FBR’s revenue target

The federal budget for 2023-24 was announced recently. There was the expectation that the fiscal efforts for resource mobilization will be aggressive enough to stabilize the economy and facilitate completion of the ninth review process by the IMF.

The year, 2022-23, is likely to close with FBR revenues at Rs 7200 billion. This will be Rs 270 billion short of the revenue target for the year. The concern is that it implies the fall in the tax-to-GDP ratio significantly from 9.2% of the GDP in 2021-22 to 8.5% of the GDP in 2022-23.

The consequence is that a stage has been reached whereby the net revenue receipts are not able anymore to even finance the costs of debt servicing. Consequently, the magnitude of financial stress can be assessed by the fact that expenditures on defence services, subsidies, grants, costs of civil administration and pensions will now all be financed through borrowing.

There is need to recognize, however, that the level of FBR revenues has been reduced by the withdrawal of the sales tax on petroleum products in 2022-23, which yielded Rs 565 billion in 2021-22. The petroleum levy, a non-tax source of revenue, has replaced the sales tax on these products.

The growth rate achieved by FBR is estimated at 17.2% in 2022-23. If the revenue from sales tax petroleum products is netted out from the revenue in 2021-22, then the growth rate rises to over 29%. This does represent a high growth rate.

Further, the import tax base, which generates 46% of FBR revenues, has been severely restricted in an effort to sharply reduce the current account deficit in the face of low and declining foreign exchange reserves. From July to May, 2022-23, the rupee value of imports has decreased by almost 3%. As such the increase in customs duty and sales tax revenues of 7.4% and 9.4%, respectively, is commendable.

There is another dimension of good performance by the FBR in 2022-23. This is the exceptional growth of 25% in income tax revenues. However, this may be attributed to the rapid increase in nominal terms of incomes in the presence of the exceptionally high rate of inflation of 29% in 2022-23.

The revenue target for 2023-24 for the FBR is Rs 9,200 billion. This will require increase in absolute terms of Rs 2,000 billion and a growth rate of 27.8%. The GDP is projected to increase by 25.2%. Therefore, the tax-to-GDP ratio is projected to rise only marginally in 2023-24.

Ideally, the FBR revenue target for 2023-24 should be fixed at a level such that federal net revenue receipts are adequate to cover the cost of debt servicing, projected at Rs 7,303 billion in 2023-24. Accordingly, this implies a FBR revenue target of close Rs 10,000 billion. However, the Government has opted for a softer target.

The finance minister is his budget speech has stated the following:

‘No new tax is being imposed this year and the government is trying to give maximum relief to the people.’

However, there are some minor taxation proposals, with increase in the income tax in withholding tax and super tax rates. The expected annual revenue is Rs 200 billion. However, this will be partly neutralized by fiscal incentives and subsidies to various sectors. Revenues expected from the mini budget presented in March 2023 were Rs 170 billion. This involved primarily an increase in the sales tax rate from 17% to 18%, which will contribute to significantly raising the sales tax revenues in 2023-24.

There are some big risk factors associated with the FBR revenue target growth rate of almost 28% in 2023-24. First, given the extremely low foreign exchange reserves at the start of the year and with the end of the IMF program, the policy of severe compression of imports is likely to continue. The growth in the import tax base will then hinge on the extent of depreciation in the value of the rupee. If the value of imports in rupees increases slowly then the growth rate of 9% in customs duties and 26% in the sales tax will be difficult to achieve.

Second, the large-scale manufacturing sector is a major source of FBR revenues. This sector is in a state of severe recession. During April 2023, the real value added by the sector has fallen by as much as 21% and over the ten-month period from July to April, the decline has been over 9%. The risk is that if the decline persists, due partly to limited availability of imported raw materials and inputs, then the FBR target will become increasingly out of reach.

Overall, the year, 2023-24, will be characterized by a great deal of uncertainty on many fronts. With elections later this year and the takeover by an elected government, with a five-year mandate, there is the likelihood that Pakistan will go back to the IMF for an Extended Fund Facility of three years.

The IMF may ask for a larger revenue target to be given to the FBR for 2023-24. It has already expressed its disappointment with the present FBR revenue target. If so, this will require presentation of a large mini-budget with a number of proposals hopefully of very progressive taxation, providing thereby for a somewhat larger program of targeted relief.

Copyright Business Recorder, 2023