FBR admits Rs3.6tr sales tax gap

Cites fragmentation of retail sector; traders protest over alleged harassment

ISLAMABAD:

The tax authorities have admitted that the entire current gap of Rs3.6 trillion in sales tax collection cannot be eliminated due to the fragmentation and informality of the retail sector, in an assessment that underscores the challenge of pooling due taxes from all economic sectors.

The assessment has recently been shared with the Prime Minister's Office, indicating that in the retail sector alone, the tax gap was nearly one-tenth, or Rs310 billion.

However, the Federal Board of Revenue (FBR) also claimed it collected Rs874 billion in the last fiscal year through enforcement measures. The Express Tribune had sent questions to the FBR on September 15, requesting a breakup of the Rs874 billion, but the authority did not provide details till the filing of this story.

Sources said the government has been informed that the sales tax gap can only be covered through enforcement at the retail level. But they added that the trade sector is too fragmented and informal to monitor effectively.

Details showed that sales tax collection in the last fiscal year stood at Rs3.9 trillion, leaving behind a gap of Rs3.6 trillion.

The development came amid another FBR-trader row in Lahore, where tax officers allegedly "harassed" a businessman. In response, the President of Lahore Chamber of Commerce and Industry demanded the transfer of a chief commissioner and threatened to resign on October 1 if corrective measures were not taken.

Successive governments have made multiple attempts to bring the retail sector into the tax net. To curb evasion, measures included restricting large purchases and enhancing perks and privileges of the tax machinery. Billions of rupees were spent on incentives such as cars and higher salaries to motivate tax officials. Now, the FBR says it can try to curb losses at the manufacturing stage. But most collection at this stage is done by manufacturers themselves through withholding taxes.

Sources said the FBR informed the PM's Office that collection is best enforced at the manufacturing stage and through digital interventions for visibility over supply chains. The government is also investing in digital invoicing to track all business-to-business payments and cargo. However, a few weeks ago, the FBR accepted cash deposits in banks as digital transactions, undermining its own initiative to tax cash transactions of over Rs200,000 at higher rates.

The FBR's assessment noted the maximum Rs814 billion sales tax gap—equal to one-fourth of the total gap—was in the textile sector. This was followed by Rs384 billion each in petroleum and food products. The gap in chemicals and fertilizer stood at Rs326 billion, while iron and steel accounted for Rs200 billion, electronics Rs193 billion, and beverages Rs101 billion. In the sugar sector, where the gap was only Rs46 billion, the FBR was accused of over-focusing.

Surprising claim

In the last fiscal year, the FBR collected Rs11.74 trillion in taxes, missing its target by Rs1.2 trillion despite imposing record new taxes. Yet, it claimed Rs874 billion was collected due to improved compliance—seven times more than the preceding year. It has not provided a breakup to substantiate the claim. On September 15, The Express Tribune asked the FBR spokesman if the tax machinery had briefed the PM that it collected Rs874 billion through improved compliance in fiscal year 2024-25, compared to Rs108 billion in the preceding year.

The Rs874 billion enforcement collection was more than the Rs805 billion the FBR said it raised through new taxes, which was less than what the government had projected in the June 2024 budget.

A senior FBR official said enforcement efforts lifted the tax-to-GDP ratio from 8.8% last year to 10.24%. He said Pakistan was on track to meet its IMF commitment of raising the revenue-to-GDP ratio to 13.7% by June 2027, with FBR's share rising to 11.5%.

The PM's Office was informed that 12,805 taxpayers have registered and chosen their licensed integrator for integration. These taxpayers account for sales turnover of Rs33.3 trillion—two-thirds of the total Rs51 trillion in fiscal year sales.

The senior official added that taxmen recently took action against a jewellers' shop and moved against furniture shops in Faisalabad. Nearly 100 retail actions have been taken so far, mostly with the help of magistrates and police nationwide, he said.