The government enhanced the scope of sales tax withholding regime to all registered companies and exporters to deduct 20% of the payable sales tax on all purchases – in a first desperate move to increase declining revenues.

The decision was taken on Thursday and is expected to compensate part of revenue shortfalls on account of declining imports that had severely affected tax collection, according to a member of the Federal Board of Revenue (FBR).

Through a statutory regulatory order, the FBR extended the scope of sale tax withholding regime from those companies which are registered in the three large taxpayer units (LTU) of the country to all the registered companies across Pakistan besides exporters. This will effectively increase the number of companies liable to be taxed under the regime from a few hundred to over 75,000.

The decision will take effect from February 14.The FBR had not disclosed the amount it intends to raise through what it insists an administrative measure instead of a revenue measure. Previously, corporations registered in LTUs were required to withhold 1% sales tax of the value of taxable supplies from persons registered outside the LTU.

During the first seven months of fiscal 2013, government collected only Rs1.03 trillion, 43% of the annual target of Rs2.38 trillion. The FBR officials said a decline in imports has significantly affected revenue collection.

The FBR’s showed a revenue growth of around 6%, far below the nominal GDP growth (8% inflation and 4% expected GDP), suggesting massive pilferages in the tax machinery. Additionally, the FBR had given roughly Rs30 billion tax breaks under political compulsions in the current fiscal year so far.

Due to massive revenue shortfalls and the International Monetary Fund’s insistence to enhance revenues as a precondition for a fresh bailout programme, the FBR is in process of taking such measures.It proposed a mini-budget of Rs60 billion, which the analysts believe is the cost of inefficiency and political appointments in the tax machinery and may have to borne by the existing taxpayers.