Four-month tax target missed

Despite record tax hikes, revenue falls short pressuring officials

ISLAMABAD:

The government has missed its four-month tax collection target by a significant margin of Rs190 billion despite imposing record-high taxes in any single year a shortfall that may necessitate either target adjustments or a mini-budget to bridge the gap.

Against the target of Rs3.632 trillion, the Federal Board of Revenue (FBR) collected Rs3.440 trillion, according to data compiled by the tax authority. The shortfall not only strains government finances but also exposes both government and taxpayers to new risks.

Although total collections were Rs688 billion, or one-fourth, higher than last fiscal year mainly due to substantial payments from income taxes the shortfall remains concerning. This development came a day after government officials sensitised the media to an anticipated revenue shortfall, citing mismatches between assumptions used in setting tax targets and the actual results from the first quarter.

The FBR also missed its monthly target for October, collecting Rs877 billion against a target of Rs980 billion falling short by Rs103 billion—despite delaying legitimate taxpayer refunds. While Rs30 billion in refunds were paid in October last year, the FBR released only Rs22.6 billion this year to inflate collections. In an official statement issued Thursday, the FBR pledged to release Rs32 billion in taxpayer refunds in November.

The FBR received nearly 5.1 million income tax returns by the last filing date. However, enforcement efforts are reportedly lacking, partly due to insufficient political will to enforce compliance among traders.

The FBR needs to sustain a 40% growth pace to meet the annual revenue goal of nearly Rs13 trillion, but first-quarter results are disappointing. Officials fear a cumulative shortfall of Rs325 billion to Rs350 billion in the first half of this fiscal year.

For the current fiscal year, the International Monetary Fund (IMF) has forced a Rs12.97 trillion tax target, compelling the government to introduce additional taxes that predominantly affect the salaried class, as well as every day consumables like medical tests, stationery, vegetables, and infant milk. Despite these efforts, the FBR fell short on sales tax, federal excise duty, and customs duties, with income tax collections as the lone exception. The government has imposed an 18% tax on milk, including infant milk and fat-filled milk, while taxing all stationery items at 10%. An 18% sales tax has been levied on vegetables and fruits imported from Afghanistan. Even daily staples like buns and rusks were not spared and face a 10% GST, while medical tests have also been taxed.

According to the IMF-Pakistan agreement, any revenue shortfall will trigger additional corrective measures. A potential mini-budget could impose further levies on items such as fertiliser, imports, and income of professionals and contractors.

Details show that income tax collection amounted to Rs1.616 trillion in the first four months of this fiscal year Rs386 billion, or 32%, higher than the previous year, and Rs201 billion above the four-month target. Sales tax collections reached Rs1.236 trillion, up by Rs234 billion, or 24%, from last year, although the FBR missed the target by approximately Rs212 billion.

The FBR collected Rs214 billion in federal excise duty, an increase of Rs38 billion, or 21%, over the previous fiscal year. However, the government missed the excise duty target by a wide margin of Rs83 billion, despite doubling excise duties on cement and extending the tax to lubricant oil and real estate sales in the budget.

Customs duty collections reached Rs374 billion, an increase of Rs32 billion, or 10%, but still Rs98 billion short of target. Tax authorities attribute the shortfall to erroneous assumptions made when setting tax targets, though the Ministry of Finance disputes this claim. In a statement issued on Thursday, the finance ministry countered assertions of forecast discrepancies, claiming inaccuracies in the reported assumptions around inflation, large-scale manufacturing (LSM), and imports. It noted that CPI inflation in the first quarter remained at 9.2% just 1% below the forecasted 10.2% arguing that such minor variances are standard given the unpredictable global economy.

The ministry referenced the IMF's recent revision of its inflation forecast for fiscal year 2025, which was adjusted downward from 12.7% to 9.5%, as evidence that deviations in forecasted and actual values are inherent in policy and budgetary planning models. Deviations between actual and forecasted values happen to be a critical component of forecasting models employed for policy and budgetary planning, said the ministry.