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Tax reforms for prosperous Pakistan   

Huzaima Bukhari & Dr Ikramul Haq

The Federal Board of Revenue (FBR) surpassed the revised targets for fiscal year (FY) 2020-2021 and for the first four months of the current FY (see details below) as elaborated by Chairman of FBR in a seminar held by PRIME Institute in Islamabad on November 17, 2021 where keynote speech was given by Dr. Arthur B.  Laffer on flat rate taxation and other issues regarding structural reforms for the prosperous future of Pakistan. In FY 2020-21, for the first time in the history of Pakistan FBR collected Rs. 4734 billion. It was laudable, but fell short of the original target of Rs. 4963 billion assigned when budget for FY 2021 was announced. FBR showed 18% growth over FY 1999-20 and 31% in the current fiscal year. In the remaining eight months, with this extraordinary growth rate, FBR can exceed the target of Rs. 5.8 trillion and even cross the figure of Rs. 6 trillion—a quantum jump in two years.

FBR Collection: October 2020 to October 2021

    Rupees in million
Revenue HeadOct-2020Oct-2021Growth
Income Tax110,30564110,241143,8591,916141,94331,70228.8
Sales Tax167,45215,144152,308223,36522,861200,50348,19531.6
Federal Excise22,445022,44525,817025,8173,37215.0
Total IR300,20215,208284,994393,04124,777368,26383,26929.2
Custom Duty53,8941,69052,20475,6353,83371,80219,59837.5
Grand Total354,09716,898337,199468,67628,610440,066102,86730.5
Revenue HeadUp to Oct-2020Up to Oct-2021Growth
Income Tax477,1554,243472,912626,3892,743623,646150,73323.9
Sales Tax646,30159,121587,180903,70274,677829,024241,84542.1
Federal Excise80,891080,89196,752196,75115,86021.3
Total IR1,204,34763,3641,140,9831,626,84377,4221,549,421408,43835.8
Custom Duty208,9892,569206,420304,68213,118291,56485,14441.9
Grand Total1,413,33665,9331,347,4021,931,52590,5401,840,985493,58236.6
Collection vs Target – Oct 2021Rs. in Million
Revenue HeadTargetCollectionDiffAchieved %
Income Tax136,600141,9435,343103.9
Sales Tax168,000200,50332,503119.3
Federal Excise27,00025,817(1,183)95.6
Total IR331,600368,26336,663111.1
Custom Duty65,20071,8026,602110.1
Grand Total396,800440,06643,266110.9

Collection vs Target – Up to Oct 2021
Revenue HeadTargetCollectionDiffAchieved %
Income Tax565,900623,64657,746110.2
Sales Tax692,400829,024136,624119.7
Federal Excise95,20096,7511,551101.6
Total IR1,353,5001,549,421195,921114.5
Custom Duty254,000291,56437,564114.8
Grand Total1,607,5001,840,985233,485114.5

The tax-to GDP ratio, however, went  down to 11.5% under the coalition Government of Pakistan Tehreek-i-Insaf (PTI) in FY 2020-21, according to Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21, available on website of Ministry of Finance (MoF). The FBR, according to Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21, collected taxes of Rs. 4764 billion and all the provinces together of Rs. 508 billion only. The MoF took figure of direct taxes of Rs. 1731.8 billion, which included contributions for Workers Welfare Fund (WWF) and Workers Profit Participation Fund (WPPF).  FBR showed this figure in its YEAR BOOK 2020-21 at Rs. 1726 billion (net) depicting growth of 13.3%.

FBR is a highly ignored institution. Successive governments, civil and military alike, have failed to provide it with basic logistic facilities, what to speak of modern tools to bridge monstrous tax gap through widening tax base. In this background and amid the sluggish economic activities during most part of FY 2020-21, due to the third deadly Covid-19 wave, surpassing even the difficult third revised target of Rs. 4691 billion by Rs. 41 billion (FBR’s Press release) was highly laudable as discussed in detail in Historic collection by FBR, Business Recorder, July 2, 2021.

We have neither a centre of excellence for fiscal research and administration nor trained staff to counter massive tax evasion and avoidance. It is heartening that a committee is now formed to formulate a single IRS code merging all the tax laws administered by Inland Revenue Service, namely, Income Tax Ordinance, 2001, Sales Tax Act, 1990, Federal Excise Act, 2015 and Sales Tax on Services Ordinance, 2001 for Islamabad Capital Territory (ICT).  This will be a milestone provided that simplification of tax codes is made and singly page tax return is devised without declaration of assets and liabilities (see details in Simplification of taxes for growth—III, Business Recorder, April 2, 202 .

