FBR collection but Rs 110b short of target

Islamabad:

As the government missed its annual tax target by a margin of Rs110 billion, Finance Minister Muhammad Aurangzeb on Sunday defended the income tax exemption he gave on property sales by all serving and retired Pakistani civil and military officials.

The coalition government gave the new income tax exemption despite the fact that the Federal Board of Revenue’s (FBR) tax-to-GDP ratio remained at 8.8% during the financial year just ended. The FBR collected Rs 9.305 trillion during the financial year 2023-24, which ended on Sunday.

The FBR’s annual collection falls short of the target by Rs 110 billion, mainly due to the squeeze on imports and poor collection of sales tax. The FBR has missed collection targets for sales tax, customs duties and federal excise (FED). But it exceeded the income tax collection target by Rs 643 billion.

In his first press conference after the approval of the new budget, the finance minister insisted twice that “the government did not give new exemptions, but only extended the existing ones”.

However, the existing exemption was meant only for the families of martyred civilians and employees of the armed forces, which has now been extended to all people who served in the government or the armed forces since 1947.

The National Assembly on Friday approved that no withholding tax will be levied on the sale or transfer of immovable property from “war injury while serving the Pakistan Armed Forces or the Federal or Provincial Government or ex-servicemen and service personnel of the armed forces or ex-servicemen or service personnel of the Federal and Provincial Government”.

A senior FBR official told The Express Tribune on condition of anonymity that the impact of the new income tax exemption will run into billions of rupees.

Aurangzeb was asked by a senior journalist if he had introduced a new ideology where tax exemptions were given to those who sided with the government but the burden fell on those who had no voice.

Responding to another question, the finance minister said it was the condition of the International Monetary Fund (IMF) to end the tax exemptions, which were Rs 3.9 trillion before the budget was approved. He added that the government was still protecting some of those exemptions.

The finance minister expressed hope that a staff-level agreement could be reached with the IMF in July, but did not give a specific date. “We are moving in the right direction in terms of past actions and structural benchmarks” for the new expanded capital facility (EFF), Aurangzeb said. He added that the size of the Fund’s program has not yet been finalized, but its duration will be three years or more.

The minister said the IMF program would contribute to macroeconomic stability and stressed that it was his and Prime Minister Shehbaz Harif’s hopes that the upcoming IMF program would be the country’s last.

Many believe that the budget for the financial year 2024-25, which comes into effect on Monday (today), would not lead the country to economic stability and prosperity. President Asif Ali Zardari on Sunday approved the government’s Finance Bill 2024 for the new financial year.

The finance minister emphasized the importance of macroeconomic stability, especially considering Pakistan’s dependence on loans. “If we cannot repatriate an investor’s dividends, we will make it difficult to request additional investment,” he said.

FBR Collection

For the just ended financial year 2023-2024, the government had set a tax target of Rs 9.415 trillion and took several measures including increasing the tax burden on the salaried class. However, according to the provisional results, the FBR collected Rs 9.305 trillion – short of the target by Rs 110 billion.

But its collection was Rs 2.1 trillion or 29.9% higher than the previous financial year. Pakistan had budgeted a tax target of Rs 9.4 trillion and the FBR collected Rs 9.3 trillion – a difference, the minister said, was “almost nothing”. “This shows a 30% year-on-year increase in tax revenue,” he added.

For the new financial year, the government has given a tax target of Rs 12.970 trillion to the FBR, which would now require a collection increase of 39.4%.

Income tax collection stood at Rs 4.53 trillion in the financial year just ended, registering a growth rate of 38.5%. The collection was RS 1.25 trillion higher than the previous year and also Rs 643 billion more than the target. Higher bank profits and higher contributions of the salaried class played a decisive role in the collection of income tax.

Sales tax collection reached Rs 3.1 trillion, higher by Rs 505 billion or 20% compared to the previous year. But it was much lower than the current rate of inflation. Sales tax collection was Rs 509 billion short of the FBR’s annual target.

FBR collected Rs 576 billion in FED, which was Rs 206 billion or 56% higher than the previous financial year. The FED collection also fell short of the target by Rs 24 billion as higher duty on liquor and cigarettes had adversely affected the production and sales of these sectors.

Collection due to customs duty ended at Rs 1.104 trillion – an increase of Rs 173 billion or 18.5%. However, collection was significantly below target, which was offset by higher collection in domestic taxes. Duty collection was Rs 220 billion below target.

Aurangzeb emphasized the need to bring retailers into the tax net and regretted that then Finance Minister Miftah Ismail’s 2022 drive to bring retailers into the tax net should not have been disrupted.

The then senior PML-N leader Maryam Nawaz Sharif had asked Miftah Ismail to stop imposing taxes on retailers. “When Miftah proposed this, it should have been implemented into law,” Aurangzeb said, adding that 42,000 retailers had registered with the registration ‘Tajir Dost’.

The government has now imposed a withholding tax of up to 2.5% on supplies made to retailers to collect Rs 95 billion in this new financial year.

Responding to questions about heavy taxation on employees, the finance minister admitted that people are anxious about the additional taxes. “I’m sorry, but to accommodate their concerns, we’re doing everything we can in terms of the process,” he said.

The minister said that the National Fiscal Compact had to be signed with the provinces to transfer some responsibilities, calling it “critical” for the country’s viability. “Right now, we have started discussing with the provinces about the revenue and expenditure and how to transfer it to make the country sustainable,” Aurangzeb said.