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Govt’s ambitious revenue targets raise concerns

ByTeam BB

Jun 19, 2023



KARACHI:

The government’s ambitious revenue collection targets in the budget have raised concerns about their feasibility, given the state of the economy and the need for an expanded tax base.

According to Amreen Soorani, Head of Research at JS Global Capital, the government aims to collect Rs12 trillion, a staggering 38% increase from the previous year. Approximately 60% of the revenue is expected to come from taxes, with a target of Rs9.2 trillion, representing a 28% increase. The remaining revenue will be sourced from non-tax avenues, which are projected to grow by 83%. The collection from income tax, sales tax, and custom duties is expected to remain relatively stable compared to the previous year.

However, concerns are mounting about the government’s ability to meet these ambitious targets, especially with a potential economic slowdown. The budget relies on fiscal expansion and increased investment in development projects to boost tax revenue.

Market observers are particularly worried about possible fiscal slippages, with sales tax collection being a major concern. One potential avenue for increased revenue could be the reintroduction of the Goods and Services Tax (GST) on petroleum products, which has been absent for the past 1.5 years. This move could generate additional revenue without significantly impacting inflation.

The overall success of revenue collection will heavily depend on the level of economic activity, she said. The Federal Board of Revenue (FBR) would need to significantly increase its monthly collection to achieve the targets. While certain measures like the Petroleum Development Levy (PDL) collection and the Finance Supplementary Act may assist, the enforcement of other measures will rely on organic growth in tax collection. The reclassification of Super Tax as Advance Tax may boost initial revenue collection, but potential legal issues could delay its impact.

Critics have voiced their scepticism regarding the feasibility of the government’s revenue targets. Zeeshan Merchant, former President of the Karachi Tax Bar Association told The Express Tribune that, “This year, the government’s aspirational tax collection target is overly ambitious. If they couldn’t meet last year’s target of Rs702 billion, how will they collect Rs1.2 trillion?”

Senator Ishaq Dar said that with 21% inflation a 3.5% growth rate is normal. For above that, he mentioned that there would be struggle. Business activities are dampened, exports have declined, Foreign Direct Investment (FDI) is minimal, debt levels are soaring, and interest on that debt continues to accumulate. These factors raise questions about how the government plans to achieve such an ambitious target.

Experts point out that global economic growth is projected to be between 2% and 2.5% this year, according to the International Monetary Fund (IMF) and World Bank. It raises doubts about how Pakistan can outpace global growth. Additionally, very few businesses earn a 21% profit, suggesting challenges in increasing tax revenue from these sources.

Critics also note the lack of steps to widen the tax net, which will only increase the burden on those who are already paying taxes. Rather than incentivising tax compliance, the government’s approach seems to encourage non-filing by imposing a mere 0.6% withholding tax.

Currently, only 3.8 million individuals out of Pakistan’s population of 240 million are tax filers, representing a meager 1.7%. For sustainable revenue collection, a nation needs at least 5% of its population to pay taxes, equating to approximately 12 million taxpayers. This highlights the significant gap of 8.4 million potential taxpayers. With 66 million bank account holders in the country, there is substantial potential to bring more individuals into the tax net if the government demonstrates the will to do so.

Published in The Express Tribune, June 20th, 2023.

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