A few months into the economic reforms launched by the Pakistan Muslim League Nawaz (PML-N) government, the updates and figures released by the Federal Board of Revenue (FBR), responsible for tax collection, make for interesting reading. The initial results suggest that the Pakistani economy, taxpayers, and tax collection systems are responding to these changes, albeit in ways as varied as the policies themselves. Notably, income tax filings have risen significantly.

The FBR’s stricter policies, along with heightened awareness around filing tax returns, have had a positive impact. This year, over 5.1 million income tax returns were filed, compared to 2.8 million in the same period last year, marking a 77.47% increase. As part of this strict approach, the FBR decided not to extend the filing deadline and instead imposed penalties on non-filers to encourage compliance in the future. This commitment to enforcing deadlines and penalties is expected to result in substantial gains for the tax system.

At the same time, overall revenues have declined due to a reduction in imports, which has impacted Pakistan’s reliance on import and consumption-based sales taxes as revenue sources. This demonstrates the complexity of the economy; while reducing the import bill to address the foreign deficit is a sound move, it also entails a loss of indirect tax revenue. However, as long as Pakistan continues to increase direct tax collection by expanding the tax net, these short-term revenue losses could be seen as a worthwhile trade-off.

The ultimate goal is for all elements of this reform to align, allowing for a potential reduction in general sales taxes, thereby offering relief to the public while income taxes carry more of the revenue burden. Regardless of how these policies unfold, it’s clear that Pakistani taxpayers are beginning to respond to the government’s reforms. The hope is that the government will maintain its commitment to these economic reforms, ensuring that these positive shifts endure.