Entanglement of tax and non-tax revenue – Journal
Raising non-tax revenue is just as difficult as tax revenue. But then the government has to decide each year how much tax it should collect and how much non-tax revenue it should generate.
Structural flaws in the tax system and in the political system make it difficult to meet fiscal targets. And the lack of capacity to run state-owned enterprises (SOEs) profitably and the absence of good policies hamper the achievement of non-tax revenue targets. The success and failure in achieving the goals also depend, to a large extent, on global and regional economic situations and national circumstances.
That said, the tax and non-tax revenue targets in Pakistan’s upcoming budget appear elusive, but not at all impossible. The government has set its tax revenue target for 2021-2022 at 5,800 billion rupees. But the Federal Board of Revenue (FBR) has made it clear that without applying new policy or administrative measures, actual tax revenues based on macroeconomic projections could only be Rs 5.33. Which means the government plans to collect at least 493 billion rupees (5.83 billion rupees minus 5.33 billion rupees) by introducing new policy or administrative measures, such as not passing on the benefits of lower international oil prices to consumers or authorize tax officials to assist collectors and above to stop delinquencies. Such political and administrative measures have already backfired politically and pursuing them will prove too difficult.
SBP profits could be affected if low interest rates persist
This makes the task of meeting the non-tax revenue target all the more important for the government even if it achieves the base tax revenue target of Rs5.33tr.
The target for collecting non-tax revenue is Rs2.08tr. When we add this amount to the overall tax revenue target of Rs5.83tr, we get the total tax revenue target of Rs7.91tr. The government must have so much money in the national kitty next year against the planned spending of Rs8.49tr. The gap between the two will obviously be bridged by borrowing from banks and non-bank sources.
Pakistani governments have failed over the years to fully exploit the potential of non-tax revenue. The main reason for this failure is that most public enterprises or public enterprises (PSEs) are not managed for professional reasons. Some of them – PIA, Pakistan Steel, Pakistan Railways and the electricity distribution companies – have instead become a drain on the public purse rather than a source of non-tax revenue.
Pakistan had agreed with the International Monetary Fund (IMF) as part of its 2013 lending program – and re-agreed with it under its current lending program – to continue ESP reforms. But not much has happened as a result of the 2013 deal, and the ongoing PES reform plan is also moving at a very slow pace.
Now as part of an initiative supported by the Asian Development Bank (ADB), Pakistan has divided its PES into two main categories – one that is to be privatized and the other whose financial performance will be continuously monitored by the Securities. and Exchange Commission of Pakistan (SECP) and the Ministry of Finance. If this initiative works well, the generation of non-tax revenue from PSE can generate the targeted amount of non-tax revenue.
Successive governments have failed to fully exploit the potential of non-tax revenue. The main reason for this failure is that most public enterprises operate unprofessionally.
For 2021-2022, the target to increase revenues from these PES plus government owned properties is Rs265.8bn. But achieving this goal depends on how aggressively the SECP and the Ministry of Finance push them to improve their financial performance. In 2020-2021, the target set for them slipped by 11%, according to budget forecasts.
Civil administration revenues are another key source of non-tax revenue for the federal government. These include federal license fees, fines imposed for violating federal laws, dividends on federal investments, oil royalties, gas infrastructure development tax, gas infrastructure development surcharge, natural gas and others. And that’s where a silver lining exists. Due to increased computerization and increased use of IT services, the leakage of these revenues is expected to decrease, thereby increasing the discounted amount of revenues. Dividends on federal investments in private sector companies are also expected to remain high due to incentives that Budget 2021-2022 provided to the stock market – the most significant being a reduction in the capital gains tax.
The objective of non-tax revenue in this regard is 684 billion rupees for 2021-2022. This target is lower than the estimated collection of Rs727.5 billion in 2020-2021 and the past trend in non-tax revenue collection in this regard is encouraging, according to budget estimates. We can therefore expect that a significant share of non-tax revenues will be useful in 2021-2022 via federal government revenues.
Profits made by the State Bank of Pakistan (SBP) and the Pakistan Telecommunications Authority (PTA) are also part of non-tax revenue. For 2021-2022, the government estimated a transfer of Rs650bn from SBP profits to the public treasury, against Rs620bn in 2020-21. But if low interest rates persist even for the first or two quarters of 2021-2022, central bank profits could be affected and the annual transfer of Rs650bn could become difficult to materialize. In this scenario, more SBP activity in the interbank forex market to avoid exchange rate volatility should help it to keep its profits high.
The net profits of the PTA may or may not remain high enough over the next fiscal year to increase non-tax revenue. This depends on the pace of payment of existing GSM (Global Mobile Communication System) charges by cell phone companies and the exact timing of the auction of a higher minimum spectrum of next-generation mobile services.
Forex income in this capacity is part of foreign direct investment, but a higher spectrum supply also results in higher fee collection by the PTA.
Posted in Dawn, The Business and Finance Weekly, June 21, 2021