The Federal Board of Revenue (FBR) surpassed the revised targets for fiscal year (FY) 2020-2021 and for the first four months of the current FY (see details below) as elaborated by Chairman of FBR in a seminar held by PRIME Institute in Islamabad on November 17, 2021 where keynote speech was given by Dr. Arthur B. Laffer on flat rate taxation and other issues regarding structural reforms for a prosperous future of Pakistan. In FY 2020-21, for the first time in the history of Pakistan FBR collected Rs 4,734 billion. It was laudable, but fell short of the original target of Rs 4,963 billion assigned when budget for FY 2021 was announced. FBR showed 18% growth over FY 1999-20 and 31% in the current fiscal year. In the remaining eight months, with this extraordinary growth rate, FBR can exceed the target of Rs 5.8 trillion and even cross the figure of Rs 6 trillion — a quantum jump in two years.
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FBR Collection: October 2020 to October 2021
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Rupees in million
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Revenue Head Oct-2020 Oct-2021 Growth
Gross Refund Net Gross Refund Net Absolute %age
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Income Tax 110,305 64 110,241 143,859 1,916 141,943 31,702 28.8
Sales Tax 167,452 15,144 152,308 223,365 22,861 200,503 48,195 31.6
Federal Excise 22,445 0 22,445 25,817 0 25,817 3,372 15.0
Total IR 300,202 15,208 284,994 393,041 24,777 368,263 83,269 29.2
Custom Duty 53,894 1,690 52,204 75,635 3,833 71,802 19,598 37.5
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Grand Total 354,097 16,898 337,199 468,676 28,610 440,066 102,867 30.5
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Revenue Head Up to Oct-2020 Up to Oct-2021 Growth
Gross Refund Net Gross Refund Net Absolute %age
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Income Tax 477,155 4,243 472,912 626,389 2,743 623,646 150,733 23.9
Sales Tax 646,301 59,121 587,180 903,702 74,677 829,024 241,845 42.1
Federal Excise 80,891 0 80,891 96,752 1 96,751 15,860 21.3
Total IR 1,204,347 63,364 1,140,983 1,626,843 77,422 1,549,421 408,438 35.8
Custom Duty 208,989 2,569 206,420 304,682 13,118 291,564 85,144 41.9
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Grand Total 1,413,336 65,933 1,347,402 1,931,525 90,540 1,840,985 493,582 36.6
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Collection vs Target-Oct 2021 Rs. in Million
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Revenue Head Target Collection Diff Achieved %
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Income Tax 136,600 141,943 5,343 103.9
Sales Tax 168,000 200,503 32,503 119.3
Federal Excise 27,000 25,817 (1,183) 95.6
Total IR 331,600 368,263 36,663 111.1
Custom Duty 65,200 71,802 6,602 110.1
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Grand Total 396,800 440,066 43,266 110.9
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Collection vs Target-Up to Oct 2021
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Revenue Head Target Collection Diff Achieved %
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Income Tax 565,900 623,646 57,746 110.2
Sales Tax 692,400 829,024 136,624 119.7
Federal Excise 95,200 96,751 1,551 101.6
Total IR 1,353,500 1,549,421 195,921 114.5
Custom Duty 254,000 291,564 37,564 114.8
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Grand Total 1,607,500 1,840,985 233,485 114.5
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The tax-to-GDP ratio, however, went down to 11.5% under the coalition Government of Pakistan Tehreek-i-Insaf (PTI) in FY 2020-21, according to Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21, available on website of Ministry of Finance (MoF). The FBR, according to Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21, collected taxes of Rs 4,764 billion and all the provinces together of Rs 508 billion only. The MoF (ministry of finance) took figure of direct taxes of Rs 1,731.8 billion, which included contributions for Workers Welfare Fund (WWF) and Workers Profit Participation Fund (WPPF). FBR showed this figure in its YEAR BOOK 2020-21 at Rs 1,726 billion (net) depicting a growth of 13.3%.
FBR is a highly ignored institution. Successive governments, civil and military alike, have failed to provide it with basic logistic facilities, what to speak of modern tools to bridge monstrous tax gap through widening tax base. In this background and amid the sluggish economic activities during most part of FY 2020-21, due to the third deadly Covid-19 wave, surpassing even the difficult third revised target of Rs 4,691 billion by Rs 41 billion (FBR’s Press release) was highly laudable as discussed in detail in Historic collection by FBR, Business Recorder, July 2, 2021.
