Pakistan's new budget relies on increasing tax revenue. Can the FBR deliver?
We all have that one LinkedIn connection who boasts incessantly about their accomplishments. Typically belonging to the #hustle and #grind community, they’ll post about waking up at 5 AM, incubating a company by noon, and investing in crypto before the end of the day. Meanwhile, you’re still trying to figure out if they have a real job (they don’t).
That, in a nutshell, is the Federal Board of Revenue. Pakistan’s tax collection agency brags so often about achieving “historic” milestones that the word has lost all meaning. Don’t believe me? Here’s a quick search of the word on their website:
But the headlines don’t quite add up. If the FBR is indeed achieving historic tax revenue collection every year, then why do we have one of the worst tax-to-GDP ratios in the world? This is where context becomes important.
See, there’s this thing called inflation. Currently standing at around 12%, it means that all the rupees you hold will be able to purchase 12% less goods and services in a year’s time. So even if you’re able to negotiate a 10% increase in salary, you’re still effectively losing money. Extending this logic to the FBR, it is not enough for them to simply increase revenue collection each year, the question is are they increasing revenue in real terms (i.e. at a rate higher than the annual inflation rate)?
Well, there is an answer. Using data from the Ministry of Finance, I found that over the past eight years, inflation has averaged 12.9%, while FBR’s revenue growth has averaged…12.3%. Essentially, the FBR hasn’t increased its revenue in real terms since 2017. Historic stuff indeed.
Now, you might be wondering what the fuss is all about. Everyone is well aware that FBR is bad at its job, what’s new? Well, what’s new is that the annual budget passed last week envisages FBR tax collection to grow by 29% next year, even as inflation will hover at 12%. The institution that has not been able to even keep pace with rising prices is now expected to trounce the inflation rate by 2x.
So, how exactly does the FBR plan to achieve its miraculous target for 2025? Broadly speaking, through hikes in two key areas: income and sales tax. Salaried individuals will again bear the brunt of increased income taxes, an unfortunate byproduct of working in a well-documented sector. Interestingly, however, new taxes have also been levied on real estate, retailers and exporters—three powerful lobby groups that have until now successfully opposed most measures to document or tax their sectors. Can the FBR finally bring them into the tax net? Skepticism remains.
It is just as significant to assess who is still excluded from paying taxes, as it aptly illustrates Pakistan’s political economy. Agricultural income tax remains virtually zero (won’t someone think of the poor feudals). Meanwhile, bureaucrats and military officers, both serving and retired, have been exempted from paying any of the aforementioned real estate taxes on property transfers (DHA Zindabad).
Those exemptions will be paid for by us, in the form of increased sales taxes. While removing certain sales tax exemptions makes sense from an economic efficiency perspective, it is worth noting that such indirect taxes are typically regressive, i.e., they take a greater proportion of income from the working poor than the wealthy.
The imposition of GST on packaged milk is a prime example, causing prices to rise by 25%, and thus pushing lower-income consumers towards unregulated sources of milk or lesser consumption, a disastrous consequence for a country with a child stunting rate of 40%.
Unfortunately, Pakistan has been reliant on indirect taxes for some time now, as illustrated by the chart above. And this year’s budget promises more of the same: squeezing the awaam, while making every attempt to protect the ruling junta’s privileges. It’s an elite club, and we’re not in it.
What I’m reading this week:
Pak (Benazir Shah, Geo)
Pakistan's economic model has reached its sell-by date (Murtaza Syed, X)