FBR’s Performance: H1 FY2025

Dr. Ikramul Haq

The low degree of accountability of expenditures has made the revenue collection system more vulnerable to frequent restructuring. Placing responsibility to bridge the widening gap between revenue and expenditure on the shoulders of FBR alone will not prove successful—Thieves of State, Rashid Javaid Rana

 

Pakistan needs at least 8% sustainable growth rate for a decade to provide over three million jobs every year to its youth alone, but it is not possible under the existing unfair and anti-business tax system. A fair tax system can easily fetch Rs. 34 trillion at federal level alone changing the entire fiscal scenario.

In these columns and elsewhere, since 1996, a concrete agenda presented, suggesting fundamental reforms in the tax system for accelerated growth of economy and collecting desired amount for development and providing universal entitlements to the entire population. The government can easily retire its debts, making Pakistan a self-reliant nation—recently desired in Uraan Pakistan [Fly Pakistan]. However, this dream cannot be achieved the way Federal Board of Revenue (FBR) is performing.

On paper, FBR is an autonomous body created by an Act of Parliament, Federal Board of Revenue Act of 2007, but in practice, it is handmaid of the rulers of the day and protector of tax evaders and non-filers. History of FBR reforms (sic) reveals that it mercilessly wasted borrowed funds of millions of dollars.

The following are some recent books/papers/reports exposing poor performance of FBR citing the incontrovertible data. These are useful sources for researchers, academicians, taxpayers, tax advisers, tax administrators, journalists and media anchors desirous of knowing how a dysfunctional state institute having unprecedented and unbridled powers, even to enact laws, can destroy the very foundation of an economy and fabric of society:

• Tax Reforms in Pakistan Historic and Critical View
• Towards Flat Low Rate Broad And Predictable Taxes 
• “The Jagga Tax” and Psychodynamics of Tax Morale in Pakistan
• Why does Pakistan tax so little?
• Pakistan’s narrow tax base: Failures so far, challenges ahead
• Broadening of Tax Base: Policy Challenges and the Way Forward

The current Chairman of FBR, according to a news item, on missing half-yearly target with a huge margin of about Rs. 386 billion, victoriously claimed: “The tax-to-GDP ratio increased to 10.8% in the first half, which was better than the IMF’s annual target of 10.6%”. This statement shows the shallowness of understanding the mundane realities of Pakistan’s economy. The real GDP of Pakistan, according to independent experts, is double the size of what the government claims in its official publications. Even the State Bank of Pakistan in an official study of 2010 mentioned the size of informal, undocumented and unreported of economy at 67% of the official GDP. It confirms that FBR is collecting much below the actual tax potential, if we consider informal economy as well.

The incumbent Chairman FBR, while briefing the Senate Standing Committee on Finance on December 24, 2024 about The Tax Laws (Amendment) Bill, 2024 said: Pakistan is a poor country and 90% to 95% people do not fall in the tax ambit. This further shows the level of understanding of head of the federal apex revenue authority on tax base in Pakistan. If this is the case, why advance adjustable income tax is being collected from at least 120 million unique mobile users. The 90/95% of them, as per own admission of Chairman FBR, should be refunded the money extorted by the State in utter disregard of the supreme law of the land—Constitution of Islamic Republic of Pakistan [“the Constitution”].       

In the light of above, can FBR collect the target assigned in the Federal Budget 2024-25 of Rs. 12970 billion from just 5-10% population (taxable) as per claim of its Chairman? While Speaking at a press conference in Islamabad on December 26, 2024, Rashid Mahmood Langrial, in the presence of Federal Minister for Finance and Revenue, Muhammad Aurangzeb, and Minister for State on Finance and Revenue, Ali Pervaiz Malik, made a stunning revelation: “The government is committed to tackling the growing tax gap in Pakistan, which currently stands at Rs7.1 trillion, with Rs2.4 trillion specifically attributed to income tax”.

