ISLAMABAD: Consumption of just eight products contributed a mammoth Rs1.1 trillion, more than half the total collection of indirect taxes in the last fiscal year, underscoring the shallowness of Pakistan’s tax system while also putting a question mark over the need of having a large workforce.
Out of Rs1.1 trillion, a sum of Rs498.9 billion came from petroleum sales alone, which was about one-fourth of all revenue generated by the Federal Board of Revenue (FBR) from sales tax, custom duties and federal excise duties.
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The FBR collected Rs1.11 trillion on account of sales tax, custom duties and federal excise duties, which was 55.2% of Rs2.1 trillion indirect taxes collection during fiscal year 2016-17 that ended on June 30.
Another worrisome element was that total indirect tax collection of Rs2.1 trillion was 63.8% of the total revenue, which puts a stranglehold on economic growth and affects the country’s competitiveness in the global markets.
The eight sectors and products – the petroleum products, vehicles, iron & steel, mechanical appliances, cigarettes, electrical machinery, cement and beverages – contributed one-third in total tax collection of Rs3.361 trillion in the last fiscal year.
This has once again highlighted the issue of unfairness in the tax system where few documented sectors are bearing the burden of the whole economy. Although these eight products contributed over 55% in indirect tax collection, there were still massive slippages, even in these sectors. The federal government loses roughly Rs50 billion worth of federal excise duties every year due to massive evasion in the tobacco sector.
During fiscal year 2016-17, the parliament approved Rs3.621 trillion tax collection target for the FBR but the tax machinery could collect only Rs3.361 trillion – falling short of the goalpost by Rs259 billion.
Among key reasons for low tax contribution by the other sectors of the economy are lack of documentation, corrupt practices and high sales tax rates. The PML-N government had initiated an exercise to introduce single-stage and single-digit sales tax but it abandoned the work abruptly. There are four types of taxes and three are indirect in nature; sales tax, custom duties and federal excise duties. The only direct tax is income.
The indirect tax collection on POL products contributed 24.7% in the total revenues generated by levying sales tax, custom and federal excise duties. It was 14.8% of the total taxes collected last year. The petroleum product was the single largest contributor and is an easy source of revenue generation.
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The government earned Rs498.9 billion from this single sector alone. It collected Rs225.8 billion sales tax at the domestic sales of the POL products, which was about 36% of the total domestic sales tax collection. The government netted another Rs212 billion at the import stage that was 30.5% of the sales taxes collected on the import of goods. The government generated another Rs61 billion on account of custom duties that was 12.3% of the total custom duties collection in the last fiscal year.
The tax collection on sale of all types of vehicles stood at Rs147.4 billion – 7.3% of total indirect taxes -and 4.4% of the total tax collection in the last fiscal year. It was second largest contributor in indirect taxation. The government collected Rs13.4 billion sales tax at the domestic stage and Rs53.1 billion at the import stage. The sector gave Rs78.3 billion on account of custom duties on the imported vehicles and Rs2.44 billion on account of federal excise duties.
Iron and steel
The third largest contributing sector generated Rs101 billion in indirect taxes, which was 5% of the total indirect taxes collected in the previous fiscal year. The sales tax collected at the domestic stage stood at Rs12.4 billion and Rs55.3 billion were collected at the imports of iron and steel. The government also collected Rs33.2 billion on account of custom duties.
The government collected Rs98.5 billion on sales of mechanical appliances, which contributed 4.9% into the total indirect tax collection. All taxes were collected at the import stage. Most of it, Rs62.9 billion, was collected on account of sales tax at the import stage and remaining Rs35.6 billion on account of custom duties.
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The consumption of cigarettes generated Rs84.4 billion revenues for the government, which was 4.2% of the total indirect collection of the last fiscal year. The sales tax collection from the sector stood at nearly Rs18 billion while the federal excise duties collection was only Rs66.4 billion – far lower than the previous year due to massive tax evasion in the sector.
The sector contributed Rs76 billion – all at the import stage – which contributed 3.8% into total revenues generated by charging indirect taxes. The sales tax collection from the electrical machinery stood at Rs50 billion while another sum of Rs26 billion were collected through custom duties.
The government raised Rs66.6 billion revenues on the sale of cement, contributing 3.3% into total indirect collection. The FBR collected Rs29.7 billion on domestic sales and another Rs36.8 billion on account of federal excise duty.
The consumption of beverages generated Rs41.7 billion, making it the eight largest contributor in all the revenues generated by levying sales tax, custom and federal excise duties. The FBR collected Rs18.9 billion worth of sales tax and Rs22.5 billion on account of federal excise duties.