Low inflation brings relief but poses revenue challenges for FBR

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LAHORE: Depending on the wider economic context and the government’s reaction, very low inflation for Pakistan’s economy can have both positive and negative implications.

The benefits of low inflation for Pakistan include stability in consumer purchase strength, as it protects the actual revenue cost – which makes essential equipment such as food, transport and energy. This is especially important in a country where many people live on fixed or low income. It also provides the State Bank of Pakistan (SBP) in reducing interest rates to support economic growth, especially during the slowdown.

Low inflation supports currency stability and investors’ confidence, which potentially attracts foreign investment and helps to stabilize the external account. This economic stability is very important for Pakistan’s long -term growth.

However, there are also a number of risks associated with prolonged or very low inflation. It stands for revenue challenges for the Federal Board of Revenue (FBR), which collect taxes based on nominal values. If prices are stagnant, sales tax revenue – due to the value of the ad – increases gradually. Similarly, if profit does not increase, the income tax from the businesses may be stagnant, and the duties of customs may be reduced due to import values.

It can also be difficult for businesses to raise prices, increase wages and limit the profit margin. This may discourage investment and expansion. In addition, if inflation is low while interest rates are high due to financial concerns, the actual value of borrowing is burdensome for both the government and the private sector.

One of Pakistan’s current low inflation driver is the global prices of oil, food and other commodities – especially in the oil and gas sector, as the country imports most of its energy needs. Low oil prices reduce fuel, electricity and transportation costs, which leads to stability in prices. Soft global food prices and domestic agricultural spirals have also helped food inflation, which is an important component of Pakistan’s consumer price index (CPI).

Despite this aid, the targets of inflation, combined with low inflation, create important challenges for the FBR. The FBR will have to focus on building structural reforms and tax base to meet its goals without relying on inflationary benefits. This will require the larger informal sector into the documentary economy. The steps include implementing the Point of Cell (POS) system in the retail and connecting wholesalers to the digital platform.

In areas such as supply chains, especially textiles, electronics and restaurants, there will be efforts to digitize supply chains. Combing to smuggling and under -invoicing will be quick, which will require better border control and maximum custom transparency. In order to improve the implementation, the FBR has to connect data with ports, shipping lines and customs declarations.

Above all, maximum income can be earned if the government improves property and agriculture taxes. Property prices need to be rational to reflect the market level. Large agricultural landowners – who are currently mostly exempt – should be taxed more efficiently. In addition, compliance with taxpayers can be increased by the use of non -filers identifying NADRA, utility bills, and banking data.

The government and the FBR will have to take advantage of technology to flag the low -reported income by using artificial intelligence and large data. Increasing mobile -based tax payment systems for SMEs and freelancers will further improve efforts to collect.

Although low inflation supports economic stability and provides relief to consumers, especially when it is driven by benign factors such as a reduction in oil and food prices, it is also a hindrance to the recovery of revenue in nominal terms. The FBR has to respond with strong implementation, improved documents, and increased technology use to maintain or increase revenue in a low inflation environment.