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The revenue collection target set for FBR in 2022-23 is Rs 7,470 billion, equivalent to 8.9% of the projected GDP, following an agreement with the IMF (International Monetary Fund). The actual collection last year was of Rs 6,126 billion. Therefore, an absolute increase of Rs 1,344 billion is anticipated, implying a growth rate of almost 22%.

However, this is still lower than the outstanding performance by FBR (Federal Board of Revenue) in 2021-22 when an extremely high growth rate was achieved in revenues of almost 29%, the highest ever, and the tax to GDP ratio was increased to 9.2%. It is not clear why a lower tax to GDP ratio is being targeted for in 2022-23 as the ratio is still low by international standards.

The Federal Budget of 2022-23 contains taxation proposals which are expected to yield up to Rs 500 billion. The bulk of proposals are targeted towards income and wealth and they are expected to yield over 90% of the additional revenues.

The instrument that has been used for the first time in an innovative manner is the capital value tax. Super tax and higher income tax will be charged from high income individuals and companies. Within the regime of indirect taxes, the appropriate step taken is the enhancement in the tax rate on cigarettes.

The greater focus on direct taxation is reflected in the variation in the target growth rate among the four federal taxes according to the IMF estimates. Inclusive of the Rs 455 billion from the taxation proposals in the budget, the income tax is expected to show an increase in revenues of almost 42% in 2022-23.

The targeted growth rate for the sales tax is less than half that for the income tax. Consequently, if the targets are reached, then the revenue from the income tax will for the first time exceed the revenue from the sales tax. This will be a truly welcome development and with the rise in the share of income tax revenues in total FBR revenues to above 40%, the tax system will become significantly more progressive.

Customs duty revenues are anticipated to show a small absolute decline of Rs 16 billion. Presumably, this reflects the pressure on containment of imports to substantially reduce the current account deficit in the balance of payments in 2022-23. Excise duty revenues are targeted to rise in a big way following the additional taxation of cigarettes.

The IMF programme includes FBR quarterly revenues in the first three quarters of 2022-23 as part of indicative targets for the ninth, tenth and eleventh reviews of the IMF programme.

The implied growth rates reveal a relatively modest growth rate expectation of 12% in the first quarter, followed by a big jump in the growth rate to 27% in the second quarter and down to 23% in the third quarter. This quarterly variation in the targeted growth rates is inexplicable.

Turning to the performance in the first quarter of 2022-23, the first two months, July and August, witnessed actual revenues exceeding the target by Rs 22 billion. This is due to the expectation of a modest increase as described above.

It is indeed surprising that the FBR should be congratulated for achieving the two-month target, when the actual growth rate achieved is only 10%.

The month of September has a more ambitious growth target of 28%. The finance minister indicated recently that this target has also been met. Overall, the collection has exceeded the quarterly target by Rs 26 billion.

However, one of the indicative targets for the IMF review of the first quarter’s performance was to pay fully the outstanding arrears of Rs 167 billion. Apparently, this has not been done to meet the target and the payment of arrears has been restricted to Rs 84 billion.

This is the point where concern rises about the prospects for FBR revenues in 2022-23. The growth rate required in the first quarter was 17%. Now the growth required in the next three quarters is 23%. There is the likelihood that there will be a shortfall in FBR revenues by the end of 2022-23.

The likelihood of a shortfall has been greatly magnified by the economic damage inflicted by the floods. The Annual Plan for 2022-23 has targeted for a GDP growth rate of 5%, while the IMF has projected a growth rate of 3.5% in 2022-23. Now the growth rate is unlikely to exceed 1% to 1.5%. The continued resort to contractionary policies will not provide the space for a recovery after the floods.

The first warning signal has been provided by the drop in the Quantum Index of Manufacturing (QIM) in July 2022 of 1.4%. The large-scale manufacturing sector is the primary tax base of FBR.

The truly extraordinary drop is in the tobacco industry of 75%. The share in collection of excise duty from this industry is historically as much as 38%. Has the enhancement in the tax rate led to such a severe contraction in the tax base?

Other industries which contribute significantly to indirect tax revenues have also shown declines in output. This includes cement, coke and petroleum products and fabricated metals. The production in these industries has fallen by 34%, 5% and 18%, respectively. Clearly, the prospects for sales tax and excise duty revenues are not promising for 2022-23.

The potential shortfall in FBR revenues is likely to be compounded further by the limited generation of revenues from the petroleum levy in relation to the ambitious target for 2022-23 of Rs 855 billion.

The month of July 22 has witnessed a precipitate decline in sales of motor spirit and HSD oil of 27% and 39%, respectively. The levy is in the nature of a flat rate imposition and, therefore, revenues are probably at least 30% lower than the monthly target.

Overall, the prospect for FBR tax revenues and non-tax revenues has been rendered very difficult by the absence of growth in the economy, worsened further by the huge negative impact of the floods.

The question is whether despite the floods the IMF will invoke the provision in the Program that in the event of a shortfall in revenues the sales tax on petroleum products will be reimposed at an appropriate rate to make up for the shortfall.

Along with the increase in the petroleum levy monthly this could lead to a hike in the prices of petroleum products and run counter to anti-inflationary policies. We hope that enough understanding will be shown by the IMF at this difficult time.

Copyright Business Recorder, 2022

Dr Hafiz A Pasha

The writer is Professor Emeritus at BNU and former Federal Minister


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