FBR mulling new taxes to meet revenue targets

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As the contribution of tax revenues to the economy slips below nine percent, the Federal Board of Revenue (FBR) is contemplating levying a minimum Rs 130 billion in new taxes, aiming to fulfill a key precondition of entering a loan programme with the International Monetary Fund (IMF), besides increasing the tax-to-GDP ratio to a respectable level.
The new measures will contribute only 0.5 percent of the GDP, but have been deemed essential to achieve a revenue target of Rs2.444 trillion which will likely be assigned to the Federal Board of Revenue (FBR) for fiscal 2013-14, said senior government officials.
The economy’s recent rebasing and an expected minimum revenue shortfall of Rs331 billion has resulted in the tax-to-GDP ratio slipping below 9%, one of the lowest in the world, officials added.
LIKELY AREAS OF TAXATION: The most lucrative option for tax authorities is increasing the sales tax rate by 1% to 17%, which will generate close to Rs50 billion in additional revenues. However, such a move will be highly unpopular, and officials say that increasing the sales taxes will fuel inflation. Therefore, the option will be left for the new government to avail.
Another measure under discussion is the reducing federal excise duty slabs on cigarettes from three to two, which will generate additional revenue worth Rs12 billion.
The FBR is also planning to make imports more expensive by increasing the tax rates on all types of imports by 1%, officials disclosed. It also intends to withdraw all zero ratings and levy a 1% tax where no taxes are charged currently.
The FBR is considering increasing the tax rate for the highest individual income category to 22-23% from the current 20%, and keeping tax exemptions for annual incomes up to Rs400,000.
THE MATH: The FBR expects to collect Rs2.05 trillion at best for this year, which is just 8.7% of GDP. This is just 8% above the previous year’s collection and almost equal to the inflation rate: so, in real terms, the FBR has done almost nothing for the entire year as far as enhancing the tax net is concerned.
If the new government decides to take other measures – as desired by the IMF – total new revenues raised will come close to Rs180 billion (equal to 0.7% of GDP), and next year’s tax target will subsequently be increased to Rs2.5 trillion.
Authorities are likely to set next year’s economic growth target at 4.4%, and the inflation target at 8% or 8.5%. Thus, nominal GDP growth (non-inflation adjusted) will automatically reap a benefit of Rs267 billion without any new tax being levied, which is 13% higher than the anticipated collection for 2013, they added.
By adding that Rs267 billion to the Rs2.05 trillion collected in taxes this year, Rs2.317 trillion in revenues will be raised without any extra effort. To achieve the Rs2.44-2.5 trillion collection target, therefore, revenue authorities will require raising new taxes approximating Rs130-180 billion.
External pressures: During negotiations with the IMF for a new bailout programme, the IMF asked Pakistan to make revenue and expenditure adjustments equal to 1-1.5% of GDP every year, during the three-year period of the new programme. This measure aims to increase the abysmal tax-to-GDP ratio to close to 13%.
Officials say that as far as next year’s tax target is concerned, any new government will have little room to make changes. However, the new leadership can choose from among the taxation options available in order to achieve the target.
According to a finance ministry senior offical, the country will have to adjust to at least 1% of GDP. This adjustment’s major component will have to be from taxation, with the authorities aiming to increase the tax-to-GDP ratio to a more respectable 9.3-9.5% in the next fiscal year.
According to an FBR official who participated in negotiations with the IMF, the lending agency has clearly told Pakistan that tax increases should come from changes in national policy. This suggests that the FBR will have to take significant measures to increase revenues, irrespective of which party wins the upcoming elections.

1 COMMENT

  1. Another clear sign the denied deal with IMF is a done deal (even tough the interim government has NO authority/mandate to do so!)

    And another clear proof your vote does not matter…….the government on May 12th and after will still be the same one that was and will be there till May 11th.

    NO CHANGE WILL COME no matter who wins (unless we mean change for the worst)

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