The first month of the ongoing financial year has been encouraging, but it should highlight the danger areas for policymakers, rather than cause too much jubilation. The Federal Board of Revenue must be feeling pleased with itself at having managed a first-month collection of Rs 410 billion against a monthly target of Rs 341.7 billion, but while this will be helpful in meeting the whole-year target of Rs 5.829 trillion, it would be too early to declare a trend. Before either the government or the IMF get their hopes up, it would be necessary to wait for at least a couple more months of such good news. To look on the bright side, the FBR exceeded its July target as well, and then went on to achieve that target.
But exactly how good is the news? The FBR has seen an increase in taxes levied on imports at the import stage. That will not only have an inflationary effect, as importers pass through the higher tax burden, but the increase in those duties, as well as those on other indirect taxes, are regressive. As for progressive taxes, like the income tax, there has been no comparative growth. This indicates that the government has failed to widen the tax base, or ensure that those within the tax net do not make use of loopholes in the law to get away with paying less than their fair share. As the budget contained no measures designed to increase the tax base, or to improve the efficiency of the tax machinery, this was to be expected. The increases have been due to inflation, not increased tax-machinery efficiency. Without properly increasing the tax base for direct taxes, increases in the collection would not be sustainable.
Though the present government has fulfilled none of its thunderous pre-election promises for taxation reform, it has two years left in its tenure, which should allow it to do the needful. The country is hurtling towards a debt crisis like never before, and the only solution is to increase revenue; over the long haul, not just for a month or two.