in the Finance Act. Now what will happen during the intervening period between the bill and the act. Similarly, items which are retailed were first put in and later withdrawn from the 3rd schedule. Businesses are caught in the conflicting demands of revenue collection authorities of Sindh and Punjab. Businesses should not feel harassed. A critical mass of taxpayers first needs to be created and the value of tax viewed over a life time not just for today. Processes need to be strengthened to capture transactions into a data base. The data of revenue for the first 26 days of the financial year indicates that revenue collection will not only be far short of the target given in the budget but may be lower than the last fiscal year's. The IMF Board of Directors is to meet on September 4. Pakistan has committed to taking prior actions before the Board meets. That needs to be Dar's top priority. The PM should himself tackle the political negotiations and leave Dar exclusively available for matters and issues that strictly fall within his ministerial jurisdiction because tough business of economy becomes tougher in tough economic times.
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