Amid poor performance in increasing the tax base, due to a 34% reduction in income tax returns filing, the Federal Board of Revenue (FBR) has managed to achieve its four-month target of Rs2.14 trillion but may face difficulties in keeping the momentum from now onwards.
The poor performance in expanding the tax base compelled Finance Minister Ishaq Dar, for the second time, to further extend the date of filing returns by another month. The new date is now November 30 – a period during which FBR is required to get Rs1.3 million more in returns just to hit the previous years number.
According to FBR officials, against the July-October target of Rs2.143 trillion, the FBR collected Rs2.148 trillion in taxes. Compared to the same period of the last fiscal year, tax collection stood higher by 16%, or Rs305 billion, a pace that was lower than the prevailing inflation rate of 23%. But sufficient enough to keep the tax department on track for the first four months of the fiscal year.
During the first four months of the previous fiscal year, the FBR had collected Rs1.84 trillion in taxes. However, due to the slowdown of the economy, it seems that the FBR may miss its coming months’ tax targets.
The FBR could not achieve its monthly tax target of Rs534 billion, which it missed by Rs22 billion primarily because of a contraction in imports. The monthly target was missed despite achieving a 15% growth rate over Rs445 billion collection last October.
The Inland Revenue Service (IRS) exceeded its July-October target, partially offsetting the impact of low collection by the Customs Department.
The tax machinery has remained unable to broaden the tax base, with the number of income tax return filers remaining lower than 2.5 million – showing a reduction of 34% in the base compared to the previous tax year. For tax year 2021, as many as Rs3.8 million returns had been filed.
Pakistan had ensured the International Monetary Fund (IMF) that it would add a minimum of 700,000 additional taxpayers to the base by broadening the net to encompass traders. Instead, it has fallen short of the previous year’s number by over Rs1.3 million. Effectively, the FBR’s base is two million lower than its own conservative target.
On Monday, the finance minister gave another extension in the date of filing returns, extending it to November 30. Last month, Dar had announced a one-month extension in the statutory deadline for filing income tax returns in the hopes that the number will increase significantly. However, only 650,000 more returns were filed in the month ended.
Despite engaging celebrities to convince people to fulfill their national obligations, the FBR has failed to achieve its desired results. Lacking the determination to go after non-compliant citizens, coupled with the weakness of the ruling alliance, that seems to be struggling to appease people due to its fast-eroding popularity, are some of the key reasons the targets were not met.
The tax authorities need to collect Rs7.470 trillion in the current fiscal year, which requires 21% growth over taxes received in the previous year. In the FY23 budget, the government has imposed over Rs1 trillion in additional taxes on account of petroleum levy, income tax, sales tax and federal excise duty.
Against the annual target of Rs855 billion, the petroleum levy collection has remained less than Rs100 billion during the first three months of the current fiscal year.
Recently, the IMF asked Pakistan to impose Rs600 billion in new taxes to achieve 9.5% of FBR’s tax-to-GDP ratio. The possible shortfall in the coming months may expose the government to more pressure from the IMF.
The collection of customs duty, which in the past was a cornerstone of the FBR’s performance, remained below the target for the fourth consecutive month. Against the four-month target of Rs343 billion, the FBR collected Rs306 billion in custom duties. This was mainly due to the restrictions imposed on imports, as the collection on dutiable imports also dropped by 10% in rupee terms despite an appreciation of the greenback.
The income tax collection in four months amounted to Rs886 billion -up by Rs259 billion or 41%. The sales tax collection increased to Rs854 billion, which is higher by only Rs28 billion or 2.7%.
The share of the taxes at the import stage has dropped below 46% of the total collection, due to an increase in income tax collection and a contraction in imports
The sales tax collection at the domestic stage was Rs298 billion -up by Rs42 billion or 16% - in four months.
Published in The Express Tribune, November 1st, 2022.
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