The Chairman FBR who wants draconian powers through The Tax Laws (Amendment) Bill, 2024 admitted just two days after his briefing before the Senate Standing Committee on Finance that due to inefficiency or lack of capacity of FBR, country’s tax gap is now at monstrous level of Rs. 7.1 trillion. FBR earlier purportedly conducted a tax gap study in 2022 on the direction of Prime Minister, Shehbaz Sharif, showing that country’s tax potential is only Rs. 9 trillion and gap is only Rs. 3 trillion as FBR collected in 2022 around Rs. 6 trillion. The last official tax gap study for 2022 by FBR, available on its website, places it at only at Rs. 1.289 trillion!

One hope the Chairman FBR will share with the masses on FBR’s website basis of his claim of tax gap of Rs. 7.1 trillion and study earlier quoted by the former chairman, Asim Ahmad: “We have found that the total tax potential under jurisdiction of the federal government stands at Rs9,000 billion out of which the FBR collected Rs6,000 billion so the tax gap was assessed at Rs3,000 billion on a per annum basis”. Apparently, FBR cannot scientifically calculate the actual tax potential and tax gap, what to speak of its capability to collect taxes wherever due, brilliantly highlighted by Nasir Jamal here!

The FBR, according to a report, “…had to resort to taking massive advances, mostly of the income of the third quarter (January-March) period, to reach closer to the unrealistic target, according to the sources”. It further claims: “It took about Rs89 billion advances on Monday—the second last day….Most of these advances were taken in Karachi. The Rs277 billion total collection on the last day of the month—Tuesday— was unparalleled. On the last day, the FBR received Rs207 billion in income tax alone”. The last two days extraordinary collection included Rs. around 75 billion from commercial banks in the wake of urgently promulgated Presidential Ordinance on December 29, 2024, Income Tax (Amendment) Ordinance, 2024, raising the income tax rate from 39% to 44% for tax year 2024 in lieu of forgoing 15% extra tax on profits earned from loans given to the government!  

The head-wise collection in the first half-year vis-à-vis targets set, as per report, is as under:

• Gross collection of income tax reported at Rs. 2.78 trillion against the target of Rs. Rs2.524 trillion, registering an excess of Rs. 256 billion.
• Sales tax collection on goods on gross basis is Rs. 1.9 trillion, against the target of Rs. 2.277 trillion—showing shortfall of Rs. 179 billion.
• Customs gross collection at Rs. 598 billion against the target of Rs. 754 billion, registering shortfall of Rs. 156 billion.
• Gross collection under federal excise duty (FED) recorded at Rs. 347 billion, whereas the target was Rs. 454 billion, showing a shortfall of Rs. 107 billion.

Except income tax, where 96% collection is through withholding taxes, advance tax and tax with returns, FBR failed to achieve the given targets. According to a report, FBR claimed that during the first half of the current fiscal year, it paid Rs. 275 billion as refunds as against Rs. 234 billion during the same period of 2023. The taxpayers say total refunds payable, determined not disputed, are to the tune of about Rs. 800 billion—FBR denies it, but does not give the exact figures on its website. We need an independent committee under Federal Tax Ombudsman (FTO) that should investigate and settle this controversy once and for all. The real net collection then can only be determined to gauge the true performance of FBR.

The World Bank in an appraisal paper related to Pakistan Raises Revenue (PRR) has termed “vested interests lobbying for tax exemptions, internal tensions and wariness of change among the FBR staff, and potential disputes affecting provinces’ readiness to collaborate with the FBR as high-risk factors” for tax reforms.

The important question for the remaining six months of the current fiscal year is: Does the Government possess any workable plan to bridge the huge fiscal deficit of Rs. 8500 billion, as per budget and also forecast by the International Monetary Fund (IMF) for FY 2025? Will the actions proposed by the World Bank under its US$ 400 million ‘Pakistan Raises Revenue Project’ or conditions imposed by the IMF help meet the daunting challenge of debt servicing that has budgeted at Rs. 9775 billion?

If FBR does collect Rs. 12 trillion, 57.5% will go to provinces and federal government will be left with no more than Rs. 5000 billion (customs collection is not part of NFC Award). One head, debt servicing alone is more than what federal government retains as taxes after transferring shares of provinces in terms of 7th National Finance Commission (NFC) Award. What is the remedy? Not destroying the ailing economy with more regressive/oppressive taxes, but to reduce monstrous wasteful expenditure—increased many a times and now current account allocation alone to go to 22% of GDP exceeding budget projections!

