Moaaz Manzoor

While Pakistan has made notable progress in tax collection, persistent structural inefficiencies, reliance on indirect taxes, and slow reform implementation continue to pose challenges in meeting IMF-driven revenue targets, reports WealthPK.

Pakistan's tax shortfall reached Rs606 billion in the first eight months (July-February) of the fiscal year 2024-25, as revenue collection remained below the International Monetary Fund-mandated target. Despite a 28% growth in Federal Board of Revenue receipts, the country is struggling to meet fiscal targets, raising concerns about upcoming IMF negotiations.

Speaking with WealthPK, Syed Ali Ehsan, Deputy Executive Director at Policy Research Institute of Market Economy, highlighted the ongoing revenue collection challenges faced by FBR. "In February, FBR missed its revenue target, continuing a seven-month trend of shortfalls. Despite year-on-year growth, collections remain below the annual target," he noted.

Ehsan pointed out that IMF-driven taxation measures have disproportionately burdened salaried individuals and consumers. "Taxes on essential items, including medical tests, stationery, and children's milk, have added to economic distress. While income tax collection has exceeded expectations, there are significant shortfalls in sales tax, federal excise, and customs duties."

He added that IMF is closely monitoring Pakistan's revenue performance. "While some shortfalls may lead to waivers, the upcoming phase of negotiations is expected to focus on deeper tax reforms rather than temporary fiscal adjustments." Dr Ikramul Haq, a tax expert and Adjunct Faculty at Lahore University of Management Sciences, highlighted the fundamental inefficiencies in Pakistan's taxation system.

"A narrow tax base, over-reliance on indirect taxes, and an outdated collection system continue to hinder revenue generation," he explained. The FBR has reportedly requested the IMF to lower its annual tax target by Rs579 billion, potentially reducing it from Rs12.97 trillion to Rs12.3-12.5 trillion.

Haq, who is also a member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics, emphasised the need for direct taxation of previously untaxed sectors like retail, real estate, and agriculture. "Political resistance and administrative inefficiencies have delayed these much-needed reforms," he noted.

Additionally, he said the financial burden of inefficient state-owned enterprises (SOEs) remains a pressing concern. "Many SOEs operate at a loss, requiring repeated government bailouts that add to fiscal pressures," Haq observed. "The IMF has long pushed for restructuring and privatisation, but political barriers continue to stall progress."

Pakistan's struggle to meet IMF-driven tax targets reflects deep-rooted structural inefficiencies, a narrow tax base, and heavy reliance on indirect taxes. Without bold reforms to enhance compliance, broaden the tax net, and reduce exemptions, the country risks persistent revenue shortfalls and prolonged dependence on external financial support.

Credit: INP-WealthPk