Economic Survey: Indirect taxes account for 60pc of FBR’s total collection

ISLAMABAD: The indirect taxes (sales tax, customs duty, and Federal Excise Duty) contribution is over 60 percent of the total Federal Board of Revenue (FBR)’s tax collection during 2021-22.

The Economic Survey (2021-22) released here on Thursday revealed that within the FBR net tax collection, sales tax posted the highest growth of 24.5 percent followed by customs duty 19.4 percent, direct taxes 13.6 per cent, and federal excise duty (FED) 10.6 per cent in FY2021 against 9.4 per cent, negative 8.6 per cent, 5.4 per cent, and 5.2 per cent, respectively in FY2020. The share-wise analysis implies that Pakistan’s tax system is mostly reliant on indirect taxes. For instance, sales tax remained the top revenue-generating source with a 42 per cent share in total tax collection. Whereas direct taxes contributed 36.5 per cent, customs duty 16 per cent, and FED 6 per cent in FBR tax collection.

It implies that indirect taxes, which are regressive in nature, account for the majority of tax revenue in Pakistan, contributing to more than 60 per cent of total FBR tax collection.

Direct taxes, on the other hand, are a more equitable way of increasing revenue because they make the system more progressive by narrowing down the inequality gap. FBR has taken various steps over the last many years to increase the contribution of direct taxes in overall tax collection. The maximum statutory rates of customs duty have been reduced from 125 per cent in FY1988 to currently 20 per cent.

Similarly, the contribution of customs duty in the total collection came down from 45.7 per cent in FY1991 to 15.8 per cent in FY2021. The tax base of FED contracted over the years and now is restricted to only a few commodities like cigarettes, cement, beverages, international travel, etc.

The contribution of FED in the total collection also dropped from around 20 per cent in FY1991 to 5.8 per cent in FY2021. The sales tax was restructured as a tax on consumption, which is in line with the principles of equity and progressivity. Over the period, customs duty slabs have been reduced from 7 to 4 and the highest slab has been brought down from 30 per cent to 20 per cent. Accordingly, customs duty slabs have been reduced to four, i.e., three per cent, 11 per cent, 16 per cent, and 20 per cent, with a ceiling of 20 per cent and a floor of three per cent, with exception of a few goods like vehicles and alcoholic beverages. This significant reduction in tariff slabs has helped reduce the share of indirect taxes.

It added that the FBR is working hard to increase revenue collection and the tax-to-GDP ratio through various tax policies and administrative reforms. In this regard, efforts are being made through maximum taxpayer facilitation, automation, ease of transactions, reducing human interface, minimizing procedural complications, increasing tax awareness, and improving the overall efficiency of the tax machinery.

Copyright Business Recorder, 2022