The Federal Board of Revenue (FBR) is facing a significant challenge as the International Monetary Fund (IMF) has set an ambitious tax collection target of Rs. 14,307 billion for the fiscal year 2025-26, equivalent to 10.7 percent of the Gross Domestic Product (GDP). This target is outlined in the IMF’s report following the first review under the Extended Fund Facility (EFF) arrangement, signaling a strong push for enhanced fiscal consolidation.
The daunting target comes alongside a proposed new Bill in the National Assembly aimed at eliminating the “non-filer” category. This legislative measure is expected to impose stringent restrictions on non-filers, barring them from undertaking key economic transactions such as purchasing vehicles and real estate, a move designed to significantly broaden the tax base and formalize the economy.
Breakdown of Projected Tax Collections
According to the IMF’s report, the Rs. 14,307 billion target for 2025-26 is broken down across various tax categories:
- Direct Tax: Projected at Rs. 6,470 billion.
- Federal Excise Duty: Estimated at Rs. 1,153 billion.
- Sales Tax: Targeted at Rs. 4,943 billion.
- Customs Duty: Projected at Rs. 1,741 billion.
While the government anticipates achieving this target through economic growth, inflation, and improved enforcement, recent reports indicate the IMF has flagged a potential shortfall of around Rs. 1 trillion, emphasizing the need for either new tax measures or significantly enhanced collection efforts from the existing base.
Introduction of Carbon Levy and Retailer Tax Reforms
In line with commitments to the IMF, the government has agreed to introduce a carbon levy on gasoline, diesel, and fuel oil. This levy, to be phased in over two years through the Finance Act 202, aims to disincentivize the use of fossil fuels, impacting vehicles with internal combustion engines and the use of heavy-polluting fuel oil in electricity generation.
Furthermore, the taxation of retailers is set for reform. The income tax on net tax revenues from the Tajir Dost scheme is proposed to be replaced by a new income tax levied directly on income tax revenues collected by the FBR from retailers. This change aims for a more direct and potentially more effective method of taxing the retail sector.
Strengthening Revenue Administration and Addressing Litigation
To support the ambitious revenue targets, the government has agreed to strengthen tax revenue collection to ensure the general government revenue reaches 12.3 percent of GDP in FY 2024-25, with FBR collections contributing 10.6 percent of GDP (Rs 12,332 billion).
Revenue administration measures are being enhanced to reduce the compliance gap. These include focusing on the Compliance Risk Management (CRM) system, implementing digital value chain monitoring, detecting irregularities in sales tax returns, closer monitoring of irregular import patterns, and strengthening faceless customs assessments.
The FBR is also actively pursuing the resolution of outstanding litigation cases totaling Rs. 367 billion. These cases are pending before various forums, including the Supreme Court (Rs. 43 billion), High Courts (Islamabad, Sindh, and Lahore collectively Rs. 217 billion), and the Appellate Tribunal Inland Revenue (Rs. 104 billion). The Supreme Court has reportedly completed initial hearings on some cases, with decisions anticipated that could resolve a significant portion of the disputed amount.
CRM Expansion and Retailer Compliance Progress
The Compliance Risk Management (CRM) systems are now operational in the Large Taxpayer Offices (LTOs) in Islamabad, Karachi, and Lahore, and have been extended to Corporate Tax Units. The FBR is integrating internal and third-party data with the goal of developing a fully automated CRM system to enhance risk profiling and audit selection.
While the initial performance of the Tajir Dost scheme for voluntary registration was below expectations, recent increases in withholding taxes on unregistered retailers have shown positive results. This includes a notable increase in the number of filers among retailers, wholesalers, and traders. A new indicative target on income tax revenue from this group has been introduced to better monitor compliance progress.
The proposed bill to eliminate the non-filer category, currently before Parliament and expected to be part of the Finance Bill 2025-26, is seen as a crucial step to further improve compliance. The progress on bringing new taxpayers with a positive tax liability into the system will also be monitored under a modified quantitative performance criterion (QPC) with the IMF.
