FBR revenue targets for 2024-25

The first two months of 2024-25 have already revealed serious problems with the overall and individual revenue targets for FBR taxes.

Identification of the problems starts with the wrong estimates of the likely level of revenues in 2023-24 from different taxes at the time of presentation of the budget. The actual outcome of fiscal operations reveals that the revenues generated from the taxes were very different, especially in the case of income tax and sales tax. The divergence is shown in Table 1.

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Table 1
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Divergence between Revised Estimates and Actual
Revenues from FBR Taxes in 2024-25
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                                  (Rs in Billion)
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                    R.E                    Actual
                2023-24    2023-24     Difference
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Income Tax         3721     4531              810
Sales Tax          3607     3099             -508
Customs Duty       1324     1104             -220
Excise Duty         600      577              -23
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TOTAL              9252     9311               59
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The big differences have risen because of large errors in the estimation of revenues from the different taxes in the last quarter of 2023-24.

The consequence is that with wrong estimates of the tax collection in 2023-24, the targets set for individual taxes in 2024-25 are very faulty, as shown in Table 2.

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Table 2
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Targeted Growth Rates in FBR taxes in 2024-25
                                          (Rs in Billion)
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                Actual   Target in Budget,    Growth Rate
                 2023-24             2024-25          (%)
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Income Tax        4531                5512           21.5
Sales Tax         3099                4919           58.7
Customs Duty      1104                1591           44.1
Excise Duty        577                 948           63.7
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TOTAL             9311               12970           39.3
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Table 2 reveals the extremely wide divergence in the targeted growth rates of revenues from individual taxes. Clearly, with a concentration of taxation proposals in the income tax in the budget of 2024-25 there is need to raise the targeted growth rate in the income tax substantially, to beyond that of the overall target.

Therefore, the target growth rate for income tax ought to be raised to close to 45%. This will reduce the required growth rate in the three indirect taxes from the target growth rate combined of 56% down to a much more realistic 34%.

The first two months’ outcome in 2024-25 has revealed an even more serious problem. This is with the achievement of the overall revenue target for FBR. It is at Rs 12,970 billion. This implies a growth rate of 39.3% in 2024-25 to achieve this target.

The first estimate of FBR revenues in the two months of July and August 2024 is Rs 1456 billion. Apparently, this represents a shortfall of Rs 98 billion, in relation to the target for these two months of Rs 1554 billion.

However, the likelihood is that the shortfall is larger. There is some under targeting of the growth in revenues. The target set of Rs 1554 billion implies that the required growth rate was 20.5%, in relation to the level achieved in 2023-24. Why was the target growth rate of FBR revenue set at only 20.5%, when the required annual growth rate is 39.3%? Now for the next ten months of 2024-25 the targeted growth rate has gone up further to 42.1%. The shortfall in July and August with respect to the required growth rate is Rs 242 billion. This is much higher than the shortfall reported by the FBR of Rs 98 billion.

There is need to appreciate that despite a heavy budget, with wide-ranging taxation proposals for 2024-25, the annual revenue target for the year of Rs 12,970 billion is looking very infeasible, especially given the likely trends in the economy.

The first problem is with the low likely growth in the import tax base. Almost 40% of FBR revenues have been from this tax base. In the first two months of 2024-25, the growth rate in the rupee value of imports has been only 2.2%. The stability in the value of the rupee and the constraint imposed on non-essential imports, with high tariffs, implies that the target growth rates in the customs duty and the sales tax on imports are very unlikely to be achieved.

What are the available policy options, especially in light of the on-going discussion with the IMF on the Extended Fund Facility? The federal budget for 2024-25 is, more or less, in shambles. Revenues of FBR are likely to show a very large shortfall in relation to the target. SBP profits repatriation to the federal government will also now be reduced by Rs 1250 billion in relation to the original target of Rs 2500 billion.

The combined cash surplus of the four provincial governments is also likely to be lower by at least Rs 500 billion. Overall, a tentative estimate for 2024-25 is of a budget deficit of above 8% of the GDP, as compared to the original estimate of 5.9% of the GDP. The targeted primary surplus of 2% of the GDP could be largely wiped out.

The above budgetary problems and the difficulty in organizing the requisite financing to meet the external financial requirements is beginning to look like the experience of Sri Lanka in getting an IMF program, following its negotiated default. There was a staff agreement with the IMF on 1st September. 2022.

However, the IMF Executive Board approval was delayed till the 21st of March 2023. We sincerely hope that this does not happen in the case of Pakistan. Meanwhile, there is a need to start preparing for a mini-budget.

Copyright Business Recorder, 2024