ISLAMABAD: The Federal Board of Revenue (FBR) has held back over Rs400 billion in tax refunds to reduce the volume of shortfall in annual revenue collection in the outgoing FY23.

The FBR’s decision to withhold tax refunds has sparked significant concerns and drawn a strong reaction from the International Monetary Fund (IMF). In response to the situation, the IMF has proposed implementing a ceiling on the net accumulation of tax refund arrears in both income tax and sales tax.

According to a senior tax official, the IMF officials have allowed some leeway to exceed the ceiling during September and December. These months are crucial as individuals and corporations file their returns with the FBR and claim their refunds.

According to IMF documents, as of the end of May 2023, the amount of income tax refund arrears stands at Rs215bn. Additionally, the arrears for the same period in sales tax amount to Rs183.8bn. These figures shed light on the outstanding tax refunds, raising concerns about the financial impact on taxpayers and the government’s revenue management.

Misses collection target by around Rs522bn in outgoing 2022-23

There is a set limit, known as the “ceiling”, for the total amount of pending tax refunds in both income tax and sales tax. This limit should not be exceeded, except for two specific months: September, where it may surpass the ceiling by Rs32bn, and December, where it may go over by Rs43bn.

However, any extra amount beyond the ceiling in these months will be promptly cleared within the following two months to bring the total amount of pending refunds back within the set limit. This approach aims to manage the refund process efficiently and ensure that all eligible taxpayers receive their refunds promptly.

The documents also define a stock of refunds. It was stated that the stock of tax refund arrears refers to the total value of tax refund claims that haven’t been paid yet by the FBR. This includes refund claims that are still waiting to be settled through various methods like cash refunds, offsetting against taxpayers’ obligations, or government bonds.

The deadline for settling these claims is set after the tax refund request has been submitted to the FBR. This measure is taken to manage and control the amount of outstanding tax refunds owed to taxpayers.

The provisional data show that FBR missed its annual budgetary collection target by almost Rs522bn, or 8.83 per cent, for the FY23 owing to a steep decline in dutiable imports as well as poor general sales tax performance. The revenue collection reached Rs7.118tr until June 27 as against Rs7.64tr projected for FY23.

Published in Dawn, July 23th, 2023