Myth Of Revenue Growth!

Dr. Ikramul Haq

Is Pakistan taxing itself to death? Fifteen years ago, Pakistanis paid Rs1.7 trillion in taxes. Imagine, last year, Pakistanis paid Rs9.4 trillion in taxes. During the same period, government expenditure skyrocketed from Rs2.7 trillion to Rs25 trillion. The real issue is not about taxes—it is about runaway government losses. High taxes are merely a symptom; excessive government expenditure is the underlying disease. The real challenge lies not in how much Pakistanis pay in taxes but in curbing the government’s wasteful spending. Taxes provide fuel, but government spending determines the direction—Taxation fears: is Pakistan taxing itself to death?, Farrukh Saleem, The News, January 23, 2025

 Inflation-adjusted tax collection in years 2008, 2016 and 2024 was the same despite an increase in the minimum income tax rate from 5% to 15%, increase in rates for the salaried class and raising sales tax rates—Rashid Mahmood Langrial, Chairman Federal Board of Revenue (FBR) in a briefing before National Assembly Standing Committee on Finance, January 21, 2025

 FY2023-24 will be remembered as a landmark year in which federal tax collection reached an unprecedented milestone, surpassing the Rs. 9 trillion mark for the first time in Pakistan’s history. The revised target was achieved at 100.5%, as noted in Table 1. Notably, the target for direct taxes was exceeded by Rs. 809.7 billion, representing a 121.8%—Revenue Division 2024 Year Book, Federal Board of Revenue

The Chairman of Federal Board of Revenue (FBR), Rashid Mahmood Langrial, has once again acknowledged that inflation adjusted tax collection in Pakistan is stagnant since 2008—the year of the so-called era of revival of democracy in Pakistan. His admission to this effect before the Standing Committee on Finance & Revenue of National Assembly on January 21, 2025, while pleading for draconian powers proposed in The Tax Laws (Amendment) Bill, 2024, tabled in the National Assembly by Federal Minister for Finance and Revenue, Muhammad Aurangzeb, on December 18, 2024, deserves appreciation. He may order FBR statistical team to prepare historic data for inflation-adjusted collected as done by Internal Revenue Service of United States etc.

It is worth mentioning that Chairman FBR, while writing forward of Revenue Division 2024 Year Book noted: “The FBR successfully achieved its revised revenue target of Rs. 9,252 billion, surpassing it slightly at 100.5% in FY2023-24. The total revenue collected amounted to Rs. 9,299 billion, marking an increase of Rs. 2.1 trillion from the previous fiscal year and achieving an impressive growth rate of 29.8%”. Before the Standing Committee, he frankly conceded that collection in fiscal year (FY) 2024 after adjustment of inflation was same as in 2008! In FY 2008, however, the total expenditures of government were Rs. 2.27 trillion that reached Rs. 20.475 trillion in FY 2024 against the total revenues of Rs. 10.085 trillion. The total tax collection in FY 2008 was Rs. 1.05 trillion out of which FBR contributed one trillion rupees.

The Chairman FBR needs to check the veracity of figures before drawing the conclusions and making public statements or giving briefings to the Standing Committees of Senate and National Assembly. The original target assigned to FBR at the time of announcement of federal budget for FY 2024 was Rs. 9415 billion. It was later reduced to Rs. 9252 billion without any public debate in the National Assembly that fixed it.

The FBR in its Press release issued on June 29, 2024 claimed that it collected Rs. 9306 billion in FY 2024 against the “target of Rs. 9,252 billion thereby exceeding the yearly target by a significant margin of Rs. 54 billion”. The reality was missing the original target by Rs. 109 billion, which stand further widened as final figure as per Revenue Division 2024 Year Book is now Rs. 9299 billion.  

The Revenuecracy has managed to hoodwink the banker-turned Federal Minister for Finance and Revenue, Senator Muhammad Aurangzeb, as it had been doing with all the finance ministers in the past. In its Press release of July 1, 2024, the FBR claimed: “…Finance Minister praised and congratulated the Team FBR for its exemplary performance in surpassing the revenue collection target for the financial year 2023-24 by collecting Rs. 9311 Billion”.

The figure of Rs. 9311 billion as revenue collection by FBR for FY 2024 is still appearing in Summary of Consolidated Federal and Provincial Fiscal Operations, 2023-24. It needs immediate revision with an inquiry against the FBR officials that communicated exaggerated figure to the Ministry of Finance.  At that time of claim of collection of Rs. 9311 billion, it was highlighted in an article that “the addition of Rs. 5 billion  within one day showed the same old mechanism of hoodwinking the public, international lenders and donors as well as finance minister”. Now, it proved that original budget was missed by Rs. 116 billion. This is not acknowledged at all in Revenue Division 2024 Year Book.

