The Federal Board of Revenue (FBR), in a press release issued on May 1, claimed to have collected a net revenue of Rs 3,780 billion during the first ten months of the current fiscal year, exceeding “the target of Rs 3,637 billion by more than Rs 143 billion.” The International Monetary Fund (IMF), before releasing the $500 million tranche, agreed to lower the collection target from Rs 4.96 trillion to Rs 4.71 trillion for the current fiscal year.

The FBR needs to collect Rs 937 billion in the remaining two months (Rs 468.7 billion per month). Its performance is praise-worthy, especially in the wake of the third deadly wave of Covid-19 endemic, affecting the economic activities through lockdowns in many parts of the country.

The FBR press release claimed the following:

“The collection represents a growth of about 14 percent over the collection of Rs 3,320 billion during the same period last year. Net collection for the month of April was Rs 384 billion, against a required increase of Rs 242 billion, representing an increase of 57 percent over Rs 240 billion collected in April 2020 and 159 percent of the target. The year-on-year growth of 57 percent is unprecedented particularly as it is realised on the heel of 46 percent in March. These figures would further improve before the close of the day and after book adjustments have been taken into account.”

Gross collections increased from Rs 3,438 billion during this period last year to Rs 3,976 billion, showing an increase of 16 percent. The amount of refunds disbursed was Rs 195 billion compared to Rs 118 billion paid last year, showing an increase of 65 percent. This is reflective of FBR’s resolve to fast-track refunds to prevent liquidity shortages in the industry. The improved revenue performance is a reflection of growing economic activities in the country despite facing the challenge of the third wave of Covid-19. However, in the closing days of April, revenue collection slowed down considerably as more measures to fight Covid were put in place. Collections in May and June would be affected in case fighting pandemic reduces the space for economic activities.

Meanwhile, FBR’s efforts to broaden the tax base are expanding apace. Early signs suggest that these efforts are bearing fruit. As on May 1, income tax returns for tax year 2020 have reached 2.9 million compared to 2.6 million in tax year 2019, showing an increase of 12 percent. The tax deposited with returns was Rs 50.6 billion compared to Rs 33.1 billion, showing an increase of 53 percent.

Pakistan Customs has collected Rs 606 billion under the head of customs duty in the first ten months of FY 2020-21 against the assigned target of Rs 507 billion and exceeded its target by Rs 99 billion which is 20 percent more than the assigned target… It is important to mention that the amount is Rs 88 billion more than customs duty collection in the first 10 months of FY 2019-20, despite the Covid-19 pandemic and has shown a growth of 17 percent as compared to previous financial year, which is quite remarkable”.

The press release does not mention collection of income tax, sales tax and federal excise duty. Out of the total collection for ten months of the current FY, according to a press report, 46 percent came from the taxes levied at import stage. These taxes are collected in advance before actual transactions take place and real income or loss is computed. These have serious impact on businesses that are already facing severe cash flow issues due to the prevailing precarious position of the economy.

This data shows that the main reliance of the FBR remains on indirect taxes. Collection under the head of income tax is Rs 1.36 trillion, showing a growth of only 8 percent over the same period of the last fiscal year. A press report claims that the FBR missed the target of income tax by Rs 42 billion. The collection of nearly 70 percent of indirect taxes (in income tax many withholding taxes are in the nature of indirect taxes) not only adversely affects the salaried class and the poor but is also one of the factors for high inflation that reached 11 percent in April 2021.

The prime minister and his economic team need to be reminded of the famous quote of Milton Friedman that “inflation is taxation without legislation.” If they want to give relief to the masses, they must reduce rates of all taxes.

The prime minister, on one hand, wants to bring down inflation and, on the other, praises growth in regressive taxes. His special assistant on energy admits that through “reducing and rationalising taxes on the fuel used for electricity generation and the consumer bills, the government can avoid a further increase in tariffs”. The press report mentions that the “FBR collects sales tax on the basis of 100 percent billed amount while the actual collection remains around 92 percent.”

All retailers, having commercial electricity connection with their total annual bill up to 1.2 million, pay 5 percent sales tax where the monthly bill amount does not exceed Rs 20,000 and at the rate of 7.5 percent where the monthly bill exceeds this threshold. An additional 3 percent sales tax is levied in case of unregistered retailers. The electricity supplier is bound to deposit this amount without adjusting any input tax.

Sales tax collected through electricity bills as per FBR’s Year Book: 2019-20 was Rs 91.8 billion in the FY 2019-20. It was the second highest after POL at Rs 234.5 billion. The income tax collected with electricity bills for other than companies is not adjustable up to Rs 43,200 under Section 235 of the Income Tax Ordinance, 2001. These indirect taxes through withholding provisions are a big burden on small and medium enterprises (SMEs) but never highlighted in any research or in briefing to the prime minister by members of Economic Advisory Council (EAC) and stalwarts of the party.

According to Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on February 28, was 180 million (84.6 percent teledensity), out of which 95 million are 3G/4G subscribers (44.5 percent penetration), 2 million basic telephony users (1.3 teledensity) and 98 million broadband subscribers (45.6 percent penetration).

At present, the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable 12.5 percent as pre-paid or post-paid mobile users. But there is no recognition of this fact. Though millions are paying advance/ adjustable income tax the nation is labelled as a tax cheat. The number of filers, according to FBR’s press release is 2.9 million. The FBR should register all taxable persons to bridge the tax gap and stop taking 12.5 percent oppressive tax from the poorest of the poor.

The above facts and the following figures of the Pakistan Bureau of Statistics, released on May 1, for April 2021 escaped the attention of the prime minister, members of EAC and leaders of the PTI who attended the meeting on May 2, where the prime minister desired development projects, reduction in inflation and pro-people budget for FY 2021-22:

“Chicken prices shot up almost 100 percent, followed by 81 percent increase in prices of tomatoes and 42 percent for eggs; wheat prices were up by 27 percent over a year.

The cooking oil prices were higher by 19 percent, sugar 18 percent and wheat flour 17 percent.

Food inflation rose higher in urban centres than in the villages. In cities, it increased from 11.5 percent to 15.7 percent, 4.2 percent within a month. In rural areas, it rose from 11.1 percent to 14.1 percent.

Core inflation, calculated by excluding food and energy items, also increased to 7 percent in urban areas — the highest in the past year.”

The prime minister and his economic team need to be reminded of the famous quote of Milton Friedman that “inflation is taxation without legislation.” In the coming budget, if they want to give relief to the masses, they must reduce rates of all taxes, eliminate collection of sales tax and income tax at the import stage and withholding taxes on electricity, internet/mobile use and bank transactions — withholding provisions having no nexus with income. There is a need to increase income tax for equity. There is also a need for broadening the tax base.

The FBR has 7.4 million NTN holders but the compliance percentage is less than 50 percent, including registered companies. Those who paid Rs 1,091.5 billion in withholding taxes in FY 2019-20, conducting transactions worth billions of rupees but not filing returns should immediately be tapped as Finance Minister Shaukat Tarin has told the FBR and the Standing Committee on Finance of National Assembly.

The writers, lawyers and authors, are Adjunct   Faculty at Lahore   University of Management Sciences (LUMS)