Karachi, November 5, 2024 – In a bid to bolster its tax-to-GDP ratio, Pakistan is set to introduce surcharges on fossil fuels as part of an aggressive revenue collection strategy outlined in the latest annual report by the Federal Board of Revenue (FBR), released on Tuesday. This initiative is in response to commitments made to the International Monetary Fund (IMF) under a new financial arrangement aimed at stabilizing the country’s economy.
The FBR report emphasizes that Pakistan has committed to increasing its tax-to-GDP ratio to 13.7% by the fiscal year 2028-29. Currently, the ratio stands at a precariously low level, necessitating an additional 2.6% increase to meet this ambitious target. The report indicates that a significant portion of this increase will be derived from the imposition of surcharges on fossil fuels, alongside efforts to enhance the provincial tax base and augment non-tax revenue streams at the federal level.
The recent completion of the IMF’s 2024 Article IV consultation with Pakistan, alongside the approval of a 37-month Extended Arrangement under the Extended Fund Facility (EFF) amounting to SDR 5,320 million (approximately US$7 billion), has catalyzed these reforms. The agreement, finalized on May 23, 2024, mandates a rigorous Fiscal Framework aimed at improving Pakistan’s economic resilience.
Under this framework, the Government of Pakistan (GoP) is expected to achieve a tax-to-GDP ratio of 13.7%, with an ambitious target of 11.1% of that increase anticipated to come from the FBR’s intensified policy and enforcement measures. Supported by the World Bank, the FBR is implementing a comprehensive Revenue Mobilization Program as part of this reform initiative, focusing on expanding the tax net and enhancing compliance.
Key components of the Medium-Term Fiscal Framework (MTFF) established under the EFF include several critical measures designed to broaden the tax base and eliminate existing inefficiencies in the tax system. Among these measures is the elimination of preferential tax treatments that have historically benefitted certain sectors, thereby reducing the overall tax contribution from the economy.
The reforms also propose a significant expansion of the coverage of Personal Income Tax (PIT) and Corporate Income Tax (CIT) to include previously untaxed sectors. This expansion will be complemented by a reduction in tax slabs, which is expected to raise the maximum tax rate to an unprecedented 45%. Furthermore, the simplification of PIT regulations for salaried and non-salaried individuals is anticipated to streamline tax compliance, thereby encouraging greater participation in the formal tax system.
Another crucial aspect of the proposed reforms includes expanding the coverage and rates of the Federal Excise Duty (FED). By enhancing these taxes, the government aims to capture revenue from sectors that have previously been inadequately taxed, ensuring a more equitable distribution of the tax burden.
Additionally, the overhaul of income tax and withholding tax regulations for motor vehicle registrations is set to create a more transparent and efficient tax collection process. These measures are intended not only to increase revenue but also to build public trust in the taxation system by ensuring that all sectors contribute their fair share to the national coffers.
While these initiatives represent a proactive approach to address Pakistan’s fiscal challenges, the proposed fossil fuel surcharges have sparked a debate about their potential impact on consumers and businesses. Critics argue that increased costs associated with fossil fuels could exacerbate the financial burdens on households already struggling with inflation, while proponents assert that these surcharges are essential for enhancing the country’s fiscal health.
As Pakistan embarks on this ambitious journey to reform its tax system, the successful implementation of these measures will be crucial for achieving the targeted tax-to-GDP ratio and ensuring sustainable economic growth. The government’s commitment to improving fiscal discipline, coupled with the backing of international financial institutions, signals a pivotal moment in Pakistan’s efforts to stabilize its economy and pave the way for long-term prosperity. The outcomes of these reforms will not only shape Pakistan’s economic landscape but also influence its relationships with international creditors and investors in the coming years.
