Sustained performance in income tax collection, coupled with a better show in previous months, has enabled the Federal Board of Revenue to achieve its seven-month target of Rs5.12 trillion. However, for the first time in this fiscal year, the monthly target was missed by Rs9 billion or 1.3%. Under an arrangement with the International Monetary Fund (IMF), a shortfall of more than 1% may necessitate a mini-budget.
The tax authorities attribute the monthly collection shortfall to the interim finance minister’s drive to restructure the FBR, which they claim shifted focus away from the core goal of meeting tax collection targets.
Provisional collection figures reveal that the FBR has collected Rs5.15 trillion so far, marking a Rs1.15 trillion or 31% increase over the same period in the previous fiscal year.
According to the understanding with the IMF, the FBR must inform the global lender monthly about progress in revenue collection. In case of a revenue shortfall, the FBR is required to implement back-up measures.
Until December, the FBR’s management expressed confidence in achieving the Rs9.415 trillion annual target despite a slump in imports. January witnessed tensions between the tax machinery and the government over the FBR restructuring drive. Although the federal cabinet, on Tuesday, approved the restructuring, the Election Commission of Pakistan immediately halted the process.
In the first seven months (July-January) of the fiscal year, the share of direct taxes increased to 48%, driven by better collection from real estate, commercial banks, and the salaried class. This helped offset losses in other areas, with income tax being the only tax where targets were met.
Income tax collection amounted to Rs2.45 trillion, up by over Rs690 billion or 40% during the first seven months of the current fiscal year. This exceeded the target by about Rs350 billion, compensating for missed sales tax, federal excise, and customs duty targets.
Sales tax and custom duties remained weak areas. Sales tax collection reached over Rs1.76 trillion, which was Rs285 billion or 20% more than the previous fiscal year but Rs240 billion less than the target due to slow growth in tax receipts at the import stage.
The FBR collected Rs306 billion in Federal Excise Duty (FED), reflecting 61% growth, Rs116 billion more than the last fiscal year but Rs5 billion less than the target. Customs duty collection stood below the target by around Rs115 billion, with the FBR receiving Rs628 billion in customs duties, Rs77 billion higher than the previous year.
Read Cabinet, ECP at odds over FBR overhaul
Pakistan committed to the IMF that it would take revenue measures equal to Rs18 billion per month if FBR’s monthly collection falls short of targets. The annual impact of these measures would be Rs216 billion, triggering only in case of revenue shortfalls.
The IMF said that Pakistan remains committed to achieving the primary budget surplus of Rs401 billion during this fiscal year but “this requires some additional effort”. It further stated that “should revenue fall short, the authorities have identified several contingent measures which can be adopted.”
Details show that against January’s target of Rs690 billion, the FBR could provisionally pool Rs681 billion – a shortfall of Rs9 billion. But there was an increase of Rs135 billion or 25% in collection compared to the same month of the last fiscal year.
While the shortfall in monthly collection is not very large, it may not prompt the IMF to call for a mini-budget. Pakistan has already committed to raising the GST rate for textiles and leathers tier-1 from 15% to 18% to collect an additional Rs1 billion per month or Rs12 billion per annum.
The caretaker government has also promised to implement a FED of Rs5 per kilogram on sugar to collect an additional Rs8 billion per month or Rs96 billion annually. It committed to increasing advance income tax on the import of machinery by 1% to collect Rs2 billion per month and increasing advance income tax on the import of raw materials by industries by 0.5% to collect Rs2 billion per month.
Additionally, the government pledged to increase withholding tax on supplies by 1% for Rs1 billion per month revenue, increase withholding tax on services by 1% to collect Rs1.5 billion per month, and increase withholding tax on contracts by 1% to collect an additional Rs1.5 billion per month or Rs18 billion per annum.
Published in The Express Tribune, February 1st2024.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.