On Monday, the Federal Board of Revenue (FBR) presented the International Monetary Fund (IMF) with an overview of Pakistan’s current fiscal standing, detailing revenue collection progress for the fiscal year 2024-25 and addressing strategies to bridge a projected shortfall of Rs 230 billion for the second quarter (October-December).
The FBR’s discussions with the IMF encompassed revenue potential, enforcement tactics, retailer registration, and broader tax base reforms, with the aim of bolstering fiscal resilience.
The IMF delegation, led by Nathan Porter, commenced meetings with the FBR’s leadership, including its chairman, the Member of Inland Revenue (Policy), and other senior tax officials. The FBR chairman outlined both short-term and long-term strategies to mitigate the anticipated deficit, which remains a pressing concern. The IMF team, currently in Pakistan to review the country’s progress on the Extended Fund Facility (EFF) program, is scheduled to meet with the finance minister on Tuesday. However, this mission is not yet part of the EFF’s first official review, which is expected to occur no earlier than the first quarter of 2025.
Last week, the finance minister highlighted that this visit serves primarily as a status assessment of the $7 billion EFF program. The government has already surpassed initial IMF targets by integrating traders and shopkeepers into the tax framework, generating Rs10 billion in tax revenue in the first quarter. This sum includes additional tax revenue collected from suppliers providing goods to unregistered shopkeepers. Moving forward, the FBR plans to implement a data-driven approach for large retailers, suspending the current fixed tax per shop policy and instead leveraging data on returns, data security, and electricity consumption to identify eligible businesses.
Under this revised policy, the FBR aims to minimize physical inspections, focusing instead on substantial data evidence to detect tax evasion among large retail operations. Consequently, the tax system will no longer rely on collecting a fixed tax from each shop, irrespective of its size. These reforms signify a departure from blanket taxation measures toward a more nuanced approach based on verified financial information.
In terms of current collection figures, the FBR reported a collection of Rs877 billion in October 2024 against a target of Rs980 billion, leaving a deficit of Rs103 billion. For the first four months of the fiscal year, the cumulative revenue stands at Rs3,440 billion, shy of the Rs3,636 billion target set for July-October. The FBR attributes this shortfall to changing economic indicators such as GDP growth, import trends, inflation rates, and fluctuations in large-scale manufacturing output, which all informed the initial revenue targets.
As part of the contingency plan, the FBR has outlined a series of policy measures, including tax rate hikes anticipated to generate Rs1,190 billion, enforcement initiatives amounting to Rs320 billion, and retailer schemes projected to yield Rs50 billion. Furthermore, expected revenues from the Sindh region and import-led growth in large-scale manufacturing were forecasted to deliver Rs2,047 billion. Despite these projections, evolving economic dynamics have led to a sales tax shortfall of Rs147 billion on imports from July to September. Nonetheless, income tax collection exceeded expectations, totaling Rs1,230 billion against a target of Rs1,098 billion for the first quarter.
In a bid to recover revenue, the FBR has crafted a strategy to target non-compliant high-net-worth individuals. Through third-party data analytics, the agency has identified 190,000 individuals liable for Rs7 billion in taxes. Notices are now being dispatched, with 50,000 non-filers under active pursuit and 25,000 cases anticipated to reach assessment orders.
Under the contingency revenue measures agreed upon with the IMF, the government plans to increase the federal excise duty on sugary beverages and raise withholding tax rates on machinery, raw material imports, and services. Collectively, these adjustments aim to contribute an additional Rs10.8 billion monthly throughout the remainder of 2024-25, with a projected cumulative impact of Rs97.2 billion for the October-June period.
In its recent report, the IMF underscored that any shortfall exceeding one percent of the projected revenue could prompt further fiscal tightening. Options include incremental hikes in advance income tax on machinery and raw material imports, as well as higher withholding tax rates on supplies, services, and contracts. The excise duty on aerated drinks may also see an increase of five percentage points, expected to bring in an extra Rs2.3 billion monthly.
Through these discussions and forthcoming reforms, Pakistan aims to strengthen its fiscal framework and navigate the challenging economic landscape while upholding its commitments under the EFF program. The government’s ongoing efforts highlight a commitment to implementing efficient tax policies that respond dynamically to macroeconomic shifts, setting a foundation for future financial stability.
