FeaturedNationalVOLUME 19 ISSUE # 8

FBR’s challenges and strategies

For years, the Federal Board of Revenue (FBR) has grappled with the challenge of broadening the tax base, resulting in an economy characterized by limited documentation. Despite initiatives in digitization, data sharing, and reductions in tax expenditures, the tax-to-GDP ratio has declined by two percentage points since its peak in 2018.

While commendable, the FBR’s current strategy of penalizing non-filers encounters implementation hurdles due to legal constraints and concerns about fundamental rights. This analysis delves into the complexities surrounding tax return filing, the lapses in transaction documentation, and the rising issues of under-reporting, highlighting the need for a more effective approach.

Over the years, the Federal Board of Revenue (FBR) has attempted, without success, to broaden the tax base, resulting in an economy characterized by limited documentation. The tax-to-GDP ratio has effectively decreased by two percentage points since its recent peak in 2018.

The Federal Board of Revenue (FBR) has surpassed its December target by Rs7 billion, thanks to the timely clearance of liquefied natural gas shipments and a remarkable increase in domestic sales tax collection fueled by historical inflation. In December, the revenue collection reached Rs982 billion, surpassing the projected target of Rs975 billion. This represents a 34% increase compared to Rs732 billion in the same month last year.

These figures are expected to further improve by at least Rs1.5 billion before the end of the month on Sunday, factoring in book adjustments. In addition to the LNG cargoes cleared earlier in the week, the cargo cleared on Saturday contributed Rs3.7 billion to the overall revenue collection. For the first half of the fiscal year (July-December) in FY24, provisional data indicates that the FBR collected Rs4.467 trillion, exceeding the Rs4.425 trillion target by Rs42 billion. The government has set a revenue collection target of Rs9.415 trillion for FY24, compared to the revised collection of Rs7.2 trillion in FY23, reflecting an increase of Rs2.219 trillion or 30%. A senior tax official attributed the improved revenue collection to a significant 37% growth in income tax collection, followed by a 28% growth in domestic sales tax.

The government aims to meet the tax target based on the projected economic growth of 3.5% and an average annual inflation rate of 21%. Autonomous growth in revenue, derived from GDP growth and inflation, is projected to reach Rs1.76 trillion in 2023-24. Revenue collection at the import stage is yet to gain momentum due to the slowdown in imports. However, the FBR has not disclosed the figures for sales tax refunds during the first half of the year.

Initiatives involving digitization, data sharing, and reducing tax expenditures have failed to yield significant returns. While the FBR’s current approach of penalizing non-filers is commendable, its implementation faces challenges due to legal constraints and concerns about fundamental rights. Filing tax returns is not a straightforward task, especially for individuals such as pensioners and widows who own assets like real estate or vehicles but lack taxable income. To address this, the FBR should simplify the tax return form, allowing individuals to file returns without the need for professional tax consultant services.

Concerningly, efforts to document transactions seem to have taken a back seat, leading to continued revenue leakage. The tobacco products sector serves as a glaring example where despite the implementation of a ‘track-and-trace’ mechanism, plugging substantial leakages remains elusive. While the number of tax filers has increased in recent years, many submit nil taxable income or minimal income tax returns. Under-reporting is also a growing issue, necessitating efficient measures to tackle it.

Penalties like freezing accounts or restricting foreign and local travel may disproportionately affect those who are not required to file returns, while tax evaders and under-filers might evade these measures. Increasing the number of filers alone may not improve the tax-to-GDP ratio without a focus on documenting economic transactions.

The challenge lies in taxing evaders when a significant portion of lawmakers, government entities, and even FBR employees do not comply with tax obligations. Addressing these elements is crucial for any effort to enhance the tax base effectively.

The optimal approach involves documenting the economy comprehensively. Once the FBR can track income, individuals’ tax liabilities can be assessed, irrespective of whether they file tax returns. This approach ensures accountability for the taxes evaded, regardless of filer status. To address the perception of unfair pressure on non-filers, the government should focus on closing loopholes, utilizing technology, and simplifying the income tax regime for retailers. Questions about under-declared revenues, exemptions for certain segments, and complex tax structures need thorough examination.

The state’s emphasis should be on increasing tax revenues, not just on the number of filers. Documenting transactions, limiting cash transactions, and ensuring sales tax registration for all are crucial steps. Sectors with substantial revenue but minimal income tax contributions, such as the power and airline industries, need reevaluation. The FBR’s primary goal should be accurate income reporting rather than merely increasing the number of filers, while under-reporting persists.

In conclusion, addressing the persistent challenges faced by the FBR in expanding the tax base requires a multifaceted strategy. The current emphasis on penalizing non-filers, while commendable, must be complemented by simplifying tax return procedures, particularly for vulnerable groups like pensioners and widows.

Efforts should be redirected towards comprehensive economic documentation, ensuring accurate reporting of income and minimizing revenue leakages. Closing loopholes, leveraging technology, and simplifying tax structures for retailers are essential steps to foster a fair and efficient tax system.

Moreover, the government’s focus should shift from merely increasing the number of filers to enhancing tax revenues through thorough documentation, limiting cash transactions, and ensuring universal sales tax registration. Sectors contributing substantially to revenue but evading income tax, such as the power and airline industries, necessitate urgent reevaluation.

Ultimately, the FBR’s primary objective should be the accurate reporting of income, transcending the numerical increase in filers, and addressing the persistent issue of under-reporting in the tax system. Only through comprehensive and strategic measures can the FBR achieve a more robust and equitable taxation framework.