Karachi, May 14, 2024 – The State Bank of Pakistan (SBP) has cast doubt on the celebrated revenue collection growth reported by the Federal Board of Revenue (FBR), especially at a time of soaring inflation and steep rupee depreciation.
In its latest half-yearly report on the Pakistan Economy released on Tuesday, the SBP underscored a combination of federal tax measures introduced over FY23 and FY24, alongside economic factors such as escalating inflation and interest rates, as well as a significant devaluation of the Pakistani Rupee (PKR), to explain the federal tax performance in the first half of FY24. However, the SBP raised a red flag, stating that the growth in FBR tax collection in real terms does not hold up under scrutiny, particularly when considering the backdrop of 28.8 percent inflation and a 22.3 percent depreciation of the PKR in H1-FY24 compared to the previous year.
According to the SBP report, tax revenue surged by 29.5 percent in H1-FY24, as opposed to 16.9 percent in H1-FY23, with federal taxes continuing to be the primary driver. The report noted that federal tax collections exceeded the H1-FY24 target by Rs 1,040 billion.
Direct taxes retained their dominance, comprising nearly half of the total collection in H1-FY24, marking the highest share in 25 years. Voluntary payments, particularly in the form of advance taxes from corporations, exhibited robust growth. Withholding taxes, notably on bank interest, securities, contracts, salaries, and imports, also witnessed significant expansion. Indirect taxes, after remaining stagnant in the corresponding period of the previous year, saw a broad-based growth of 12.2 percent in H1-FY24, fueled by higher sales tax and Federal Excise Duty (FED) collections.
The tax measures introduced by the government aimed to meet higher revenue targets through changes in tax rates and the rationalization of tax expenditure, given expectations of a subdued economic recovery and increased overall expenditure. Key tax measures included revisions to the super tax and income tax slabs, increases in withholding taxes, adjustments in import-related taxes, changes in advance taxes on builders and developers, and alterations to the general sales tax rate.
Economic indicators, including quarterly GDP and high-frequency data, moderately rebounded, supporting tax collection growth in H1-FY24. The depreciation of the PKR compared to the previous year, along with elevated inflation and interest rates, also contributed positively to tax revenue.
Advance taxes, bolstered by a significant increase in corporate profits, played a pivotal role in driving overall direct tax collection growth in H1-FY24. The high interest rate environment boosted bank profits, while individuals’ interest earnings from profit-bearing accounts and government securities investments surged. The depreciation of the PKR cushioned the revenue impact of falling import values, resulting in increased import-related taxes in H1-FY24.
Despite the impressive headline figures, the SBP’s skepticism underscores the complex interplay of economic factors influencing Pakistan’s revenue landscape. As policymakers navigate these challenges, ensuring sustainable revenue growth remains a pressing imperative for the country’s economic stability and development.
The SBP’s critical assessment serves as a reminder of the need for prudent fiscal management and policy coherence to navigate the turbulent economic waters ahead.