It is worthwhile to mention that FBR never reveals accumulative figure of determined refunds not issued (deliberately blocked is better connotation) during a fiscal year. In other words, to that extent, collection is always overstated—this aspect is highlighted repeatedly in these columns but till date no independent audit is conducted to this effect by the Auditor General of Pakistan, even though it is a constitutional responsibility that was reminded to him in a column published on July 6, 2024. The attention of Federal Tax Ombudsman was also drawn towards it in a recent column published on January 4, 2025. It is not understandable why FBR has yet not revealed publically on its website, the actual amount of refunds due to the taxpayers that are yet not paid.

It is incontrovertible fact that FBR collects overwhelming part of income tax through many pass through withholding taxes, which in essence constitute indirect taxes—collected at the time of clearing of goods and before rendering services. In addition, advance tax pertaining to the next fiscal year are paid in billions by banks etc.

This important institution suffers from multiple shortcomings, like basic logistics, lack of modern tools, no centre of excellence for fiscal research and administration, trained staff to enforce the various anti-avoidance provisions in all the tax laws it administers—Income Tax Ordinance, 2001, Sales Tax Act, 1990, Customs Act, 1969 and Federal Excise Act, 2015.

FBR in the past used to issues data relating to collection of taxes and duties in its annual year books, with analysis highlighting vital areas of achievements, weaknesses and other disclosures to adjudge its performance. As before and since fiscal year 2019-20, even in the latest published Revenue Division 2024 Year Book,  there is no mention about total income tax returns received for tax years 2024, and persons registered under Sales Tax Act, 1990 until June 30, 2024 and how much tax was contributed by various sectors of economy.

The last time such data was officially released was in FBR Year Book 2018-19, showing a total of 2,666,256 income tax returns received for tax year 2018, till the date of finalizing the year book, out of which 43,246 were those of companies. However, in ‘Tax Directory of all Taxpayers for Tax Year 2018’ as well as in ‘Tax Directory Analysis for Tax Year 2018’, total number of income tax returns received till September 14, 2020 for tax year 2018 were shown at 2,852,349.

The incremental increase in tax received from new filers was not revealed despite repeated requests. Such non-disclosures constitute flagrant violation of Article 19A of the Constitution, which says: “Every citizen shall have the right to have access to information in all matters of public importance subject to regulation and reasonable restrictions imposed by law”. The data for tax year 2024 on these two accounts is also not made public till to date.

Pakistani citizens are not seeking any information about any particular taxpayer, which is protected under section 216 of the Income Tax Ordinance, 2001, but they only want to know the contribution of all income tax return filers for each tax year. The citizens also want analysis of contribution made by all categories of taxpayers, namely companies, association of persons (AOPs) and individuals (salaried, non-salaried) as well as sector-wise tax paid by those engaged in business and profession. This data is not available in Revenue Division 2024 Year Book for the consecutive six years now.

As regards much-trumpeted extraordinary performance claiming, “FY2023-24 will be remembered as a landmark year in which federal tax collection reached an unprecedented milestone, surpassing the Rs. 9 trillion mark for the first time in Pakistan’s history”, it is pertinent to mention that out of total net collection of income tax of Rs. 4530.7 billion, the contribution of 15 types of withholding taxes alone was Rs. 2183.8 billion. 

The remaining withholding provisions fetched Rs. 556.275 billion (total Rs. 2740 billion). Advance tax paid was Rs. 1530 billion and with returns Rs. 162 billion. FBR collected only Rs. 126.8 billion (arrears of Rs. 31.8 billion and out of current demand Rs. 95 billion), which is only 2.8% of total income tax collection. The argument by the critics that huge staff of Inland Revenue Service (IRS) contribute negligibly towards total collection with its own efforts is getting strength by every year in the light on numbers contained in Revenue Division 2024 Year Book  and Annual Performance Report (2023-24), discussed in detail in article published on January 11, 2025.

 The claim of IRS that growing share of withholding taxes in the income tax collection is due to enhanced and tight monitoring by the field officers and staff is fallacious too. For the default of withholding taxes, if any substantial demand was created, it should have been reflected in Tables 7 and 11 of Revenue Division 2024 Year Book showing recoveries out of arrears and current demand.

Bifurcation of 15 major contributors under withholding tax regime for FY 2024 and FY 2023 is available in Table 9, Page 10 of Revenue Division 2024 Year Book that is placed below.

