Income tax filers drop 35%

The interim government has failed to broaden the tax base, with the number of income tax return filers shrinking 35% to just under 3.9 million compared to last year, amid challenges to achieve monthly tax collection targets.

The caretaker government, whose rule has now effectively ended with the oath of the new National Assembly, also remained unable to tax retailers, neither was it able to suspend the mobile phone connections of non-filers of income tax returns. There was hope that, unlike politicians, technocrats would move against powerful retailers.

Sources told The Express Tribune that, contrary to the hype created around bringing reforms in the Federal Board of Revenue (FBR), the figures of income tax return filers have significantly dropped.

This is the second consecutive month in which the government has missed the monthly tax collection target. However, due to better collection in the previous months, the FBR has somehow managed to achieve the eight-month tax target of Rs5.83 trillion.

The FBR, whose performance remained exceptionally good during the first half of the fiscal year, started facing problems from January this year. This coincided with the interim finance minister’s attempts to restructure the tax machinery despite opposition from some cabinet members and questions over the mandate of the caretakers. The Election Commission of Pakistan also advised the interim government against restructuring the tax machinery.

Shrinking Tax Base

In November last year, Pakistan had shared a plan with the International Monetary Fund (IMF) to increase the number of income tax return filers to 6.5 million by June 2024. The interim government decided to set up district tax offices to expand the base by shifting half of the tax force in the regional tax offices to these new offices.

The Special Investment Facilitation Council (SIFC) had also given the interim government the target to increase the tax base by at least one million during the current fiscal year over last year’s figure. When these targets were set, about 5 million people had filed tax returns for the last year.

As of the end of February, sources said, the total income tax returns received by the FBR stood at just 3.88 million – a number that was 2.1 million or 35% short compared to tax year 2022. The government faced a reduction in the number of filers across all four categories: companies, associations of persons, business individuals, and the salaried class.

However, senior FBR officials hope that the figure will see a sharp jump in March after the publication of the Active Taxpayers List on Monday. All non-filers’ names will be omitted from the new list, which will double the rate of withholding taxes on their transactions.

Details showed that compared to 92,704 associations that filed returns in the previous year, this year the figure has so far remained at 91,135. Similarly, in the last tax year, about 77,600 firms had filed their returns, which have now dropped to less than 72,000, showing a decline of about 8%.

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The major reduction in the number of filers was in the case of business individuals, as about 1.6 million or 43% fewer persons filed their income tax returns this year, said the sources. In the last tax year, about 3.8 million business individuals filed returns, which have now shrunk to 2.2 million.

Similarly, about 22% or 435,000 fewer salaried persons filed their returns this year. As against nearly 2 million salaried persons who filed returns last year, only 1.55 submitted their annual statements of wealth and income this year.

The FBR had sent a proposal to the finance minister to impose tax on retailers, but she left the matter for the next government, according to the sources. Similarly, a committee was also constituted to suspend the mobile phone connections of non-filers, but no order was issued in this regard.

A senior FBR official said that despite the low number of filers, there were about 840,000 new filers this year, which showed the efforts of the tax machinery. Out of this, the big number was business individuals, as 510,000 business persons became return filers for the first time.

Nearly 11 million individuals and companies are registered with the FBR, but less than 7 million did not file their annual returns.

Tax Collection

The FBR has managed to achieve its eight-month tax collection target of Rs5.829 trillion, thanks to better performance in the first six months of the fiscal year. A timely decision by the Supreme Court of Pakistan in the super tax case also helped the FBR get Rs6 billion on the last day, which in return became the reason to achieve the eight-month target.

The FBR, for the second time in this fiscal year, missed the monthly target by a margin of Rs33 billion or 4.6%. Under an arrangement with the IMF, Pakistan may have to kick in a mini-budget if the monthly collection falls short of the target by more than 1%.

The tax authorities attribute the shortfall in the monthly collections to the interim finance minister’s drive to restructure the FBR and the increased number of holidays in February.

The provisional collection figures showed that the FBR has so far collected Rs5.83 trillion, showing an increase of Rs1.34 trillion or 30% over the collection made during the same period of the previous fiscal year.

Till December, the FBR’s management was confident of achieving the Rs9.415 trillion annual target despite a slump in imports. Income tax collection amounted to Rs2.76 trillion, up over Rs800 billion, or 41%, during the first eight months of this fiscal year.

Sales tax and customs duties remained the weakest areas. Sales tax collection reached over Rs2 trillion, which was Rs316 billion, or 19%, more than the last fiscal year. The FBR collected Rs352 billion in FED, and the collection of customs duty stood at Rs710 billion.

Details showed that as against February’s target of Rs714 billion, the FBR could provisionally pool Rs681 billion – a shortfall of Rs33 billion. But there was an increase of Rs162 billion or 32% in collection compared to the same month of the last fiscal year.