The federal tax agency has currently collected around Rs3.01 trillion in the fiscal year 2023 against a target of Rs3.65 trillion. Therefore, the FBR is trailing by a massive Rs635 billion with the first half of the year almost ending. Further, if the trend continues, the collection of Rs7.47 trillion by June 2023 seems a distant dream.
The contractionary measures taken by the government have resulted in a drop in imports, but it also meant that the primary source of tax revenue, import taxes, also saw a significant dip. Last year, collection from import taxes constituted more than 50 percent of the total taxation.
“FBR collection target of 7.4trn seems over-optimistic. We expect a shortfall to be partially covered by imposing GST on petroleum products, additional taxes on non-essential, and higher FED on cigarettes,” read a report by Arif Habib Limited.
It is highly likely that the government’s new year’s present to the public would be a mini-budget same as how 2022 kicked off.
“A key concern on the fiscal front is the likely shortfall in the government’s revenue target of 30 percent year over year (YoY) growth in FY23. While tax revenue growth has been on track thus far, we see risks to the downside emanating from a sharp slowdown in economic activity and a prolonged curb on imports. Moreover, we foresee a shortfall in non-tax revenue targets particularly Petroleum Development Levy (PDL),” the report added.
Also, adding to woes of the tax regulator is the recent decision of Sindh High Court (SHC) against the applicability of super tax.
As per a report by Ismail Iqbal Securities, the court decision meant that the levy shall be applicable from tax year 2023, not retrospectively and applicability of higher super tax rate of 10 percent for 15 sectors against 0-4 percent for others was declared discriminatory, hence, ultra vires to the constitution.
Though this may be bad news for the government, players in the stock market rejoiced at the decision. The bourse posted a strong recovery on the back of positive investor sentiment driven by the SHC’s ruling.
Explaining the correlation between the two events, Havaris Arshad, Senior Chartered Accountant and Ex-Manager at PwC, said, “The most common methods to value equity are based on cashflows and any positive impact on future cashflows (like reduction in taxation) would inadvertently elevate the stock value. This is evident from what happened at the PSX after the super tax news broke out.”
Sources following the developments have stated that amidst the chaos, FBR is likely to bridge the revenue gap through arbitrary collection of advance tax from companies and a scheme to bring the small traders into the tax net is also being devised.
Meeting the tax targets is one of the prerequisites of Pakistan’s deal with the IMF and a failure to do so would trigger a series of contingency measures, including a mini-budget. Given the current situation, it is highly likely that the government’s new year’s present to the public would be a mini-budget same as how 2022 kicked off.