EDITORIAL: The IMF (International Monetary Fund) mission is currently in Pakistan to conduct the first review under the Extended Fund Facility (EFF) arrangement.
The government is reportedly well-positioned for the review, and the finance minister remains very confident. Overall, the binary targets — both on the fiscal and monetary sides — are likely to be met.
However, there are issues with the structural benchmarks and indicative targets. While the review is likely to be cleared the Fund is expected to press the government to expand the tax base and reduce the burden on the formal sector.
Tax revenues are short by Rs 450 billion as of February, and the gap is expected to increase to one trillion rupees by year-end. Some valid reasons exist for these slippages, as inflation is much lower than initially anticipated, as is real GDP growth.
However, the shortfall also stems from the failure of the FBR (Federal Board of Revenue) and the government to bring retailers and wholesalers into the tax net. The situation is no different in real estate and, generally, across a large segment of the economy that operates informally.
The government simply cannot further burden the already small formal taxpaying sector. Corporate and individual tax rates (both salaried and non-salaried) are among the highest in the world, while public service provisioning is among the lowest.
Indirect taxes — GST, FED, and others — are excessively high, leading to declining sales in several sectors of the documented economy due to a heavy tax burden.
The Laffer curve appears to be at play, indicating that tax rates may have already exceeded the optimal level.
Unfortunately, the FBR and the Finance Ministry lack the capability to conduct proper tax analysis. Industry-specific reports are also inadequate. With higher tax rates, the incentive for informal businesses to thrive has increased. For instance, after doubling tax rates on tobacco, informal players have flourished.
The same applies to the formal dairy and juice markets, where the imposition of GST and increased FED has allowed smaller, tax-evading players to dominate. This shift is disrupting the formal packaging industry, as these businesses are illegally importing packaging from China to evade duties. As a result, volumes and tax collection from the formal sector are shrinking.
The formal sector now faces hiring challenges, particularly in the financial and IT sectors.
Many individuals prefer freelancing, and some firms, through their foreign subsidiaries, are enabling this shift. Even for exporting firms, the tax advantage should apply at the corporate level, not at the employee level. However, high salary taxes are pushing individuals to seek alternative options.
The FBR must rethink its strategy. Raising the GST rate is not an option, as it would only drive more businesses into informality. The overall enforcement is weak, governance is poor, and public service delivery remains suboptimal. Tax rates must be rationalised while the tax net must be expanded.
Additionally, the Fund perhaps is not happy with the progress on the agriculture income tax. While Punjab took a legislative action just within the specified deadline of 31st December 2024, other provinces delayed the process. Even after legislation, there appears to be little intent to enforce the tax, and the IMF staff likely senses this hesitation.
An odd inconsistency has emerged — Punjab legislation includes farm produce and livestock as part of agriculture for taxing income whereas FBR claims taxation of income from livestock falls under federal jurisdiction. Seeing this, other provinces excluded livestock from their tax laws.
The question remains: Why isn’t the FBR collecting taxes on livestock if it is in its jurisdiction? It is a massive sector, constituting over half of the agricultural economy with a huge cash market during Eid-ul-Azha, yet it remains untaxed. The FBR, therefore, owes an explanation.
The bottom line is that the FBR must pull its socks up, and the IMF should push for genuine tax broadening until it happens. This review may cleared by the visiting IMF mission, and the gap might be temporarily filled by cutting development spending, but the real focus must be on next year’s budget framework. There can be no more excuses for failing to expand the tax base.
Copyright Business Recorder, 2025
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