Analysis of Sales Tax Revenue

Analysis of Sales Tax Revenue Allocation in Pakistan’s

FY 2024-25 Budget: Trends and Implications

Abstract
Sales tax revenue is a cornerstone of Pakistan’s fiscal system, playing a critical role in funding
public services and infrastructure. This paper analyzes the allocation of sales tax revenue in the
FY 2024-25 budget, examining federal and provincial shares, trends in revenue collection, and
implications for governance and economic equity. Data from the "Budget in Brief FY 2024-25"
reveals significant growth in sales tax revenue, from PKR 2,050 billion in FY 2023-24 (Revised
Estimates) to PKR 2,786 billion in FY 2024-25 (Budget Estimates). The study highlights the role
of the NFC Award in equitable revenue distribution and addresses challenges such as inefficient
collection mechanisms and inter-provincial disparities. Recommendations are made to strengthen
revenue authorities and enhance fiscal transparency.

Introduction
Sales tax, a major component of Pakistan’s fiscal framework, serves as a critical source of
revenue for both the federal and provincial governments. Its importance is rooted in its dual role
as a tool for revenue generation and an instrument for equitable resource distribution. The FY
2024-25 budget underscores the growing reliance on sales tax to meet developmental goals and
sustain public services. As Pakistan grapples with economic challenges, including fiscal deficits
and inflation, sales tax has become increasingly significant in ensuring fiscal stability.

Sales tax is primarily levied on the sale of goods and services. At the federal level, the Federal
Board of Revenue (FBR) collects sales tax on goods, while provinces are responsible for
collecting sales tax on services under the National Finance Commission (NFC) framework. This
dual responsibility reflects the federal structure of governance, aiming to balance national
revenue needs with regional autonomy. However, disparities in tax collection efficiency and the
varying economic capacities of provinces make the equitable distribution of sales tax revenue a
complex yet crucial task.
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The FY 2024-25 budget introduces several reforms to improve tax collection, including
digitization, compliance risk management, and automation of processes. These initiatives aim to
expand the tax base, minimize evasion, and enhance transparency. Meanwhile, the NFC Award
plays a pivotal role in determining the distribution of sales tax revenue, ensuring that less
developed provinces receive a fair share to support their socio-economic development.

Background
The historical evolution of sales tax in Pakistan highlights its centrality in the country’s
economic policies. Introduced as a federal levy, sales tax was later bifurcated into taxes on goods
(federal jurisdiction) and taxes on services (provincial jurisdiction). This division aligns with the
principles of fiscal federalism, granting provinces greater autonomy in managing their financial
resources. The NFC Award, a constitutionally mandated mechanism, is instrumental in defining
the revenue-sharing formula between the federation and provinces.

In the FY 2024-25 budget, sales tax constitutes a significant portion of the federal government’s
gross revenue, projected at PKR 2,786 billion, a 36% increase from the revised estimates of the
previous fiscal year. This substantial growth reflects the government’s efforts to broaden the tax
net and improve compliance. At the provincial level, sales tax on services empowers regional
governments to generate revenue independently, fostering financial self-sufficiency.

Despite its importance, sales tax administration faces persistent challenges, including
inefficiencies in collection, reliance on indirect taxation, and disparities in provincial capacities
to generate and utilize revenue. These issues underscore the need for robust reforms to enhance
tax efficiency and equity. By addressing these challenges, sales tax can serve as a powerful
instrument for promoting fiscal stability, reducing economic inequalities, and supporting
sustainable development.

Objective and Scope

The objective of this analysis is to comprehensively examine the allocation of sales tax revenue
in Pakistan’s FY 2024-25 budget. Sales tax plays a pivotal role in the country's fiscal structure,
serving as a substantial source of revenue for both the federal and provincial governments. This

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study seeks to understand how sales tax revenue is distributed, how it supports fiscal governance
at different levels, and its broader implications for economic development and resource equity.

This analysis also aims to evaluate the trends in sales tax collection, focusing on the growth
trajectory compared to previous fiscal years. By analyzing data from the "Budget in Brief FY
2024-25," the study delves into the specifics of how sales tax revenue is generated and allocated.
It further explores the mechanisms used for its equitable distribution, particularly through the
NFC Award, and how these mechanisms address inter-provincial disparities in economic and
fiscal capacities.

