FBR revenue target
The year, 2024-25, witnessed revenues of close to Rs 11,700 billion of the FBR. These revenues represent a dominant share of 84 percent in national tax revenues, which also include the revenues from provincial taxes and the petroleum levy.
FBR revenues are shared with the provincial governments under the 7th NFC Award. These governments are entitled to a share of 57.5 percent from the divisible pool of revenues, consisting of FBR revenues. Consequently, through the transfers, FBR revenues represent almost 87 percent of the total tax revenues of the four provincial governments combined. Net of transfers, FBR revenues contribute almost 54 percent to total federal revenues.
The year, 2024-25, has witnessed both positive and negative outcomes with respect to FBR revenues. Attainment of the level of revenues at Rs 11,700 billion represented a very high growth rate of 25.7 percent, with an absolute increase of as much as Rs 2,389 billion. Consequently, the FBR revenues to GDP ratio rose sharply from 8.9 percent to 10.2 percent of the GDP in 2024-25.
However, there was simultaneously a big shortfall of Rs 1270 billion with respect to the budgetary target of Rs 12,970 billion, implying a big shortfall of almost 10 percent. This shortfall is attributable to an extraordinarily ambitious target growth rate in FBR revenues of 40 percent, in an economy with low growth rate of 3 percent or less. We had highlighted already at the start of 2024-25 that the 40 percent growth rate in FBR revenues was infeasible, and mini-budgets may be required.
The target for 2025-26 of FBR revenues has been set at Rs 14,131 billion. In absolute terms, this represents an increase of Rs 2,431 billion and a growth rate of 20.8 percent in comparison to last year's level. This growth rate is in relation to a projected nominal GDP growth rate of 12 percent. If FBR achieves the target, then FBR revenues will rise by 1 percent of the GDP and approach 11 percent of the GDP.
The two tax bases which play a key role in influencing the size and growth of FBR revenues are the growth of the large-scale manufacturing sector and of imports. The Annual Plan targets for a 3.5 percent growth rate in the former sector and a similar growth rate in the dollar value of imports. The rate of inflation is projected at 7.5 percent. At this stage, it is not clear what the extent of depreciation will be of the rupee.
The large-scale manufacturing sector has exhibited a lack of buoyancy in recent years. There was actually a fall in real value added of 1.5 percent in 2024-25. Therefore, the sector will have to overcome negative factors like the already high tax burden, excessive costs of energy and credit, to be able to achieve the 3.5 percent growth rate in 2025-26.
According to the PBS, the rupee value of imports increased by only 5.4 percent in 2024-25. Therefore, FBR's performance of increase in revenues of 25.7 percent must be seen as highly exceptional given the slow growth in the two major tax bases. The answer lies in the large number of budgetary taxation measures in the federal budget of 2024-25.
Therefore, there is a need to assess the taxation proposals in the budget of 2025-26, which have been accepted and incorporated in the Finance Bill.
The changes in income tax include an increase in the withholding tax on services from 4 percent to 6 percent. Also, the tax on profit on debt and dividends has been raised from 15 percent to 20 percent and very large pensions have been subjected to a flat 10 percent tax.
The measures in sales tax include the levy on retail price of a number of items, limits on the extent of input adjustment, phased withdrawal of sales tax exemption to PATA/FATA and the addition of clause 37, whereby arrest can be made in the event of tax fraud. The last item of powers given to FBR for arrest of persons engaged in tax fraud has been strongly resisted by the private sector and needs to be reviewed on a top priority basis.
There are two reductions in tax rates in the federal budget of 2025-26. The import duty structure with five duties from 0 percent to 20 percent has been brought down to four from 0 percent to 15 percent, along with big reduction in regulatory duties. The second reduction is in the personal income tax of salaried taxpayers. On the average this implies a reduction in tax liability by approximately 10 percent.
Based on the growth rate of the tax bases and the tax measures, both for raising or reducing tax rates, a projection can be made of the likely level of FBR revenues in 2025-26.
The elasticity of FBR revenues with respect to the rise in the various tax bases combined together is close to unity. As such, the likely growth in FBR revenues, in the absence of any rate changes, is projected at above 11 percent in 2025-26. This implies a normal increase in FBR revenues by approximately Rs 1300 billion, to Rs 13,000 billion.
Incorporation of the impact of the taxation measures, both positive and negative, is the next step. The enhancement in tax rates, withdrawal of exemptions and toughening of tax regulations is likely to lead to additional revenues of Rs 850 billion. However, the reduction of rates of customs duty and personal income tax are likely to imply a revenue loss of approximately Rs 250 billion. Therefore, the net impact of the taxation measures is likely to be Rs 600 billion. Therefore, the overall projected level of FBR revenues is Rs 13,600 billion. This implies a likely shortfall of Rs 531 billion.
Examination of the individual tax growth rate targets also highlights a problem. The highest growth rate has been set in the case of sales tax of 22.4 percent, followed by customs duties at 20.7 percent, income tax at 20.5 percent and excise duties at 14.7 percent. Given the reduction in customs duties, the revenues from this source may show lower growth because they are no compensating moves. Also, the growth rate of income tax revenues may be somewhat lower.
Overall, FBR faces a challenging revenue target in 2025-26, as it did in 2024-25. It managed a growth rate of 25.7 percent in 2024-25 and is now required to achieve a growth rate of 20.8 percent. This will hinge crucially on how the economy performs, especially in terms of the growth rate of the large-scale manufacturing sector and the extent of increase in the rupee value of imports, especially of high duty items.
Copyright Business Recorder, 2025
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