Outsourcing tax collection through incompetence

Pakistan is not yet out of the economic crisis, the intensity of which keeps massively impacting the masses throughout the country while the imbalance in tax revenue collection continues to mar the those already paying taxes. As per data by the Federal Board of Revenue (FBR), the salaried class paid 200% more taxes than exporters or retailers, with Rs. 264.3 billion paid in FY23 which was 40% higher than in FY22.Pakistan’s active taxpayers add up to 5.3 million while individuals account for 3.69 million. The highest amounts of income tax were collected from savings account holders, contractors, importers, non-filers’ electricity bills, telephone, and mobile phone users, salaried individuals, and dividend income. Other significant sources of revenue included taxes on property transactions, exports, foreign income fees, brokerage commissions, and car registrations.

Ironically enough, FBR has been deepening its pockets while dampening those of the electricity customers throughout Pakistan because power being an essential utility gets them a captive audience. This is evident from the fact that it collected over Rs. 630billion in taxes from all customer categories in FY23. Its reliance on the power sector to meet tax revenue targets is quite evident. Despite the fact that inflation was at a record-level high in May at 38%, amidst challenging macroeconomic situation, the FBR apparently continued to outsource its responsibility to the power sector which is already stained by circular debt, being at Rs. 2.636 trillion to be precise.

A large portion of the accumulated debt is attributed to inflated electricity bills which remain unrecovered because of the inclusion of large sums of taxes and capacity payments. Reports indicate that FBR collected Rs. 1.4 trillion in the last three fiscal years from FY21-23. This is approximately 53% of the total circular debt stock of the power sector.

The current structure of electricity bills in Pakistan incorporates various taxes, not just one. These increase the overall cost for customers. While essential for government revenue, imposition of taxes further affects the propensity of customers to foot their overall bill. The inclusion of taxes in electricity bills has sparked significant furor, particularly given the country’s ominous socio-economic landscape. According to NEPRA’s State of Industry Report, there are 86.58% domestic electricity customers in Pakistan whose consumption is calculated to be 43.92% of the total electricity consumed by various customer segments. Taxation regimes require attention towards areas like real estate, wealth, and agriculture perhaps, instead of simply increasing sales and income taxes. Focus on driving tax revenue generation in these areas to create the fiscal space and breathing room for a potential reduction in taxes levied on electricity bills. With approximately 40 million electricity users, the power sector admittedly has manifolded more connections than the number of active taxpayers in the FBR list. But this should not be used as an excuse to make DISCOs a collection agent on behalf of the FBR or the Government.

The focus of DISCOs should be exclusively on recovering the legitimate costs incurred in their business, not fulfilling the responsibilities of FBR. If this system must follow, it should extend both ways – the FBR should subsidize the circular debt and help reset the sector! It has the infrastructure, expertise, and mandate to collect taxes directly, however, despite all the resources in place it is falling short on its main role. An even radical proposal would be disbanding the FBR and transferring their operational budget to the power sector too.

Applying taxes on electricity bills is inherently regressive as it disproportionately affects lower-income households, because they end up spending a higher percentage of their income – which is also subject to taxes - on utilities compared to affluent households. The government should seek alternative methods to meet tax revenue targets than resting their faith on the power sector simply because their tax collecting entity is not performing.

The government should focus on broadening the tax base and enhancing compliance at a national level instead of using DISCOs as a shortcut. A more transparent and efficient tax system can increase public trust and compliance, meanwhile penalties should be imposed on those who do not comply and purposely stay out of the tax bracket.

 Mobashir Sandila

— The writer is an energy sector analyst with keen interest in the power sector, especially renewable energy, policy development and challenges.

 Mobashir Sandila

— The writer is an energy sector analyst with keen interest in the power sector, especially renewable energy, policy development and challenges.

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