  The FBR YEAR BOOK 2020-21 mentions as under:

FBR’s revenue collection has also evinced a remarkable growth during FY 2021. After two lean years FY 2019 and FY 2020 ending with a growth of -0.4 and 4.4 percent, FBR revenue collection recorded a growth of 18.4 percent during FY 2021. In absolute terms, FBR collected Rs. 4,734.2 billion, which is Rs. 736.8 billion higher than FY 2020. The achievement is historical as it is for the first time that FBR’s collection has surpassed the psychological target of Rs. 4 trillion. The revised target has been surpassed by around 1 percent. Sales tax and customs recorded growth of 24.1 percent and 19.3 percent, followed by direct taxes 13.3 percent and FED 11.6 percent.

[underlined for emphasis]

In FY 2020-21, FBR collected only Rs 1692 billion as income tax showing a shrinking share of direct taxes in total collection of Rs 4764 billion that is merely 3.6% of GDP. It could have been 7% of GDP alone if agricultural income tax from the rich and mighty absentee landlords was collected on their actual incomes and collection by FBR was exclusive of monstrous tax expenditure of Rs. 2.3 trillion in FY 2018-19 and 2019-20. The present Chairman FBR has rightly asked provinces to join hands to plug evasion of agricultural income tax by the rich landlords and his efforts must be supported. Taxing “agricultural income” is the sole prerogative of provincial governments under the Constitution of Islamic Republic of Pakistan [“the Constitution’]. All four provinces have laws for imposition of agricultural income tax (AIT) the share of which, in total tax revenue of Rs. 4.75 trillion in fiscal year 2019-20 (11.4% of GDP) was only (0.06 % of GDP). Share of agriculture in GDP of Rs. 44.7 trillion was around 19%.

Results for the first four months of the current fiscal year showing growth of 28.8% under the head income tax after paying off refunds of Rs. 1916 million, confirms the necessary corrective measures. If FBR collects Rs. 5000 billion income tax in next two years, it will be a great leap forward. How to collect this amount is discussed in detail in Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, December 2020) and Tax Reforms in Pakistan: Historic & Critical Review (PIDE, Islamabad).

In sales tax, federal excise and custom duties, due to rampant corruption and inefficiencies, the total collection is much below the actual potential. In FY 2020-21, FBR collected Rs.1990 billion under the head sales tax, Rs 277 billion under federal excise duty and Rs. 765 billion under custom duties. Total indirect collection of Rs 3032 billion was pathetically low. It should have been at least Rs 5000 billion. The total tax collection at national level in FY 2020-21 was Rs. 5272 billion whereas all the provinces together contributed only 1.1 percent of the GDP and share of agricultural income tax was as low as 0.06 percent of GDP. There is thus an urgent need for fundamental structural reforms to harness the actual tax potential as suggested in the seminar held in Islamabad on November 17, 2021 and endorsed by Chairman FBR in his speech as well as conveyed to Prime Minister of Pakistan by Dr. Laffer in a meeting the next day.

The total current expenditures (both federal and provincial consolidated) in FY 2020-21 were Rs. 10,400 billion that is 22% of GDP. A country having tax-to-GDP ratio of 11% incurred cost of debt servicing of 12% GDP alone in FY 2020-2021. This exposes its national security vulnerability and even bulk of defence expenditure was through borrowed funds. In these circumstances, can we continue with huge tax expenditure for the miltro-judicial-civil complex and their pensions met from further borrowing—both internal and external?      

If existing tax gap is bridged, our revenue collection can reach Rs. 10 trillion (direct taxes Rs. 7 trillion and indirect Rs. 3 trillion) which could change the entire fiscal scene. We would have enough money for current expenditure (must be reduced drastically through lean federal and provincial governments and ending wasteful expenses), development and public welfare outlays—government would be able to retire debts in just a few years and we can easily become a self-reliant economy. However, this dream for Pakistan can never be realised unless all sections of society are taxed according to their actual ability to pay at lower rate with broadest possible tax base. The tax policy must be used as a tool for rapid industrialization and creation of job opportunities rather than funding inefficient governments.


The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE)

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