We have neither a centre of excellence for fiscal research and administration nor trained staff to counter massive tax evasion and avoidance. It is heartening that a committee is now formed to formulate a single IRS code merging all the tax laws administered by Inland Revenue Service, namely, the Income Tax Ordinance, 2001, the Sales Tax Act, 1990, the Federal Excise Act, 2015 and the Sales Tax on Services Ordinance, 2001 for Islamabad Capital Territory (ICT). This will be a milestone provided that simplification of tax codes is made and singly page tax return is devised without declaration of assets and liabilities (see details in Simplification of taxes for growth—III, Business Recorder, April 2, 2021.
The FBR YEAR BOOK 2020-21 mentions as under:
“FBR’s revenue collection has also evinced a remarkable growth during FY 2021. After two lean years FY 2019 and FY 2020 ending with a growth of -0.4 and 4.4 percent, FBR revenue collection recorded a growth of 18.4 percent during FY 2021. In absolute terms, FBR collected Rs 4,734.2 billion, which is Rs 736.8 billion higher than FY 2020. The achievement is historical as it is for the first time that FBR’s collection has surpassed the psychological target of Rs 4 trillion. The revised target has been surpassed by around 1 percent. Sales tax and customs recorded growth of 24.1 percent and 19.3 percent, followed by direct taxes 13.3 percent and FED 11.6 percent”.
In FY 2020-21, FBR collected only Rs 1,692 billion as income tax showing a shrinking share of direct taxes in total collection of Rs 4,764 billion that is merely 3.6% of GDP. It could have been 7% of GDP alone if agricultural income tax from the rich and mighty absentee landlords was collected on their actual incomes and collection by FBR was exclusive of monstrous tax expenditure of Rs 2.3 trillion in FY 2018-19 and 2019-20. The present Chairman FBR has rightly asked provinces to join hands to plug evasion of agricultural income tax by the rich landlords and his efforts must be supported. Taxing “agricultural income” is the sole prerogative of provincial governments under the Constitution of Islamic Republic of Pakistan [“the Constitution’]. All four provinces have laws for imposition of agricultural income tax (AIT) the share of which, in total tax revenue of Rs 4.75 trillion in fiscal year 2019-20 (11.4% of GDP) was only (0.06 % of GDP). The share of agriculture in GDP of Rs 44.7 trillion was around 19%.
Results for the first four months of the current fiscal year showing growth of 28.8% under the head income tax after paying off refunds of Rs. 1916 million confirm the necessary corrective measures. If FBR collects Rs 5,000 billion income tax in next two years, it will be a great leap forward. How to collect this amount is discussed in detail in Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, December 2020) and Tax Reforms in Pakistan: Historic & Critical Review (PIDE, Islamabad).
In sales tax, federal excise and customs duties, due to rampant corruption and inefficiencies, the total collection is much below the actual potential. In FY 2020-21, FBR collected Rs 1,990 billion under the head of sales tax, Rs 277 billion under federal excise duty and Rs 765 billion under customs duties. Total indirect collection of Rs 3,032 billion was pathetically low. It should have been at least Rs 5,000 billion. The total tax collection at national level in FY 2020-21 was Rs 5,272 billion whereas all the provinces together contributed only 1.1 percent of the GDP and the share of agricultural income tax was as low as 0.06 percent of GDP. There is thus an urgent need for fundamental structural reforms to harness the actual tax potential as suggested in the seminar held in Islamabad on November 17, 2021 and endorsed by Chairman FBR in his speech as well as conveyed to Prime Minister of Pakistan by Dr Laffer in a meeting the next day.
The total current expenditures (both federal and provincial consolidated) in FY 2020-21 were Rs 10,400 billion, that is 22% of GDP. A country having tax-to-GDP ratio of 11% incurred cost of debt servicing of 12% of GDP alone in FY 2020-2021. This exposes its national security vulnerability and even bulk of defence expenditure was through borrowed funds.
If existing tax gap is bridged, our revenue collection can reach Rs 10 trillion (direct taxes Rs 7 trillion and indirect Rs 3 trillion) which could change the entire fiscal scene. We would have enough money for current expenditure (must be reduced drastically through lean federal and provincial governments and ending wasteful expenses), development and public welfare outlays—government would be able to retire debts in just a few years and we can easily become a self-reliant economy. However, this dream for Pakistan can never be realised unless all sections of society are taxed according to their actual ability to pay at lower rate with broadest possible tax base. The tax policy must be used as a tool for rapid industrialization and creation of job opportunities rather than funding inefficient governments.
(The writers, lawyers
and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development
Economics (PIDE))
Copyright Business Recorder, 2021
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS), member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). She can be reached at [email protected]
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS) as well as member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). He can be reached at [email protected]
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