The economic landscape of nations relies heavily on a robust revenue system, acting as the lifeblood sustaining various functions. Emerging as the paramount source, diverse revenue streams, particularly “tax revenue,” play a crucial role in shaping global economies.
This financial influx serves as the primary funding avenue for current operational needs and vital developmental initiatives within a country. The effectiveness of the tax revenue system significantly determines a nation’s fiscal health and its ability to address multifaceted economic demands.
In cases where dependence on tax revenue falls short of meeting economic demands, governments often resort to alternative, albeit costly measures such as debts, posing a considerable fiscal burden.
Pakistan, grappling with a persistent imbalance between generated revenue and escalating financial needs, finds itself ensnared in a deadly debt trap. The increasing size of the debt burden, coupled with the federal government’s net revenue being entirely consumed to service debts, highlights the urgent need for effective fiscal strategies to ensure sustainable economic stability.
The current scenario should be a serious concern for all stakeholders. If left unaddressed, there is a looming risk where both tax and non-tax revenues may solely be allocated to debt servicing.
To avert this crisis, a comprehensive overhaul and reevaluation of the taxation framework are imperative, strategically aligning it with dynamic economic needs and market realities. Immediate proactive measures are necessary to reshape fiscal policies.
According to the Federal Board of Revenue (FBR) Year Book 2022-23 for fiscal year (FY) 2022-23, revenue collection reached a historic milestone, surpassing the Rs. 7 trillion mark for the first time at Rs. 7.16 trillion. Despite this achievement, collection fell short of the revised target by 0.5% and approximately 4% from the original target.
Major contributors to tax revenue in FY23 were direct taxes at Rs. 3.2 trillion (46%), sales tax at Rs. 2.59 trillion (36%), federal excise at Rs. 0.4 trillion (5%), and customs duty at Rs. 0.9 trillion (13%).
In FY23, revenue collection from withholding taxes amounted to Rs. 1.8 trillion, showing substantial growth of 32.2% compared to Rs. 1.4 trillion in FY22. This confirms FBR’s main dependence on withholding taxes, making it the primary spinner of its revenue stream.
Despite this, there are challenges associated with the withholding tax system. The ‘Tax Gap Report 2022’ highlights disparities in sales tax collection, revealing a substantial gap of Rs. 519 billion, representing approximately 24% of the tax collectible under the existing sales tax regime.
Similarly, the disparity in income tax collection gaps surpasses that of sales tax, being 31% of the total tax collectible. The Report indicates a significant gap of Rs. 731 billion in income tax collection, calling for comprehensive strategies to plug these gaps.
The implementation of the ‘Synchronized Withholding Administration & Payment System’ (SWAP) is a significant step forward, aiming to transform the landscape of withholding tax processes. SWAP’s core feature is the automatic generation of withholding statements, fostering a more business-friendly environment and reducing compliance costs.
However, challenges remain in realizing the full potential of revenue generation through SWAP. The inability to tap into the actual tax potential and crack down on the informal economy directly affects compliant taxpayers and struggling classes.
Addressing these challenges requires a comprehensive review of tax collection processes and policies, aiming for a more effective and equitable system. This proactive stance is crucial for safeguarding the economic interests of both businesses and individuals, fostering a sustainable and balanced fiscal environment.
(Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have co-authored a book, Pakistan Tackling FATF: Challenges and Solutions)
