FBR Misses Tax Target by Rs356 Billion: Inaccurate Assumptions Blamed
ISLAMABAD: In a significant setback, Prime Minister Shehbaz Sharif’s government has missed its five-month tax target by Rs356 billion, underscoring the challenges of meeting fiscal goals despite aggressive measures and incentives. The Federal Board of Revenue (FBR) provisionally collected Rs4.28 trillion by the end of November, falling short of the Rs4.64 trillion target. This marks a growth of less than 23% against the required 40%.
Monthly Shortfall and Impact
November’s Performance: The FBR missed November’s tax target by Rs166 billion, making it the fourth monthly shortfall in five months. This continued underperformance poses a significant challenge to the government’s fiscal strategy and economic stability.
PM’s Remarks: Prime Minister Sharif highlighted widespread tax evasion in collusion with tax officials but indicated that reforms would take time to show results. Despite appointing Rashid Langrial as the FBR chairman in August and approving a Rs32.5 billion incentive package for tax officials, including new cars and extra salaries, collections have yet to improve significantly.
Utilization of POS Funds
Revised Rules: The government has amended rules allowing the FBR to utilize Point of Sales (POS) funds, initially meant for digital initiatives, to provide perks to officials. This move has raised questions about the effectiveness of resource allocation in enhancing tax collection.
Consultancy Services: Foreign-funded consultancy services from McKinsey, financed by grants from the Bill & Melinda Gates Foundation, have not yielded significant improvements in tax collection efficiency.
IMF Concerns and Mini-Budget Possibility
IMF’s Emergency Talks: Two weeks ago, during unscheduled emergency talks, the International Monetary Fund (IMF) expressed concerns over falling tax revenues, despite the government imposing a record Rs1.5 trillion in new taxes, predominantly burdening the salaried class and corporate sector.
Potential Mini-Budget: The IMF will assess December’s collection data before deciding on a mini-budget, which may target sectors like fertilizer, imports, and contractors’ incomes. The IMF believes direct tax collection is on track, but indirect tax targets for sales tax, federal excise duty, and customs duty face significant challenges.
Revenue Shortfalls and Sectoral Performance
First Half Projections: Authorities initially projected a shortfall of Rs325-350 billion for the first half of the fiscal year, but these estimates have proven optimistic. The FBR needs a 40% growth rate to achieve its annual target of nearly Rs13 trillion, but the first five months’ results are disappointing.
Sales Tax and Excise Duties: For July-November, the FBR missed targets for sales tax, federal excise duty, and customs duties, though it exceeded its income tax goal. Sales tax collections reached Rs1.546 trillion, up 23% from last year but still Rs310 billion below target.
Excise Duty and Customs: Federal excise duty collections rose to Rs277 billion, 25% higher than last year, yet Rs100 billion short of the target. Customs duties totaled Rs473 billion, up 9% year-on-year, but missed the target by Rs137 billion.
Enforcement and Political Will
Enforcement Efforts: The FBR’s enforcement efforts are hampered by a lack of political will to pursue traders aggressively. New Member Operations Dr. Hamid Ateeq Sarwar claimed stringent measures could recover an additional Rs1 trillion.
Tax Impositions: The government imposed an 18% tax on milk and infant milk, 10% on stationery, and 18% on vegetables and fruits imported from Afghanistan. Even everyday items like buns and rusks, as well as medical tests, were subjected to new taxes.
Income Tax Collections
Five-Month Overview: Income tax collections for the first five months totaled Rs1.983 trillion, exceeding the target by Rs190 billion and reflecting a 27% year-on-year increase. However, November’s income tax target fell short by Rs9 billion, with collections amounting to Rs376 billion.
Refunds: The FBR withheld legitimate taxpayer refunds, totaling Rs35 billion in November, slightly lower than Rs36 billion a year earlier. This marked the second consecutive month of reduced refunds compared to the previous year.
Government Measures and Future Outlook
Policy Rate Adjustment: The State Bank of Pakistan (SBP) is expected to cut its policy rate by 1.5 basis points, potentially lowering it to 12% by the end of the current fiscal year.
Fiscal Year 2024-25: Arif Habib Limited Research Head Tahir Abbas predicts that while the inflation rate may rise slightly in December and May 2025, it will remain range-bound below 9% for FY25, with average inflation projected at 7.6%.
Frequently Asked Questions (FAQs)
1. Why did the FBR miss its tax target?
The FBR missed its tax target due to a combination of factors, including inaccurate assumptions used to set the target, lower-than-expected growth in tax revenues, and challenges in enforcement efforts.
2. What measures has the government taken to improve tax collection?
The government has implemented various measures, including appointing a new FBR chairman, approving incentive packages for tax officials, revising rules to utilize POS funds for perks, and hiring foreign-funded consultants. However, these measures have not yet yielded significant improvements.
3. How has the IMF responded to the tax shortfall?
The IMF has expressed concerns over falling tax revenues and may consider recommending a mini-budget targeting specific sectors. The IMF will assess December’s collection data before making a final decision.
4. What are the projections for inflation and policy rates in FY25?
Inflation is expected to remain range-bound below 9% for FY25, with an average rate of 7.6%. The State Bank of Pakistan (SBP) is anticipated to cut its policy rate by 1.5 basis points, potentially lowering it to 12% by the end of the fiscal year.
5. What impact have new taxes had on consumers?
The imposition of new taxes has significantly burdened consumers, with taxes applied to essential goods, including milk, infant milk, stationery, vegetables, fruits, buns, rusks, and medical tests. These measures have contributed to the tax shortfall by affecting consumption patterns.
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