FBR’s performance and erratic taxation

For greater equity, the government needs to revisit its massive tax expenditure

FBR’s performance and erratic taxation


or the Federal Board of Revenue (FBR), financial year 2021-22 ended on a positive note. It admirably surpassed the revised target of Rs 6.1 trillion by Rs 25 billion. The provisional numbers depict an impressive growth of 29 percent as over the previous fiscal year, when net collection had been Rs 4.7 trillion.

The data shows a significant increase of 32 percent in direct taxes as compared to the last year. During the fiscal year (FY) 2021-22 net collection from income tax stood at Rs 2,278 billion against Rs 1,731 billion in the previous year.

Similarly, sales tax collection reached Rs 2,525 billion as compared to Rs 1,983 billion during the last fiscal year. For the first time, net collection from customs duty touched the Rs 1,000 billion mark, compared to Rs 747 billion in 2020-21. The federal excise duty collection came to Rs 322 billion as compared to Rs 284 billion during the previous year.

Despite political turmoil, the FBR performed extraordinarily well in the last quarter of FY 2022, registering a net collection of Rs 1,741 billion, which is 32 percent higher than the Rs 1,351 billion collected in the last quarter of 2021. During 2022, the FBR also processed refunds of Rs 335 billion, 33 percent higher than Rs 251 billion paid in the previous year.

Out of the Rs 335 billion refunds, Rs 105 billion was issued in the last quarter of financial year 2021-22 — 55 percent higher than the Rs 68 billion issued in the same quarter of the previous fiscal year. This helped taxpayers manage liquidity challenges without seeking expensive loans from banks and other financial institutions.

These numbers, however, cannot be seen in isolation. One of the most important performance criteria is the tax-to-GDP ratio. This provides an index for quantifying capacity and performance of the tax system. With an improved tax-to-GDP ratio, the government can rely on internal resources rather than have to borrow at exorbitant costs. Historically, tax-to-GDP ratio in Pakistan has remained low. There are many factors behind the failure.

Key elements in the weakness are an extremely narrow tax base, negligible contribution by the agriculture sector, rampant tax evasion, lack of documentation, the monstrous size of the informal economy, numerous tax exemptions, concessions, waivers and amnesties, limited use of technology and artificial intelligence, the pervasive corruption and unending litigation.

During the five year (2013-18) rule of the Pakistan Muslim League (Nawaz), the FBR had considerably improved the tax-to-GDP ratio which reached 11.2 percent in 2017-18 (before rebasing). The World Bank also appreciated this achievement. It documented this significant improvement in the overall tax-to-GDP ratio from 9.5 percent in fiscal year 2012-13 to 13 percent in fiscal year 2017-18, attributing the increase in tax revenues to policy measures, reduction in tax exemptions for specific industries and improvements in tax administration at the federal and provincial levels.

However, even this improvement fell short of the 15 percent benchmark that is considered the minimum permissible for developing countries to fund basic governmental functions. The four-year rule of the coalition government led by the Pakistan Tehreek-i-Insaf (PTI) witnessed a significant decrease in tax- to-GDP ratio. It fell to around 8.6 percent for financial year 2021 and will likely recover to about 9.5 percent in the fiscal year 2022 (once the figures are finalised).

The FBR is heavily dependent on prescribed withholding agents to collect taxes on its behalf. Total collection by FBR’s own efforts is not more than 5 percent of the total net revenues. It has miserably failed to modernise itself.

An increase in the tax-to-GDP ratio is considered mandatory by international lenders and donors to bridge deficits and generate fiscal space for spending on infrastructure, education and health and other projects for the benefit of the public at large. The World Bank estimates that Pakistan has substantial potential to increase its tax receipts without imposing new taxes or raising tax rates and using a broad-based, low-rate approach. It refers to tax gap analysis indicating that Pakistan’s tax revenues can be increased significantly to 26 percent of GDP, if tax compliance alone is raised to 75 percent.

For broadening the tax base and encouraging equitable and fair tax treatment, the government needs to revisit its massive tax expenditure. Tax laws currently offer numerous exemptions and reduced rates to select industries and economic activities. These exemptions distort the competitive environment.

According to tax expenditure report of FY 2022, tax revenues forgone on account of exemptions and concessional rates are estimated at Rs 1,482 billion or 2.67 percent of the GDP. Tax expenditures are approximately 25 percent of the total collection in FY 2021-22. The biggest part of tax expenditures is related to sales tax exemptions and concessions, which are estimated to be Rs 740 billion, followed by Rs 400 billion in income tax and Rs 342 billion in custom duties.

In recent years, the FBR has made efforts to increase the share of direct taxes in its collection, yet its overwhelming reliance remains on indirect taxes and collection through withholding agents. This is indicative of the fact that the tax collecting authority has a limited capacity to identify unregistered taxpayers and bring them into the tax net.

The FBR is heavily dependent on prescribed withholding agents to collect taxes on its behalf. Collection by FBR’s own efforts is not more than 5 percent of the net revenues. Unfortunately, the FBR has miserably failed to modernise itself and use latest data analysis techniques to corroborate information received through withholding agents and third-party sources to verify taxpayers’ declarations.

Unless this is done, the FBR will never be able to ascertain the information provided by taxpayers and identify potential taxpayers who remain outside the tax net by not filing tax returns/ statements.

All the federal and provincial tax authorities are entrusted with the responsibility of collection of taxes, duties and charges by integrating and sharing information. There must be coordinated efforts between the federal and provincial governments to enhance the overall tax receipts.

Currently, different indirect and direct taxation laws/ rules/ regulations are applied by the federation and the provinces. This leads to disputes and litigations.

The recent tax measures announced in the federal budget for FY 2022-23 have been strongly criticised by many tax experts, stakeholders and the public at large. For example, the deemed tax on immovable property is nothing but in pith and substance a backdoor imposition of wealth tax.

After the Eighteenth Constitutional Amendment the federal government cannot levy wealth tax, gift tax, estate duty, capital gains tax or inheritance tax on immovable property.

Measures to this effect clearly signal that the government has no respect for the supreme law of the land—the Constitution, which provides that all kinds of taxation on immovable property is in the exclusive domain of the provinces.

Item No 50 of the Federal Legislative List through the 18th Constitutional Amendment, in fact, debars the Federation from levying any kind of tax on immovable property. Therefore, Capital Value Tax (CVT) on immovable property stands transferred to the provinces. If the Federation cannot levy any tax on immovable property, how can it tax “capital gain” arising out of immovable property?

The phrase “not including taxes on immovable property” in Item 50 cannot be read to “include taxes on capital gains on immovable property”. It is obvious that taxes include taxes on income and capital gains.

The National Assembly has intentionally or ignorantly transgressed the constitutional command in taxing immovable property under the garb of income taxation and capital gains. This shows that the provinces have no political will to tax the rich and mighty owners of substantial immovable property in the wake of the 18th Amendment by imposing progressive taxes, namely wealth tax, inheritance tax, gift tax, estate duty, etc, that were once in vogue in Pakistan. While the poor and small farmers are burdened with heavy sales tax on many goods (inputs) directly used for crop production the rich absentee landlords are paying negligible tax on their colossal agricultural incomes.

Abdul Rauf Shakoori is a corporate lawyer based in the USA

Dr Ikramul Haq, Advocate Supreme Court and writer, is adjunct faculty at Lahore University of Management Sciences

FBR’s performance and erratic taxation