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While Federal Board of Revenue(FBR) appreciates and acknowledges the importance of direct taxes and income tax as highlighted by the authors in news item captioned “Dismal Income Tax Collection”, published in some section of the press on 11th November, 2022, it is clarified that the present policy of FBR and the Federal Government is also based on direct tax dominated system i.e. the principle of equity where tax contribution is proportional to “ability to pay”. As a result, direct taxes collection continue to register steady growth and during the first four months of the current year direct taxes/income tax have risen to 886 billion which is 41% higher than the direct tax inflows during the same period last year. It is also mentioned that there is a shift in the tax mix and the ratio of direct tax to indirect tax is also increasing. Resultantly, during first four months of the current year, percentage contribution of direct taxes in overall revenue has increased to more than 41% for the first time in a decade, as against 36-39% in the past few years as has also been quoted by the authors.
Although, FBR does not agree with the notion that withholding taxes are collected in indirect mode, FBR, during the last few years, has adopted the policy of reducing withholding tax provisions and introducing measures which directly target the rich. Even, during the current year’s budget, maximum amendments were introduced regarding direct taxes. These amendments were aimed at taxing affluent and wealthy class by including provisions such as super tax, CVT on foreign assets, deemed rental income on the assets of the rich and higher rates for companies earning high profits such as banks. These provisions alone have a revenue impact of approximately Rs 250 billion. At the same time certain withholding tax provisions were eliminated and consequently, the percentage contribution of withholding taxes in direct taxes has also been reduced to 65.8% during first four months from 67.15% during corresponding period of the previous year.
Authors have also pointed out towards declining tax-to-GDP ratio. Although, tax-to-GDP ratio is lower than what is desired, it is clarified that the current ratio is due to rebasing of GDP from 2005-06 figures to 2015-16 figures, thus adversely impacting it. With base year 2005-06, tax-to-GDP ratio would have been higher by at least 2 percentage points. To further improve the ratio, FBR is continuously striving to increase the tax base with the help of IT/automation and third party data. In this regard Directorate General of Broadening of Tax Base was made functional during last month along with establishment of Directorate General of Digital Invoicing & Analysis.