Central bank reproaches FBR’s dependence on regressive taxation

KARACHI: The central bank has highlighted Federal Board of Revenue (FBR) dependence on regressive taxation to meet targets, and advocates broadening of base through documentation of economy.

Regressive tax is defined as the tax that takes a larger percentage from low-income people than from high-income people as it generally is applied uniformly.

State Bank of Pakistan (SBP) notes in the report on State of Pakistan’s Economy that two-third of the total direct taxes collected in the first half of current fiscal year came from withholding taxes, most of which are applied on economic transactions.

“This introduces an element of regressivity in the direct tax system, which should be reduced by making more efforts on the part of tax authority and increasing documentation of the economy,” it said.

FBR collected Rs540.8 billion through direct taxes during H1-FY16, which was Rs82 billion higher than the revenue collected during H1-FY15.

Most of this collection came from withholding taxes i.e. Rs 376.8 billion, while voluntary payments and collection on demand contributed Rs161.5 billion and Rs24.1 billion respectively.

Indirect taxes collection posted a growth of 18.4 percent and reached Rs844.1 billion during H1-FY16. Around 70 percent of these were generated through sales tax. Within sales tax receipts, Rs216.3 billion came from petroleum products.

Collection via customs duty showed a growth of more than 30percent in the first half on the back of additional duties introduced recently.

Central bank notes if FBR tax collection shows a growth rate higher than the nominal GDP growth during FY16, then tax-to-GDP ratio will be higher than last year i.e. 8.5 percent. Currently, FBR tax to GDP ratio hovers around 9.0 percent.

“This can happen if FBR maintains its current growth rate of 18.2 percent for the whole year and nominal GDP growth rate does not exceed 12 percent, as projected in the Annual Plan FY16,” SBP said.

In response to a weak fiscal outcome in terms of revenue collection during first quarter of FY16, the federal government announced new tax measures including additional customs and regulatory duties on certain items, as well as an increase in FED on cigarettes.

In the meantime, withholding tax on all financial transactions for non-filers was continued in a bid to promote tax filing culture in the country.

“However, the impact of this particular tax in terms of financial exclusion and growth of informal sector cannot be ruled out. The increase in the informal economy, in turn, has negative implications for tax collection in the long run,” SBP said.

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