Inevitable tax reforms

FBR’s transition into a semi-autonomous body is essential to its ability to strategise, plan and execute revenue mobilisation

Inevitable tax reforms


he signs of economic stabilisation are strengthening, with gradual disinflation under way and external pressures easing further since the first review on the back of improved fiscal balances. However, the outlook remains challenging, with downside risks remaining exceptionally high”—IMF Country Report No 2024/105, Executive Summary of Second and Final Review of Stand-by Arrangement, May 10, 2024

Pakistan’s engagement with the International Monetary Fund under a 9-month $3 billion stand-by agreement has yielded satisfactory results, confirming the government’s steadfast commitment to economic reform and stability. Through diligent implementation of the SBA, the governments have steered the country towards financial resilience. Enhanced revenue mobilisation and prudent spending have led to a primary surplus during the first nine months of the current fiscal year.

The surplus amount of Rs 1.615 trillion (1.5 percent of the GDP), represents significant improvement compared to Rs 503.774 billion (0.6 percent of GDP) in the corresponding period last year. This shows that Pakistan is on the path to recovery with better fiscal management and sustainable growth strategies.

An encouraging trend that emerged in tax collection is now fading. The data released by the Ministry of Finance revealed 30 percent growth in revenue collection by the Federal Board of Revenue in the first nine months of the ongoing fiscal year. Tax collection reached Rs 6.71 trillion, up from Rs 5.15 trillion in the corresponding period of the preceding year. Notably, federal excise duty registered a 64.2 percent increase; while direct taxes rose by 41.4 percent. Sales tax and customs duty also registered healthy growth, rising by 17.7 percent and 15.2 percent, respectively.

However, amidst this robust performance, there were reports of a shortfall of Rs 163 billion to Rs 183 billion on the part of FBR in meeting annual target of Rs 9.415 trillion. It is worrisome that the FBR missed its 10-month target by Rs 52 billion—it collected Rs 7.362 trillion against a target of Rs 7.414 trillion. The collection in April 2024, Rs 650 billion, was short of target by Rs 57 billion.

The fact is that Pakistan continues to grapple with serious challenges on fiscal front. The repercussions of imprudent borrowing and extravagant spending, spanning both developmental and non-developmental domains, have exacerbated our fiscal predicament. Although there has been an increase in the number of taxpayers, the growth in terms of GDP share remains disappointingly sluggish.

The tax-to-GDP ratio has emerged as a pivotal gauge, shedding light on tax compliance, capacity and efficacy in the national taxation framework. Improving this ratio, which remained at 6.9 percent in the first nine months of the current fiscal year, has assumed paramount importance in fortifying fiscal sustainability and fostering economic resilience. Addressing these challenges demands strategic reforms in the FBR and prudent fiscal management, steering Pakistan towards a path of enduring fiscal health and prosperity.

Enhanced tax collection, coupled with a higher tax-to-GDP ratio, expands the fiscal leeway for the government, enabling organic revenue generation domestically, thereby reducing reliance on borrowing.

Recent data yields some intriguing observations: the tax to GDP ratio stood at 8.8 percent in FY-2009, rose to 9.8 percent by FY 2018, but subsequently witnessed a decline, plummeting to 8.5 percent in FY-2021 before rising to 9.2 percent in FY 2022. This underlines the need for concerted efforts to bolster tax compliance and broaden the tax base, ensuring sustainable fiscal growth and reducing dependency on external financing. Achieving a higher and stable tax-to-GDP ratio is imperative for fortifying the country’s fiscal resilience and fostering long-term economic stability.

Pakistan’s tax-to-GDP ratio has remained low. Recent data shows that the ratio stood at 8.8 percent in FY-2009, rose to 9.8 percent by FY 2018, but subsequently witnessed a decline, plummeting to 8.5 percent in FY-2021 before rising to 9.2 percent in FY 2022.

Speaking at a pre-budget conference, Federal Minister for Finance and Revenue Muhammad Aurangzeb emphasised the necessity of enhancing the tax-to-GDP ratio and highlighted a commitment to comprehensive reform. Achieving this goal demands a multifaceted strategy encompassing digitalisation of the tax infrastructure; improved collection methods; broadening the tax base; and fostering transparency in operations. Insufficient attention has been directed towards addressing the issue of a narrow tax base. Major sectors, such as agriculture, retail and real estate, either evade taxes altogether or have low tax rates relative to their potential contributions.

The proliferation of exemptions and concessions exacerbates distortions in the tax framework, fostering an environment of unequal treatment among taxpayers and sectors. This inequity undermines the integrity of the tax system and perpetuates disparities in fiscal obligations. In order to rectify these shortcomings, concerted efforts must be undertaken to streamline taxation policies, eliminate preferential treatment and incentivise compliance across all sectors of the economy. By fostering a fair and equitable tax regime, Pakistan can unlock untapped revenue streams, fortify fiscal sustainability and propel economic growth.

In addition to addressing current fiscal challenges, the government has also made significant strides in implementing the standby arrangement. This includes the introduction of a scheme aimed at registering retailers and enforcing tax filing to bolster revenue collection. Initially scheduled for launch at the beginning of the calendar year, the scheme has been rolled out, albeit with some delay.

As outlined in SRO 457(I) /2024, which delineates a special procedure for small traders and shopkeepers in key urban centres such as Karachi, Lahore, Islamabad, Rawalpindi, Quetta, and Peshawar, these entities are mandated to pay monthly advance taxes effective from July 1, 2024. The first payment is due on July 15, 2024. It will be followed by payments on the 15th day of each month thereafter. This initiative aims to enhance tax compliance among retailers, ensuring the government receives its rightful revenue share.

FBR’s transition into a semi-autonomous body is essential to its ability to strategise, plan and execute revenue mobilisation efforts without political interference. It is imperative that the FBR undertakes this transformation. Additionally, the FBR must proactively tackle challenges like tax evasion, the informal economy, smuggling of goods, lack of automation and litigation. By granting the FBR greater autonomy and authority, Pakistan can bolster its capacity to effectively combat these issues and optimise revenue collection. Investing in advanced technological solutions and streamlining legal processes will further strengthen the FBR’s capabilities. Ultimately, such initiatives will foster fiscal transparency, fortify the economy and facilitate sustainable development.

Pakistan needs to improve its legal framework for expeditious resolution of tax disputes, as delays inflict significant loss on the national exchequer. Recent news reports have revealed a staggering backlog of 145,036 cases across various courts, involving disputed claims of Rs 4.23 trillion. At the Supreme Court level alone, 3,455 tax-related cases with a total sum of Rs 1.4 trillion remain unresolved. At the High Court level, 19,528 cases involving Rs 740 billion await adjudication. The pressing issue requires focused attention to streamline processes and ensure timely and enhanced revenue collection to expedite tax dispute resolution, thus paving the way for a healthy business environment. This can mitigate financial loss, stimulate economic growth and attract foreign investment. This will fortify GDP growth, maintain fiscal equilibrium and drive overall development, leading to heightened per capita income and reduced inflation rates.

Dr Ikramul Haq, an advocate of the Supreme Court and writer, is an adjunct faculty member at Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the USA.

Inevitable tax reforms