 It is pertinent to mention that no bifurcation is given for the remaining as many as 45 withholding tax provisions that were prevalent during the relevant year. A detailed disclosure is essential to ascertain the percentage of pass-through items. For example, income tax withheld at imports that is always passed on to consumers like sales tax, yet it is accounted as direct tax by the FBR! A cursory look of above items confirms that at least 65% of the amount collected under the income tax withholding tax regime was in the nature of indirect tax that was passed on and could not qualify as personal/corporate income tax burden.

The above data belie the claim of FBR at page 6 of Revenue Division 2024 Year Book that share of income tax in total tax collection of FBR was 48.7% and around 4% of GDP [page 8]. After adjustment of withholding taxes in the nature of indirect taxes, it cannot be more that 30% of total tax collection and around 2.8% of GDP. It shows a pathetic performance of FBR!

The FBR must also disclose the quantum of all due income tax refunds not paid until the last day of FY 2024. In the Revenue Division 2024 Year Book only refunds under the head direct taxes actually paid of Rs. 53.13 billion are mentioned which were Rs. 54 billion in FY 2023 showing negative growth. Had all due tax refunds of over Rs. 500 billion under all taxes been subtracted from collection of FBR, total amount would not have been more than Rs. 8.5 trillion negating the claim of crossing Rs. 9 trillion mark in FY 2024.

Figures provided in the Revenue Division 2024 Year Book confirm, overwhelming reliance on indirect taxation [even under the garb of income tax through presumptive/minimum tax regimes on a number of transactions] without evaluating its impact on the economy and life of the poor masses.

It is an irrefutable fact that despite resorting to all kinds of highhandedness, blocking of refunds and unjust withholding taxes, FBR has failed to improve tax-to-GDP ratio. It was pathetically low at 8.7% for FBR collection. FBR was not be able to collect even Rs. 9.4 trillion—the original target for fiscal year 2024.

The State must collect taxes where due and not in advance or from those not chargeable to tax. Provision like section 236 and many others providing withholding of taxes on transactions rather than real incomes reflect a bad tax policy—anti-poor and contradictory to FBR’s claim of increasing direct taxes by diligently taxing the rich and the mighty.

Heavy taxation on electricity bills and a number of food items and those of daily use by the citizens is completely unjustified when tax expenditure remains as high as four trillion in FY 2023 and FY 2024, even more if calculated by including hidden tax benefits to militro-judicial-civil complex.

 Tax credits for senior citizens and special people that were available before the enhancement of tax rates by Finance Act, 2019 should have been restored by the incumbent government in 2024 budget, but it failed to do so. The disproportional and cruel taxation of salaried persons in formal sector is the worst legacy of the apex revenue authority as highlighted in an article.

 The fixed and turnover taxes are ill-advised. Many years back, on query about such unfair taxation, Dr. Ehtisham Ahmad, renowned economist and having rich experience of restructuring tax systems of various countries commented:  “It may also create incentives for larger firms to masquerade as SMEs, or hide value chains by transacting with untraceable SMEs. Much depends on how the GST/VAT is applied. The Mexicans solved the problem by effectively dropping the VAT registration threshold to zero, bringing in complete value chains without the possibility of manipulation by the SMEs or the larger firms using the SMEs (important in textiles for example)”.

On proposal of harmonized sales tax on goods and services, single national tax agency and National Tax Court, Dr. Ehtisham Ahmad responded:

“I strongly support the three issues mentioned, but would add that it is useful to consider a different administration model to that recommended by the IMF which focuses on primarily on large taxpayers. Integrating SMEs into the regular tax regime is critical—also for their uplift, including electronic invoicing and greater efficiency and integration with global value chains. Also, the more accurate and timely information would help to block leakages in the income tax, including by large taxpayers who hide productions, employment and profits by transacting with invisible smaller taxpayers/suppliers—so whole chains disappear (as in textiles). It is a mistake to keep beating up on middle income wage earners…..is in the IMF program. This is regressive at best, since non-wage income remains notoriously difficult to tax. You also need an arms’ length administration with information based audits. And impartial tax courts as you propose”.

Prime Minister Shehbaz Sharif must take personal interest in the above recommendations and also order FBR to pay refund of adjustable tax collected in advance during the last 20 years from millions of mobile users having no or non-taxable income. Tax refunds to the needy will be a great gesture on the State’s part in helping all those earning no income or income below taxable limit in these very difficult days when oppressive taxation, imposed through the Finance Act, 2024, is pushing millions more Pakistanis below the poverty line.

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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.