The Federal Board of Revenue (FBR) has shown commendable performance by collecting Rs. 6,710 billion in nine months of fiscal year 2023-24, just marginally short of the full-year collection seen in FY23.
The tax collector is on track to clear its targets by the end of June, but it’s only inflation and indirect taxes driving revenue. So, this isn’t good news.
“There is a high risk of hyperinflationary mayhem if advanced tax from corporate revenue is used to generate more taxes. This doesn’t improve revenue rather makes it unhealthy. This is purely inflation and indirect tax. We need more direct taxes,” an Islamabad-based investment banker told ProPakistani.
FBR is collecting direct tax revenue indirectly through advance and withholding taxes. ProPakistani reported earlier that the tax machinery had also obtained advances from companies in the first two months of 2024.
“The tax revenue is below par, with significant funds diverted to low-taxed bank and mutual fund deposits. Understand that revenue growth in Pakistan primarily reflects inflationary pressures and sporadic rate hikes, rather than an expansion of the tax base,” the banker added.
He argued that the State Bank of Pakistan’s failure to lock in low interest rates last month was only part of the problem. “It is also responsible for paying the bills that the federal government racks up. Excessive, wasteful government spending is a perpetual complaint but this time, we may truly be at the breaking point”.
The issue primarily stems from the high-interest rate environment and commodities super cycle which have worsened in the last 3 years. Meanwhile, the government’s borrowing costs have constrained its ability to spend wisely, worsening the fiscal deficit. Between July 2023 and January 2024, the fiscal deficit increased 43 percent YoY to Rs. 2.4 trillion.
High levels of internal and external borrowing cast concerns on the government’s rising debt. In July-January FY24, the total public debt stock of the federal government increased by Rs. 4 trillion or 6.6 percent YoY to Rs. 64.8 trillion.
Remittances have arguably taken the biggest hit in the past year out of all indicators, hampered primarily by currency inflation and the weakened real estate sector. Inflows declined by 6 percent YoY to $2.25 billion in February, but March data is expected to show some growth. Overseas Pakistanis send the bulk of their foreign earnings back home during the month of Ramazan.
Where to start?
We need to prioritize FBR restructuring. Ever since the February 8 General Elections, the plan has hardly been discussed at cabinet meetings. Secondly, directly tax dentists, judges, parking lot managers, grooming salons, agriculture, and real estate. Taxing large agricultural holdings and encouraging innovative agricultural practices can enhance productivity and revenue generation.
Directly deal with property and agriculture like you would any corporate structure to mitigate tax evasion.
In restructuring Pakistan’s tax system, comprehensive and sustained actions are needed. The success of improving the tax net by enhancing direct taxes would help materialize the promise of sustainable economic recovery, compared to short-term fixes often pursued under pressure from the International Monetary Fund to meet revenue goals.
Collect more and more taxes. If people suffer or die if hunger and diseases, never mind.
What is more important, Money or Humans?