ISLAMABAD: The Federal Board of Revenue (FBR) is confronting a substantial Rs65 billion revenue shortfall, which has been attributed to a combination of industrial slowdown, declining electricity consumption, and ineffective enforcement measures.
With the International Monetary Fund’s (IMF) scheduled visit for Pakistan’s second review just around the corner, the FBR’s underperformance raises fresh concerns over the government’s fiscal health.
As of the last working day of the month, which is August 29, the FBR’s provisional collection stood at Rs 1.635 trillion, missing its target of Rs 1.7 trillion by a significant margin. Although the FBR anticipates that final figures could reduce the shortfall to around Rs45-50 billion, officials are wary of a broader trend of sluggish revenue growth. Despite a 13% increase from the previous year, the growth rate still lags behind the necessary pace to meet the government’s annual revenue target of Rs14.13 trillion, which requires a 20% year-on-year increase.
Electricity and industrial slowdown hit hard
A major factor contributing to the revenue dip has been the decline in electricity consumption from the national grid, which decreased from Rs 125 billion last fiscal year to Rs 86 billion this year. Tax authorities have linked this drop to the broader industrial slowdown, and consumers have massively shifted from grid electricity to solar power generation.
These developments have severely impacted the FBR’s ability to meet its collection targets. As industrial production fails to pick up, the revenue shortfall continues to widen, leaving the FBR with little room for manoeuvre.
Reversal of enforcement measures further complicates recovery
The situation worsened last month when the FBR took a step back on critical enforcement measures. In a controversial move, the FBR accepted traders’ cash deposits in banks as legitimate transactions, undermining efforts to curb tax evasion. Moreover, delays in enforcing the ban on high-value purchases by individuals without declared assets further weakened the FBR’s position.
Finance Minister Muhammad Aurangzeb had earlier warned that the government’s inability to pass additional enforcement measures in Parliament could lead to extra revenue steps worth Rs400-500 billion. However, following protests from the business community, the measures were reversed, partially stalling the government’s fiscal reform agenda.
Key appointments amid revenue woes
In a bid to address the ongoing challenges, the FBR has appointed Dr. Hamid Ateeq Sarwar, who returned from retirement for a one-year contract, to oversee several critical functions. Sarwar now holds the positions of Member, Strategic Transformation, Member, Inland Revenues Operations, and Acting CEO of Pakistan Revenue Automation Limited. This reshuffling is part of the FBR’s broader effort to streamline tax collection and improve internal efficiencies.
Sectoral performance overview
- Income Tax: With Rs 695 billion collected, the FBR met its two-month target.
- Sales Tax: Rs 625 billion was collected, falling Rs 65 billion short of the target.
- Federal Excise Duty: Collection amounted to Rs113 billion, slightly under expectations.
- Customs Duty: Rs200 billion collected, surpassing targets, largely due to the clearance of pending cargoes held by importers.
Customs duty remains the only bright spot in the FBR’s performance, with higher-than-expected imports contributing to the surplus. However, future revenue growth may be impacted by fluctuations in the value of the Pakistani rupee, which remains volatile but is attaining stability in a gradual manner.
Refund delays and business strain
Another key issue exacerbating the FBR’s troubles is the delay in tax refunds. In August, refunds stood at only Rs 37 billion, a sharp decline from Rs 53 billion in the same period last year. For the July-August period, cumulative refunds totalled Rs118 billion, Rs14 billion less than the previous fiscal year. The delay in refunds is creating significant financial strain on businesses already grappling with a challenging economic environment.
Delicate balancing act ahead
As Pakistan approaches the IMF’s crucial review of the country’s fiscal performance, the FBR’s failure to meet revenue targets presents a major hurdle. The IMF will assess the government’s program implementation through June this year, but the first quarter of the current fiscal year, which has been less than stellar, will also come under scrutiny.
The government’s ability to turn things around in the coming months will be critical, but the path to fiscal stability remains fraught with challenges. Despite the government’s ambitious revenue targets and reform plans, the FBR’s continued underperformance, its ongoing struggle with weak industrial growth, and declining consumption leave little room for optimism.
