Higher interest rates drive record tax collections in FY24: Pakistan central bank

Higher interest rates may have been a worry for the common man and many businesses but they significantly boosted tax collections in fiscal year 2023-24 (FY24), according to a report by Pakistan's central bank released on Thursday.

In FY24, Pakistan's total revenue surged to PKR 13.27 trillion ($47.4 billion), with tax revenue contributing PKR 10.08 trillion, according to the State Bank of Pakistan (SBP).

The report notes banks paid substantial income taxes due to record profits. Besides, withholding taxes on individuals' earnings from bank deposits and government securities also increased.

Higher interest rates led individuals to invest more in government securities, seeking safe returns amid inflation. This trend resulted in higher profits and, consequently, higher tax collections.

It may be mentioned here that the policy rates remained at 22% from July 2023 to May 2024, after which SBP started reduced the interest rates, which now stand at 17.5%. Analysts are expecting a significant rate cut in the upcoming monetary policy announcement on November 4.

According to SBP, elevated inflation, though slowing, contributed to higher indirect tax collections.

Domestic sales tax collection rose by 26.8%, partly due to increased electricity prices.

Higher prices of commodities like sugar, cement, and cigarettes also boosted sales tax and Federal Excise Duty (FED) collections.

Moreover, increased corporate profits led to higher dividend payments, raising withholding tax collections.

Despite a 0.8% decline in imports in dollar terms, they rose by 14.9% in PKR terms due to currency depreciation. Taxes collected at the import stage increased by 20.2%.

During the year under review, the government implemented revenue mobilization measures, including rate increases and rationalization of tax expenditures.

Direct tax changes included broadening the super tax scope and revising income tax slabs for salaried and non-salaried individuals.

Indirect tax measures included raising the standard sales tax rate from 17% to 18% and increasing it further on certain goods.

These efforts collectively enabled higher tax collection in FY24, reflecting the government's strategy to enhance revenue through various fiscal measures.