FBR expects substantial cut in tax target by IMF

Finance ministry denies global lender has agreed to downward revision

ISLAMABAD: The acting chairperson of the Federal Board of Revenue (FBR) believes that the International Monetary Fund (IMF) is likely to reduce the country’s tax collection target by a substantial margin because of their negotiations with the global lender but the finance ministry does not share her optimism.

“The IMF was very satisfied with the FBR’s performance and is likely to substantially bring down the target,” Nausheen Javaid told the Public Accounts Committee, the parliamentary watchdog, on Tuesday.

However, the finance ministry dismissed her claim saying that the IMF had not agreed to reduce target yet.

The acting FBR chief’s statement came as her organisation’s performance is under question for the reduction in income tax returns filed in the three categories of taxpayers in the tax year 2019, which officially closed last week.

Less than 4,900 individuals and companies have paid taxes up to the tune of Rs10 million or more in the year. “The target is likely to go down as a result of IMF negotiations,” she told the committee.

Special Finance Secretary Omar Hamid, who was also present at the committee’s meeting, told The Express Tribune that the IMF had not agreed to reduce the target so far.

The anticipated shortfall between the Rs5.238 trillion downward revised target and collection projections was one of the main reasons behind a two-week delay in reaching a staff-level agreement with the IMF.

The IMF was pushing for a Rs200 billion mini budget but Prime Minister Imran Khan did not agree to that.

The acting chief claimed that the FBR had performed very well in the first seven months of the fiscal year and achieved 96% of the assigned target.

PTI MNA Syed Fakhar Imam, a member of the Public Accounts Committee, questioned the rationale for trying to have the target reduced if the FBR had achieved 96% of it.

The acting chairperson said the FBR had missed the targets because of a steep compression of imports that caused a reduction of Rs307 billion in the collection in seven months.

The FBR has missed the first eight-month revenue collection target by Rs484 billion despite slapping Rs735 billion additional taxes and double-digit inflation. Its collection was higher by 16.5% against the same period last year.

Shrinking tax base

The FBR has faced another setback in the shape of the reduction in the income tax base.

The acting chairperson told the committee in comparison with February last year, there was an increase in the number of income tax returns filers.

However, she admitted that against the tax year 2018, about 337,756 less people and companies had filed their income tax returns -- a reduction of 12% -- this year. She did provide the reasons for the shrinking tax base.
In the tax year 2018, over 2.829 million people and companies had filed their returns – a figure that dropped to 2.5 million this year.
There were over 1 million new income tax filers in 2018. This year only 373,756 new individuals filed their returns, according to the FBR chairperson’s presentation.

This means that 715,633 individuals and companies that filed their returns in the previous tax year did not submit the statements of their income and expenditures this year. The FBR has done nothing about them.
The number of 2.5 million filers -- to be precise – was just 40% of the people and entities registered with the FBR for income tax, reflecting very poor enforcement.

Around 6.2 million people are registered with the FBR and assigned a national tax number (NTN).

Every person earning taxable income of more than Rs400,000 a year, has at least one 1,000cc vehicle or owns a home is under obligation to file their income tax return.

Fresh details available with The Express Tribune show that there has been a reduction in income tax returns filed in the three categories.
As against 2.7 million individuals who filed their returns in 2018, only 2.38 million fulfilled this legal obligation next year – around 338,400 individuals preferring to stay away.

About 540,000 of the total individuals declared their income as nil and did not pay any taxes. Around 3,100 individuals paid taxes up to the Rs10 million or more.

As many as 63,750 associations of persons filed their returns this year, 300 less than last year. Around 25,000 associations declared their income as nil and did not pay any taxes. Around 1,400 associations of persons paid Rs10 million or more in taxes.

Similarly, only 43,150 companies filed their returns in the tax year 2019 -- down by 1,050 companies in 2018.

Around 23,800 companies declared their income as nil and 300 companies paid Rs10 million or more in income tax this year.

There were 118,000 companies that are registered with the Securities and Exchange Commission of Pakistan and only 36.5% of them chose to file their income tax returns with the FBR, raising serious questions about its capabilities.

The committee also inquired about the status of the reforms in the FBR.

“We are part of the tax service and we know that gradual tax reforms will work better than quick reforms,” the acting chief said. “Introducing quick reforms might jeopardise the FBR’s revenues and we cannot retrench people because of the manual operating systems,” she added.

Shabbar Zaidi, the outgoing chairman of the FBR, was in favour of radical reforms in the FBR and wanted to lay off thousands of employees.