Tax targets for FY25

EDITORIAL: The first quarterly review report on the recently concluded Stand-By Arrangement (SBA) available on the International Monetary Fund website projects Federal Board of Revenue (FBR) target at 9.415 trillion rupees for the current year and 11.005 trillion rupees for the next fiscal year or a rise of 1.59 trillion rupees.

Two observations are critical. First, with the second and final review successfully completed and the last tranche under the SBA disbursed it may be appropriate to wait for the uploading of the associated documents before projecting any tax targets for next fiscal year as they would almost certainly be the outcome of ongoing negotiations premised on the performance of key macroeconomic indicators to date as well as policy measures already taken by the Pakistani authorities given that Pakistan has already requested a longer term loan and the Fund management has publicly accepted the request.

And second, three policy measures taken by the newly elected government to date have so far not been effectively implemented yet and include: (i) the FBR’s Tajir Dost Scheme envisaging the registration of an estimated 3.2 million traders launched a month ago with the deadline 30 April 2024 has so far attracted 75 registrations.

And while negotiations with the government are proceeding and there is optimism that they will be successfully concluded yet such optimism in the past has been misplaced; (ii) massive transfer of officers, even those who recently received an award from Shehbaz Sharif, has not only visibly reduced the morale of FBR staff members, but there is the real possibility of a challenge to this decision in the courts; and (iii) the refusal of the Pakistan Telecommunication Authority to disable SIM cards of over half a million non-filers on the following grounds: “as per applicable legal regulatory regime, the execution of Income Tax General Order (ITGO) issued under section 114-B of Income Tax Ordinance, 2001 does not fall within the jurisdiction of the [PTA].”

The pre-budget reforms therefore have not yet panned out, and therefore it is unclear whether the IMF team will accept the government’s projections, whatever they may be, in terms of tax revenue collections for next fiscal year.

It must be borne in mind that higher tax collections in recent years were possible not only because of increasing the ambit of indirect taxes (standard sales tax was increased from 17 to 18 percent) but also due to high inflation, whose impact on higher collections is significant.

Thus, while measures like the ones implemented by the newly elected government were identified more than a decade ago, yet the threat of strike action coupled with political considerations were stumbling blocks to their implementation. Raising revenue through widening the tax net may therefore require more time, raising awareness amongst the general public, and the implementation of punitive measures against those who flout the laws.

Business Recorder has been consistently proposing that next fiscal year’s budget should reduce reliance on additional tax collections in the sales tax mode, a highly regressive tax whose incidence on the poor is greater than on the rich, as a means to contain the budget deficit target to whatever is agreed with the Fund team; and instead to focus on reducing current non-development expenditure which has been rising exponentially each year reaching a high of 92 percent of total outlay in the current year’s budget.

Further considering that current expenditure is largely funded by borrowing from the domestic commercial sector, thereby crowding out private sector credit, there have been negative repercussions of these budgetary measures on not only raising the government’s indebtedness but also reducing the growth rate.

Or, in other words, the general public is being subjected to an eroding income due to heavy reliance on indirect taxes as well as the government injecting large sums for current expenditure made possible from borrowed funds.

This is an untenable situation and must change; however, initially, the stakeholders, the major recipients of current expenditure, would have to make voluntary sacrifices for the next year or two followed by reforms in the state employees’ pension system, which is at present unsustainably and unfairly funded entirely at the taxpayers’ expense. Privatisation of state-owned entities may have to be deferred the need for reforms till the economic environment, domestically as well as internationally, is conducive for sale.

Copyright Business Recorder, 2024