This is where the actual fault lies, as pointed out rightly in Thieves of State by Rashid Javaid Rana, “The vigorous campaign to reform revenue collection may not prove fruitful without understanding prevailing symptoms such as the lack of societal tax culture, absence of equitable and transparent government spending…..Placing responsibility to bridge the widening gap between revenue and expenditure on the shoulders of FBR alone will not prove successful.”  

Perpetual failure of FBR to meet assigned targets is not something new. Every year FBR fails to collect downward revised target what to speak of originally assigned one in the budget estimates because the tax evaders and avoiders are the favourite children of political masters—lip service against corruption that includes tax evasion but we are not ready to recognize it is an ugly joke.

The ever-widening fiscal deficit, resulting in more borrowing and taking away a large part of the budget for debt servicing, cannot be reduced until (i) we curtail unproductive/ wasteful expenses by 30% (ii) increase non-tax revenues by leasing out valuable state lands and assets e.g. GORs and palatial government houses etc. through public auction and for specific activities to generate employment and boost economic activity and (iii) make taxes at all levels—federal, provincial and local—simple, low rate and broad-based, and payable with ease to one federalized agency.

Successive governments have failed to end harmful tax policies, refrained from giving amnesties and immunities to ‘Thieves of State’ and reduce wasteful expenses. No serious effort has been made by any government to broaden the tax base through lowering of rates, effective enforcement and reduction of unproductive/wasteful expenditures.

Unfortunately, until today, FBR has been claiming big success in broadening the tax base, but the reality is that it has even failed to regain its lost return filers paying tax on near to real incomes. There was a time when FBR used to get over four million returns showing substantial amount of tax and tax-to-GDP ratio reached 13%! FBR stalwarts need soul-searching to find out what has gone wrong and where these taxpayers have vanished. Many writers have been giving warning about the devastating effects of high indirect taxation and excessive burden of withholding taxes. Yet the government insisted on these even on low income levels and the result is now before us, there is a tax defiance on mass scale—it is evident from increasing numbers of NIL/loss filers, decreasing number of filers who are paying actual due taxes, and massive tax evasion in withholding tax regime.

The most painful aspect of Pakistan’s cruel tax system is that on the one hand, the State is least pushed to provide free education and health facilities and on the other, individual income taxation is insensitive to family circumstances to determine ability to pay, in utter violation of Article 3 of the Constitution. In civilized, democratic countries, income tax laws recognize the cost of living alone or with family—expenses to nurture children are always taken into account. The laws thus allow deductions/allowances according to size of family. In Pakistan, FBR not only denies any such allowance or deduction, but also extorts advance income tax even from the lower-income earners and their family members having no income on facilities like mobile phones. Adding insult to injury, FBR expects them to file tax returns to get the money withheld as refund, whereas the cost to get it is much more than the amount due and chances of harassment after filing returns are obnoxiously high.

Successive governments have been emphasizing the importance of increasing tax revenues, mainly on the dictates of IMF, but flawed and irrational tax policy has destroyed our economy. In Pakistan, the financial system is for the rich or to lend money to the government, thus small-and medium-size enterprises (SMEs) do not get credit for growth. In such circumstances, demanding the businesses to pay huge taxes in advance through various withholding provisions, ahead of time, before they even know what their income is going to be, is a sure recipe for disaster. This may be well-intended to counter tax evasion, but is actually only destroying SMEs.

This is the sordid story of tax reforms in Pakistan even when enormous funds—over US$800 million—and best professional advice (sic) was available. The real issue of taxation in Pakistan is appeasing the rich and powerful, and lavish spending on comforts of elites, which are the main cause of huge budgetary gap. Such wrong policies are responsible for continuous increase in the miseries of the people. According to the 2024 Global Multidimensional Poverty Index (MPI) by the United Nations, 93 million Pakistanis now lives below $2.15 per day, facing severe poverty. To come out of this mess, solution lies in what is suggested in Towards Broad, Flat, Low-rate and Predictable Taxes (Prime, 2024).

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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.