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EDITORIAL: The Federal Board of Revenue (FBR) collected Rs 2,316 billion in taxes during the first five months of this fiscal year. This denotes an increase of 37 percent over the same period of last year and exceeds the target for this period by 15 percent or Rs 298 billion.

The uptick in the economic activities, high growth in imports and currency depreciation are the prime reasons for this handsome growth. The highest growth is observed in the customs duties (CD), which are up by 45 percent to Rs 383 billion in Jul-Nov. The country’s imports grew 65 percent in Jul-Oct and the currency on average depreciated by 4 percent in the same period. This shows that CD is still shy of imports’ growth.

The second highest growth has been witnessed in GST collection, which is up by 41 percent in 5MFY22 to Rs 1,050 billion. According to media reports, the GST at import stage increased by 80 percent to Rs 733 billion while the GST from domestic sales is a bit lower than last year’s number. The GST on petroleum products remained low in 5MFY22 as compared to the same period of last year. Nonetheless, the higher growth in overall GST collected is attributed to increasing imports that crossed $7 billion – for the first time during November in the history of the country.

Direct taxes are up by 32 percent to Rs 578 billion in Jul-Nov and this depicts a better economic performance that is also yielding higher tax revenues in the shape of withheld taxes, advance tax and also tax deposited with income tax returns by individuals and others except companies.

The collection of direct tax collected at the import stage is Rs 114 billion as advance income tax. Rest is from economic activity within the country. Most of the listed companies made decent profits in 1QFY22 as is evident from their quarterly results. Therefore, the tax contribution, too, is higher.

The IMF (International Monetary Fund) and independent economists expect that with stabilisation policies in place to curb imports, growth in tax revenues could become a casualty because of the historically high reliance on imports for collection of taxes. That is why the Fund has apprehensions about the continuation of growth momentum in tax revenue collected by the FBR. With import compression, the GST and CD growth would definitely decelerate in the second half of this fiscal year. Interest rates have moved up to lower imports that would have an adverse impact on corporate profitability as well but at the same time have a positive impact on profitability of banks. FBR is yet to broaden the tax base in any meaningful manner.

The most recent effort has been to digitize payment systems within the supply chain by compelling companies rather than non-corporates to use digital means when making payments in excess of Rs 250,000 per person in a fiscal year or else risk rejection of expense by the tax authority. This perhaps is the most absurd of measures that FBR has proposed as companies by and large are compliant as far as documentation is concerned; these religiously withhold tax when making payments and electronically report details of payments made by them.

In fact, this provision should have been applied to businesses other than companies who by and large do not report or under-report their earnings. Unless reversed this measure threatens to disrupt business transactions that are primarily made by extending credit and this credit is secured through ‘Post-Dated Cheques’. There are many question marks on the very introduction of this provision by the FBR. It, for example, poses risk of businesses shifting from corporate sector to non-corporate one with a view to circumventing the obstacles threatening their business transactions.

Indeed, it’s a grim prospect as it would cause immense harm to the formal sector of economy. This measure is also astounding as except for a couple of banks who are offering digital solutions on a large-scale, the banking system too is not fully geared to cater to FBR’s wishes. And most important of all, nowhere in the world have bank cheques been declared unacceptable by tax authorities and taxpayers forced to switch to digital.

The Chairman FBR and his team deserve to be complimented for the increase in the overall revenues by two fifths without any meaningful GST collection on petroleum products and widening of the tax base. We hope that they would maintain this trend and also focus on bringing more people in the tax net because after all, there is a limit to which one can extract higher taxes without raising rates and number of taxpayers.

Copyright Business Recorder, 2021

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