Situationer: Ambitious taxation target: tall order for a low-growth economy

Taxing "all sectors, all sources of income" will take more than just prudent planning.
Published June 12, 2024

IN LINE with the International Monetary Fund’s (IMF) demands, the Shehbaz Sharif government has reportedly set a massive tax target of Rs12.9 trillion for the incoming fiscal year, more than 41 per cent higher than the collection projected for fiscal 2024.

This new tax target will require additional revenue measures of at least Rs2 trillion and, despite a projected 30pc increase in the Federal Board of Revenue’s (FBR) tax collection this year, many consider it to be rather ambitious considering the low-growth, low-inflation economic environment.

The FBR’s capacity to achieve this target remains in doubt, and concerns linger regarding its field formations, which, the grapevine says, have been staffed in recent days with ‘favoured’ individuals in the most coveted positions. Yet, policymakers are confident that they can achieve a “tax miracle” without placing any new burden on the general public, even with the economy projected to grow at 3.6pc and inflation expected to remain at 12pc.

Speaking at the unveiling of the Economic Survey of Pakistan 2023-24, Finance Minister Muhammad Aurangzeb outlined his strategy for meeting the revenue target.

A banker by profession, he highlighted three key areas that he believes the FBR must prioritise: the enforcement of tax laws, enhancement of compliance, and digitalisation of tax collection to plug loopholes and combat corruption within the tax system.

He placed particular emphasis on the importance of “everyone” paying taxes.

Taxing ‘all sectors, all sources of income’ will take more than just prudent planning

The minister himself admitted several concerns regarding the feasibility of such an ambitious revenue target, and though he pointed to the 30pc expected growth in revenue collection this year to justify his position, the minister failed to acknowledge a significant factor: the 25pc inflation recorded in the first 11 months of FY24, which played a crucial role in boosting revenue numbers.

The government ex­­pects inflation to be much lower next year, which will deprive the FBR of an easy boost in revenues. Former Chairman FBR Dr Muhammad Irshad estimated that the FBR may be able to collect 5-6pc more taxes through stricter enforcement, while it needs an additional 21pc to meet the higher target for next year.

The FBR’s revenue projections from tax initiatives have so far mostly proven incorrect and have not yielded the promised results. It is now proposing increasing the tax burden on the salaried class and associations of persons, along with other measures, such as withdrawing tax breaks on hybrid vehicles, taxing solar panels, and increasing the tax rate on local sales in five export-oriented industries.

The authorities are also planning to minimise exemptions for tribal areas, impose a withholding sales tax on iron and copper, and increase excise duty on cement. Customs charges may be lowered on some products and hiked for others, and a fertiliser tax may be in the offing.

However, the question remains whether these tax suggestions will prove sufficient. Another former FBR chairman from the customs group, who wished not to be named, agreed that there is potential for increasing revenue from domestic taxes by improving tax enforcement. However, he said there is a need for political will and a realistic target that can be readily met.

State Minister for Finance and Revenue Ali Pervaiz Malik said on Tuesday his government has no option but to collect taxes from all sectors. Mr Malik said all sources of income will be taxed, and all sectors will be included in the tax net. He also mentioned the need for better documentation, referring to a recent campaign to register retailers and wholesalers.

On the enforcement front, the finance minister may need a new team to oversee his ambitious taxation plans. The government has already removed several top tax officers from the BPS-21 grade due to concerns regarding their integrity, and a list of tax officers from BPS-17 to 20 has also been finalised for the chopping block. It remains to be seen whether the government’s drive to remove dirty tax officers will impede or improve tax collection.

Published in Dawn, June 12th, 2024