Buoyancy of FBR revenues

The good news is that FBR has achieved extraordinary growth in tax revenues of 41 percent in the first two months of the current financial year. Income tax revenues are estimated to have achieved growth of 29 percent while indirect tax revenues have shown even faster growth of 47 percent.

The favorable outcome is that the target for the first two months has been substantially exceeded. It was Rs 690 billion and actual revenues at Rs 850 billion have been higher by Rs 160 billion. Consequently, the first quarter target of Rs 1200 billion will most likely be met.

There is need to understand why FBR revenues have started performing so well after a somewhat sluggish performance in the last three years of increase cumulatively of only 24 percent. How much is because of higher fiscal effort by FBR and additional taxation in the Federal budget of 2021-22 and how much is due to faster growth in the underlying tax bases of imports and domestic incomes/value-added? This is a relevant question.

There are some unusual features in the proposed fiscal effort in 2021-22, as highlighted by the taxation proposals in the Federal budget for 2021-22. First, sales tax rates have been raised on inputs like crude oil, LNG and ginned cotton which will be largely invoiced away in the next stage of value added. Second, there is greater reliance on administrative measures like extension of the track and trace system and installation of POS equipment in retail outlets. Third, an unusually large number of taxation proposals has been withdrawn during the budget discussion in the Parliament.

Therefore, the fiscal effort by FBR can potentially fetch only an additional Rs 250 billion or so. Normal growth of revenues accompanies the rise in the tax bases during 2021-22. The two primary tax bases are imports and domestic production / incomes. The year 2020-21 saw 53 percent of FBR revenues being collected from imports and the remainder 47 percent from the domestic economy.

The same pattern has been repeated in the first two months of 2021-22. The growth of income tax revenues, mostly collected from incomes generated inside the country have shown a growth rate of 29 percent. As opposed to these indirect taxes have shown much faster growth of 47 percent in these two months. Over 70 percent of indirect tax revenues are collected on imports.

Therefore, the explanation for the very high growth rate of 41 percent in FBR revenues is primarily attributable to the upsurge in the rupee value of imports of as much as 68 percent in the first two months. August saw the highest ever level of imports in a month of $6.5 billion.

The initial performance of FBR needs to be seen in relation to the annual target for 2021-22. The required growth rate over the next ten months has come down to 21 percent after the overachievement in the first two months.

There is more or less equal emphasis in the annual revenue targets on growth of direct and indirect tax revenues. In fact, income tax revenues are expected to show growth in 2021-22 of over 26 percent as compared to 21 percent in the case of indirect taxes. This is targeted to increase the share of direct taxes to 37 percent. However, the share has currently fallen to 30 percent.

The fundamental question is whether the tax base will continue to grow as rapidly in the remaining ten months of 2021-22. Following the COVID-19 attacks in 2020, the rupee value of imports was very low at Rs 612 billion in July 2020 and Rs 586 billion in August 2020. Therefore, there is a ‘low base effect’ on import growth in the first two months of 2021-22.

Imports started picking from December 2020 onwards and reached a peak of Rs 995 billion in June 2021. If imports remain in the monthly range of $6 to $6.5 billion in 2021-22 and the rupee continues to depreciate then the projected growth rate of the import tax base is as follows:

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Imports Growth Rate (%)
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1st Quarter          2021-22        56
2nd Quarter          2021-22        41
3rd Quarter          2021-22        31
4th Quarter          2021-22        23
               Annual               36
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These growth rates are predicated on the assumption that there will be no strong actions against imports, given the likelihood that the current account deficit could go out of control and even exceed 4 percent of the GDP. Beyond the devaluation of the rupee, the time may come during the year when interest rates are raised significantly, and other measures taken to reduce imports.

Therefore, over-reliance on the import tax base for very high growth rate in indirect tax revenues is likely to be a risky strategy. The FBR must give the highest priority to collection from domestic sources including the income tax, domestic sales tax, and excise duties.

Given that there is a need for 21 percent growth in the next 10 months a balanced outcome particularly from the viewpoint of progressivity of the tax system is that attempts are made to achieve at least 21 percent growth in income tax revenues in 2021-22. If indirect taxes yield more than 21 percent growth then this can be seen as a temporary bonus.

There is need, in fact, for FBR revenues to be more than the target of Rs 5829 billion in 2021-22. There is likely to be a very large shortfall in revenues from the Petroleum Levy in 2021-22 of over Rs 450 billion. Therefore, for the overall Federal revenue target to be met FBR will have to collect significantly more than the target for the year.

We hope the new FBR Chairman will succeed in achieving a new record in growth rate of revenues of above 24 percent in 2021-22.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021