Tax target. Design: Ibrahim Yahya
ISLAMABAD:
The federal government’s tax shortfall has jumped to Rs450 billion against the downward revised target for the first eight months of this fiscal year, increasing the prospects of a second revision amid the International Monetary Fund (IMF)’s view that the tax base cannot be broadened soon.
Till the last working day, the Federal Board of Revenue (FBR) pooled little under Rs8.1 trillion in taxes for the July-February period of fiscal year 2025-26.
The collection was Rs450 billion below even the downward revised target. Against the original target, the shortfall was as high as Rs670 billion, showcasing the tax machinery’s weak performance this fiscal year despite securing additional fiscal incentives.
The government had initially set the FBR’s target at Rs14.13 trillion, which was lowered by Rs216 billion after the second review talks. Sources said the FBR has made another proposal for a substantial reduction in the target, which will be taken up with the IMF next week.
The government has been offsetting the shortfall by increasing petroleum levy rates and drastically reducing development spending to achieve the overall primary budget surplus target agreed with the IMF. However, the policy is creating an artificial sense of fiscal stability for both the global lender and the Pakistani authorities.
Multinational and top local firms met the IMF delegation on Thursday and expressed concerns about the cost advantage available to tax-evading businesses and sectors. Participants told The Express Tribune that IMF Mission Chief Iva Petrova said immediate broadening of the base was not possible.
The IMF also appeared complacent in keeping the base narrow, endorsing the policy of placing undue burden on the salaried class and allowing the FBR to shift the Rs50 billion tax target from traders to the general retail sector.
On Monday, the first day of talks, the IMF asked the FBR to provide revenue projections for the remainder of the fiscal year. A separate session has been scheduled to examine factors behind lower-than-expected performance in sales tax and income tax, said the sources.
The Rs8.1 trillion collection includes Rs125 billion recovered under the super tax. Had the Federal Constitutional Court not ruled in favour of the FBR in January, the collection would have been lower than Rs8 trillion.
Sources said the FBR also recovered super tax in cases where it had already been taken in advance, adding that the net impact of the judgment would be lower than the FBR’s Rs216 billion estimate.
Due to the widening gap, the State Bank of Pakistan (SBP) on Thursday instructed banks to remain open on Saturday. This is the third consecutive month that banks have been asked to stay open to offset the impact of the FBR’s poor performance.
In a functional tax and governance system, banks are not forced to keep branches open to compensate for revenue shortfalls. The FBR’s performance has deteriorated despite distributing 1,000 cars and increasing salaries by up to 400% to incentivise officers.
Musharraf Rasool Cyan, technical member of the National Finance Commission from Khyber-Pakhtunkhwa, said this week that the FBR had collected Rs63 trillion less than agreed under the 2010 NFC formula. At the time it was agreed to raise the tax-to-GDP ratio by 1% annually to reach 15% by 2015, but last fiscal year it stood at 10.2%.
Details showed that against the reduced target of Rs4.1 trillion, the FBR collected Rs3.94 trillion in income tax, missing the goal by Rs160 billion, though it was 15% higher than last year.
Sales tax collection amounted to merely Rs2.8 trillion, Rs322 billion below target, though 11% higher year-on-year. Poor performance in the sales tax collection area was also because the FBR has now started taking sales tax in advance.
Finance Secretary Sindh Fayaz Jatoi said this week that the sales tax potential was Rs11 trillion annually, but the FBR was collecting only 15% to 20%, calling for shared collection responsibilities with provinces.
Federal excise duty collection stood at Rs531 billion, Rs6 billion above the revised target and 17% higher than last year. Customs duty collection missed the target by Rs49 billion, remaining at Rs850 billion.
The FBR paid Rs385 billion in refunds, Rs33 billion more than last fiscal year.
Against the February target of Rs1.03 trillion, the FBR collected Rs918 billion, missing the mark by over Rs100 billion. Even with an expected Rs25 billion collection on Saturday, the monthly shortfall may still remain in the range of Rs85 billion.
