During the outgoing fiscal year FY23, the Federal Board of Revenue (FBR) took the decision to retain tax refunds worth over Rs400 billion as part of its strategy to mitigate the shortfall in annual revenue collection.
This move, however, has raised concerns and drawn a strong reaction from the International Monetary Fund (IMF). To address the situation, the IMF has proposed the implementation of a “ceiling” on the net accumulation of tax refund arrears in both income tax and sales tax.
The IMF’s proposal allows some flexibility to exceed the ceiling during the crucial months of September and December. These months are pivotal as individuals and corporations file their tax returns with the FBR and claim their refunds.
However, any excess amount beyond the ceiling during these months must be promptly cleared within the following two months to ensure compliance with the set limit and efficient management of the refund process.
The data from IMF documents reveals that as of May 2023, the outstanding income tax refund arrears amount to Rs215 billion, while the sales tax arrears for the same period stand at Rs183.8 billion. These figures highlight the significance of addressing the issue and its potential impact on taxpayers and the government’s revenue management.
To manage the refund process effectively, the concept of a “stock of refunds” has been defined. This refers to the total value of tax refund claims that remain unpaid by the FBR, encompassing refund claims awaiting resolution through various methods, such as cash refunds, offsetting against taxpayers’ obligations, or government bonds.
The FBR sets deadlines for settling these claims after the tax refund requests have been submitted, ensuring that outstanding tax refunds owed to taxpayers are managed and controlled efficiently.
Despite these efforts, provisional data shows that the FBR missed its annual budgetary collection target by approximately Rs522 billion, reflecting an 8.83 per cent shortfall for FY23. The decline in dutiable imports and poor general sales tax performance contributed to this outcome, with revenue collection reaching Rs7.118 trillion until June 27, falling short of the projected Rs7.64 trillion for FY23.