Salaried class boosts tax contributions to Rs200 billion amid growing FBR shortfall

ISLAMABAD: Salaried individuals contributed nearly Rs200 billion in income taxes during the first five months of the current fiscal year, representing a significant surge of Rs72 billion, reported Profit. However, the Federal Board of Revenue (FBR) has struggled to effectively leverage transaction data to tax non-compliant individuals. Revenue from taxpayer audits fell by 16%, dropping from Rs31 billion in the same period last year to Rs26 billion this year. The FBR predominantly depends on taxes from salaries, utility bills, phone usage, and bank transactions, as audit processes are often more intricate and yield lower results.

During this five-month period, the FBR fell short of its tax collection goal by Rs341 billion, and the gap is expected to widen by the end of December. Salaried employees contributed Rs198 billion in taxes, marking a 57% increase compared to the previous year, following tax increases implemented by Prime Minister Shehbaz Sharif’s administration last June, rather than opting for spending cuts or broadening the tax base.

Audit collections have decreased, with the Rs26 billion collected this year compared to Rs31 billion last year. An FBR official indicated that this decline was influenced by court decisions that complicated the freezing of bank accounts and recovery of disputed taxes. In anticipation of stricter policies, many citizens hastened to file their income tax returns before the extended deadline, with around 5.6 million taxpayers submitting returns this year and contributing Rs145 billion—nearly 50% more than the previous year.

Nevertheless, the government has yet to revise the Income Tax Ordinance to eliminate the non-filer category. Of the Rs198 billion in income taxes collected, Rs53 billion came from federal and provincial government employees, who received pay raises of 20-25% in the budget. Private sector employees contributed the remaining Rs145 billion, despite frequently not receiving annual increases in their pay.

Non-corporate employees paid Rs86 billion—an increase of 42%—while corporate sector employees contributed Rs59 billion for a 56% rise. Provincial government employees experienced the largest growth, contributing Rs33 billion, a rise of 109% compared to last year. Federal employees added Rs20 billion, reflecting a 71% increase.

The FBR collected less than Rs13 billion in taxes from goods supplied by traders, illustrating a disproportionate burden on salaried workers whose contributions exceeded taxes collected from traders by more than 14 times.

To enhance audit processes, the FBR intends to recruit 1,620 auditors from the private sector. Currently, the FBR has only 355 auditors for domestic taxes, significantly fewer than the 1,914 needed. Audit-based tax collection is a lengthy endeavour and is likely to yield results on a quarterly or biannual basis.

To meet monthly targets, the FBR has also relied on advance tax payments, garnering Rs483 billion in advance income tax from July to November, which is 20% more than last year. However, this approach has been contentious, as legal cases have raised concerns about potential overreach by tax officials.