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FBR, IMF & revenue targets

Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori

The federal budget for fiscal year (FY) 2022-23 assigned an ambitious target of Rs. 7.470 trillion to the Federal Board of Revenue (FBR) which includes both direct and indirect taxes.  The revenue collection of direct taxes includes Income Tax, Workers Welfare Fund and Capital Value Tax, whereas indirect taxes consist of Sales Tax, Federal Excise Duty, and Customs Duty.

The report, ‘Evidence-based Revenue Forecasting FY 2022-23’, issued by FBR notes that out of total target of Rs. 7.470 trillion, 94 percent (Rs. 6.6 trillion) is estimated to be achieved through a tax buoyancy mechanism and will not require any new policy measure. However, the remaining will require additional policy measures. It is pertinent to be noted that for each tax collection segment e.g. direct taxes, indirect taxes, etc. the automatic growth is estimated by multiplying buoyancy estimates with projected growths of the respective bases, and for fiscal year (FY) 2022-23, GDP was estimated to grow at 4% and Large Scale Manufacturing (LSM) to progress by 7.4%.

The federal budget 2023 introduced a variety of measures for generating additional revenues. Some notable changes include imposition of a super tax on high-earning persons through insertion of section 4C in the Income Tax Ordinance, 2001. It is effective retrospectively for tax year 2022 and onwards, except in the case of banks from tax year 2023 onwards because they remained subjected to tax under section 4B until tax year 2022. Section 4C requires all persons inclusive of companies, individuals and associations of persons etc to pay 1 percent tax on income exceeding Rs. 150 million, but not exceeding Rs. 200 million; 2 percent where income exceeds Rs. 200 million but not Rs. 250 million, 3 percent where income exceeds Rs. 250 million but not Rs. 300 million; and 4 percent on income beyond this threshold.

Similarly, for tax year 2022, the Finance Act 2022 imposed one-time super tax at the rate of 10% in the case of airlines, automobiles, beverages, cement, chemicals, cigarette and tobacco, fertilizer, iron and steel, LNG terminals, oil marketing, oil refining, petroleum and gas exploration and production companies, pharmaceuticals, sugar, and textiles provided their income exceeds Rs. 300 million.

Writ petitions were filed challenging section 4C and its first proviso, wherein the Sindh High Court (SHC) in its detailed judgement [(2023) 127 TAX 112 (H.C. Kar.)] of January 13, 2023 upheld its constitutionality but declared retrospective application for tax year 2022 ultra vires. The judgement of Sindh High Court also declared 10% levy on selected sectors as discriminatory offending Article 25 of Constitution of the Islamic Republic of Pakistan [“the Constitution”]. The Court held: “The operation of this judgment shall remain suspended for a period of sixty days from the date hereof; hence, the securities furnished pursuant to respective ad interim orders shall remain intact for the said period”. It was to facilitate the federal government/FBR to obtain stay from the Supreme Court and non-encashment of bank guarantees deposited with the nazar (treasurer) of the court in compliance of stay order. Till the writing of these lines, there is no news of suspension of the order of SHC by the Supreme Court or filing of leave to appeals by the federal government/FBR.

The Lahore High Court also admitted writs against retrospective application of section 4C and granted stay against furnishing of bank guarantees against the impugned demand till the decision of writs. This interim injunction as per official tweet of FBR was vacated on February 6, 2023 by the Supreme Court with instruction of payment of 50% of the impugned demand within 7 days of its order.          

Another revenue measure was insertion of section 7E in the Income Tax Ordinance, 2001, with effect from tax year 2022 onwards, requiring all persons having more than one capital asset (only immovable property) in Pakistan exceeding market value of Rs. 25 million, to pay 20% tax on deemed rent that is 5% of fair market value of the immovable property. In other words, it is in pith and substance, 1% tax every year on the fair market value of the immovable property [‘Legal fiction, Section 7E & Constitution’, Business Recorder, December 2, 2022]. Fair market value means the rate prescribed by FBR for the said property and where the same is not available, the rates notified by Deputy Collectors of the area for the purpose of registration of immovable property for stamp duty purposes.  

Exclusions from the levy of section 7E include: capital assets owned by a provincial government or a local government; capital assets owned by a local authority, a development authority, builders and developers for land development and construction, subject to the condition that such persons are registered with Directorate General of Designated Non-Financial Businesses and Professions; one capital asset owned by the resident person, self-owned business premises from which rent is received and taxed, self-owned agricultural land where agricultural activity is carried out by the person but does not include farmhouse and land annexed thereto; a capital asset in the first tax year of acquisition where tax under section 236K of the Income Tax Ordinance, 2001 has been paid; and immovable property from which income is chargeable to tax and paid.  In addition to these exclusions from the chargeability under section 7E, the following persons are not taxable in respect of any immoveable property allotted to them:

  • “a Shaheed or dependents of a shaheed belonging to Pakistan Armed Forces;
  • a person or dependents of the person who dies while in the service of Pakistan armed forces or Federal or provincial government;
  • a war wounded person while in service of Pakistan armed forces or Federal or provincial government; and
  • an ex-serviceman and serving personnel of armed forces or ex-employees or serving personnel of Federal and provincial governments, being original allottees of the capital asset duly certified by the allotment authority”.

The above revenue measures and imposition of Capital Value Tax 2022 on foreign assets of a resident individual have elicited debate and criticism, as well as writs under Article 199 of the Constitution in high courts of provinces and Islamabad. The ongoing legal battle has affected the overall tax collection of FBR.

During the first seven months of the current fiscal year, FBR collected Rs. 3965 billion, 18% higher than Rs. 3367 billion collected in the corresponding period of last year. FBR’s Press release states that during the first seven months collection of direct taxes grew at a robust pace and witnessed a growth of 48 percent compared to July 2022 to January 2023, claiming that it is “reflective of Government’s policy of shifting tax burden to wealthy and affluent segments of society”. In an earlier Press release, FBR conceded:  “…certain policy interventions having revenue impact of Rs. 250 billion introduced through Finance Act 2022 could not be implemented as these are subjudice in the courts. Target for the month of December was Rs. 965 billion which could not be achieved due to the aforementioned reason”.

FBR’s January 2023 communiqué celebrates “commendable” revenue collection performance surpassing the monthly target of Rs. 533 billion by Rs. 4 billion “despite the challenging economic situation”. After vacation of interim stay by Supreme Court given by Lahore High Court in the writs challenging 4C and order to pay 50% of demand in 7 days, FBR’s collection in February will improve. FBR nevertheless, must share details of collection shortfall till to date due to continued import restrictions, industrial slowdown, and shrinking GDP growth, 2% projected by World Bank and International Monetary Fund (IMF). These are certainly going to have a negative impact on meeting targets vis-à-vis compliance of ongoing IMF programme.

There is already an agreement with IMF that if FBR fails to meet its monthly collection targets, the government will impose general sales tax (GST) on petroleum/fuel products, withdraw GST exemptions and ensure extra taxation on sugary drinks and cigarettes. As the IMF review is ongoing, it is widely expected that government will take additional tax measures to revive the stalled programme on completion of ninth review.


Huzaima Bukhari & Dr. Ikram Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently co-authored a book, Pakistan Tackling FATF: Challenges and Solutions.   

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