EDITORIAL: As expected, the FBR (Federal Board of Revenue) is falling short of ambitious revenues targets in an economy experiencing a painful slowdown. Increase in tax rates on the existing base has further dampened the pace of growth in the formal economy.
Reduced imports, coupled with a stable PKR, have resulted in a decline in revenues generated from imports on which the FBR relies for generating more than half of its collection.
And going forward, the falling interest rates would have an adverse impact on tax collection as almost 40 percent of interest income is taxed. A mini-budget appears to be in the offing.
Reportedly, FBR has proposed a one percentage point increase in all Withholding Tax (WHT) rates from 1st October. This step, if implemented, would be totally against the spirit of widening the tax base and the efforts aimed at increasing effective direct taxes.
Another problem from increasing WHT rate is that there would be less taxes at the end of year, as the collection on WHT could surpass the overall tax liability in most cases. That is effectively tantamount to kicking the proverbial can further down the road.
FBR is more concerned about short-term collection to meet monthly (and quarterly) targets to remain current on the IMF’s (International Monetary Fund’s) targets where the programme is yet to be approved by the Board.
The issue is that almost half the sectors in the economy are not taxed. And there is immense resistance from the powerful circles — be they traders or big landlords — to tax the untaxed sectors while collection from the already taxed sectors is reaching its peak.
The higher tax rates and imposition of taxes on traders and retailers have further slowed the economy, as volumes in various industries are showing a decline. The tax rates on milk and other products have increased and there is a visible decline in the formal sector component within these sectors.
Higher tax rates on salaries have lowered the disposable income and consumers have had to reduce their discretionary spend. The whole objective of tax reforms is to improve collection in direct form. And that should be done by gradually tapering off the higher WHT rates. However, FBR, it appears, feels compelled to plan the exact opposite.
The commitment with the IMF is to impose agriculture tax from 1st January 2025. This has its own challenges. There are numerous instances where the transfer of land titles have not been made to the next of kin who tend to avoid to give women in their family their legal rights, and land title remains in the names of dead ancestors.
How will the FBR collect taxes from the dead? In case of retailers, the government is failing to document the economy as it has reportedly conceded to the retailers’ demand that they would not provide information about assets and bank accounts (apart from the one account where refunds, if any, are to be credited).
Textile players say that FBR is deliberately delaying refunds to show better collection numbers in the short term. Exporters are paying 2-2.5 percent tax on revenues where part of it is refundable if the income tax is less than the collection.
But FBR is delaying it, which is increasing the working capital cost of exporters in days of high real positive interest rates. And the other problem is that at the end of the year, there would be higher refund claims with little tax collection in the last month.
And FBR would be short of the targets for the full year. However, short-term issues are in focus at this point due to the fragile political situation and pressure of targets agreed with the IMF.
The bottom line is that the situation is fluid, and FBR should revisit the drawing board and re-strategize the scheme by enhancing the direct form of tax collection. Otherwise, next year will be even worse for the existing base.
Copyright Business Recorder, 2024