The scope of this analysis extends beyond mere figures to consider the operational frameworks,
such as FBR reforms, provincial tax authority performance, and federal oversight. It also
investigates the impact of these allocations on public service delivery, such as health, education,
and infrastructure development, highlighting both opportunities and challenges. The study
encompasses the implications of sales tax revenue allocation on governance, particularly the
financial autonomy of provinces, and how these allocations align with the broader goals of
economic stability and equitable growth.

This comprehensive approach ensures that the study not only outlines the numerical allocation of
resources but also evaluates the effectiveness of sales tax as a tool for fiscal federalism and
socio-economic development. By addressing these dimensions, the study contributes to
understanding the vital role of sales tax in shaping Pakistan’s fiscal landscape and the reforms
needed to optimize its potential for sustainable development.

Overview of Sales Tax Revenue in FY 2024-25

Revenue Generation

According to Table 4 of the FY 2024-25 budget document, sales tax revenue is projected at PKR
2,786 billion, marking a significant increase from the revised estimate of PKR 2,050 billion in
FY 2023-24. This growth underscores efforts to expand the tax base and improve collection
efficiency.

Comparison with Previous Years

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 Analysis of Sales Tax Revenue

 FY 2023-24 Revised Estimates: PKR 2,050 billion.

 FY 2024-25 Budget Estimates: PKR 2,786 billion (36% increase).
 Categories of Sales Tax Revenue
 Sales Tax on Goods: Collected by the federal government.
 Sales Tax on Services: A provincial subject as recognized under the NFC Award

Distribution of Sales Tax Revenue

A. Federal and Provincial Shares

Sales tax revenue forms a part of divisible pool taxes, distributed under the NFC Award:

 Federal Share: 42.5%.

 Provincial Share: 57.5%.

B. Provincial Breakdown

The provincial share is distributed based on population, revenue generation, and other socio-
economic indicators. The percentages are as follows (Table 6):

 Punjab: 51.74%.
 Sindh: 24.55%.
 Khyber Pakhtunkhwa (including 1% War on Terror): 14.62%.
 Balochistan: 9.09%.

C. Straight Transfers for Sales Tax on Services

 Provinces have the autonomy to collect and retain sales tax on services, contributing to fiscal
decentralization.
 Key Observations
 Equitable Distribution: Smaller provinces like Balochistan benefit from weighted criteria
such as poverty and backwardness.
 Challenges: Variability in collection efficiency among provinces.

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Implications for Governance and Development

Fiscal Autonomy

Provincial control over sales tax on services enhances fiscal capacity, allowing targeted spending
on local priorities such as education, health, and infrastructure.

Economic Disparities

Larger provinces like Punjab and Sindh generate higher revenue, while smaller provinces rely
more on federal transfers, perpetuating disparities in resource utilization.

Revenue Collection Efficiency

FBR reforms, such as digitization and compliance risk management, aim to address
inefficiencies in tax collection. Provincial authorities must adopt similar strategies to improve
service tax revenue.

Impact on Public Services

Allocated funds significantly impact public service delivery. For example:

Education: Increased provincial revenues support educational reforms and infrastructure.

Health: Investments in hospitals and medical services.

Infrastructure: Development projects to enhance connectivity and productivity.

Challenges and Recommendations

Challenges

Inefficient Collection Mechanisms: Despite reforms, tax evasion and underreporting persist.

Dependence on Federal Transfers: Smaller provinces lack revenue generation capacity.

Inter-provincial Disparities: Uneven resource allocation creates economic imbalances.

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 Analysis of Sales Tax Revenue

Recommendations

Strengthen Revenue Authorities: Invest in capacity building for FBR and provincial tax bodies.

Diversify Tax Base: Encourage provinces to expand their tax bases beyond sales tax.

Enhance Transparency: Implement audit and monitoring systems to ensure equitable utilization
of funds.

Promote Collaboration: Foster inter-provincial cooperation to share best practices in tax

administration.

Conclusion
Sales tax revenue remains a vital pillar of Pakistan’s fiscal framework. The FY 2024-25 budget
demonstrates progress in revenue generation and equitable distribution, though challenges persist
in achieving efficiency and equity. Strengthening tax administration, fostering provincial
autonomy, and addressing disparities are essential for sustainable fiscal governance.

References
 Government of Pakistan, Budget in Brief FY 2024-25.
 National Finance Commission Award Documents.
 Federal Board of Revenue Reports.