The taxation pressure on a relatively small pool of taxpayers is increasing. FBR has trumpeted an 86 percent increase in collection in dollar terms over the last three years. However, there has been no significant expansion in the tax net, as neither the number of taxpayers is increasing nor are new sectors being added. The burden is becoming increasingly skewed towards existing taxpayers.
FBR collected Rs13 trillion in the last fiscal year, which is more than Rs500 billion lower than the IMF’s latest projection and almost a trillion short of the previous target. As a share of GDP, it stood at 10.2 percent, slightly lower than last year. The increase in dollar terms is also optically high, as the base in FY23 was low due to sharp currency depreciation. Now it appears higher, while many economists believe the currency is overvalued. That could drag the dollar comparison down once the currency adjusts.
Many businesspersons say that FBR pushed, as usual, for higher advance tax payments in June to come closer to the target. The bigger challenge now is to achieve 17 percent plus growth in FY27 to reach Rs15.3 trillion. The target becomes even stiffer given some reduction in tax rates here and there, while no major new taxes have been imposed and rates have not been increased.
The consequence will be even higher pressure on the existing base. The economy is not gaining momentum and the natural increase in tax collection will be limited. FBR may push harder on recoveries, and that is already becoming visible. Businesses are scared. The revenue strategy to meet the target is missing.
Then there is the continuing dichotomy in tax rates across different types of income. Some incomes are taxed at 1 percent or even lower, while in some cases the rate goes beyond 40 percent. The authorities are offering all kinds of concessions for dollar inflows, whether from IT, freelance income, or remittances. In the effort to chase dollars, the domestic economy continues to suffocate.
There is a limit to how much the domestic formal sector can take. Even after the marginal reduction, large formal sector companies are effectively paying more than 50 percent of their income in taxes. Capital formation remains disincentivized. The minimum tax is making life difficult for certain businesses, especially textiles, and that will hinder growth in goods exports.
There is no effective drive to enhance documentation. The fiscal targets are to be met partly through around Rs1 trillion in grants from provinces. This will push provinces to generate more revenues, and their pressure on sales tax on services is already being felt by some businesses.
Businesses are feeling stressed. They not only have to give up a higher chunk of income in taxes but also have to spend more time dealing with tax matters, which hurts productivity. Overall sentiment is negative, and undue stress continues to keep investment at bay.
Things are unlikely to improve in this fiscal year, as FBR’s target is expected to become a binary IMF condition by December 2026. The pressure is likely to be even higher this year. The government needs to rethink its strategy, as much needed investment is likely to remain low, while savings continue to be absorbed by the government, where spending remains inefficient.