Pakistan’s Progressive Taxation
Petroleum levy leads to PKR 8 billion in revenue following fiscal deficits.
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Pakistan’s rising fiscal deficit has made the government take certain steps to bridge the gap. Most recently, luxury taxes have been applied to expensive Hi-octane fuel. In simple terms, the fiscal deficit means the difference between the federal government’s revenue and its expenditures. Lately, both have been moving in opposite directions to widen the gap.
The reduction in revenue generation has been attributed to non-tax revenue and rising inflation since the FBR has stayed on top of its targets throughout FY 2021-2022. On the other hand, expenditure has seen an uptick, due to inflation and relief efforts for floods.
This government has focused primarily on restricting imports to manage national accounts. Previously, heavy duties were imposed on luxury import items including automobiles, cigarettes, etc.
These luxury taxes may prove as an efficient source of revenue generation since most of the cash flow through the levy will go towards central (federal) accounts. The recent petroleum levy promises a revenue increase of PKR 8 billion for the government and the imposition of an extra PKR 20 per liter for consumers.
These taxes are a small step towards equitable taxation. In a country where most of the tax revenue is generated through sales taxes, a wealth tax or luxury tax might work.
GRAPHICS OF THE DAY
Growth in non-tax revenue for Pakistan
Pakistan's fiscal deficit trend (as % of GDP) during the past 5 financial years
Revenue Breakdown (Tax vs. Non-Tax during FY 2022)
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