Pakistan assures IMF to increase tax-to-GDP ratio to 13.7 percent

ISLAMABAD   -  Pakistan has assured the International Monetary Fund (IMF) to increase the tax-to-GDP ratio to 13.7 percent while achieving a primary surplus of 2 percent of GDP by FY28. “Given Pakistan’s low tax to GDP ratio, our fiscal consolidation strategy will be primarily revenue-based, designed to achieve a net 3 percentage points of GDP increase in tax revenues by the end of the program,” the government has stated in documentation, which were released by the IMF last week.

The specific measures include tax policy reforms aimed at simplifying col­lection and broadening the tax base. In the next three years, the government will intensify its efforts to simplify our tax policy. Government will start by en­hancing Annual Tax Expenditure Report with a chapter dedicated to evaluating the costs and benefits of tax incentives. This review will enable country to as­sess current tax credits and exemptions under the Income Tax Ordinance (ITO), repealing those whose costs outweigh their benefits and ensuring that any new concessions are grounded in a thorough cost-benefit assessment. In line with commitment to transforming direct taxa­tion, government plans to amend the ITO to ensure equitable taxation of all income sources. Additionally, the government will repeal the remaining exemptions for donations and non-profit organizations in the Second Schedule of the ITO, mak­ing them eligible for tax credits instead. To pave the way for a more efficient and straightforward sales tax system, govt will introduce a single turnover-based registration threshold for all business­es by FY27. Businesses exceeding this threshold will be required to register for both income tax and sales tax. Govt will continue to streamline the GST. In FY26 govt aims to establish a unified reduced rate, therefore govt plans to reclassify all products that will be taxed in FY25 from 5 percent GST to the 10 percent category. Lastly, govr will persist in efforts to trans­form the GST into a broad-based VAT.

Revenue administration reforms aimed to collect taxes broadly and fairly. The gov­ernment will pursue the full implementa­tion of the compliance risk management measures in Large Taxpayers Units (LTU) in Islamabad, Karachi, and Lahore Region­al offices by December 31, 2024 (struc­tural benchmark). The government will continue to strengthen compliance efforts with the ultimate goal of implementing an automated CRM system. As the first step, govt will integrate all data shared by the 145 agencies under the Memoranda of Understanding (MoUs) signed in accor­dance with the documentation law, by no later than December 2024. Furthermore, govt will pursue the continued implemen­tation of the Compliance Improvement Plan (CIP) and expansion of the recently launched Tajir Doost scheme to an addi­tional 36 cities, bringing the total number of cities covered by the scheme to 42, to continue our efforts to bring the service sector into the tax net.

A Statutory Regulatory Order (SRO) to extend the scheme to these 36 cities will be issued no later than July 2024, with mandatory collection starting in FY25Q1. The government will continue the implementation of digital invoic­ing, track-and-trace, along with strin­gent control and heighted enforcement to reduce the fraud and tax evasion. To enhance our track-and-trace system, it will amend the protocol to incorporate aggregation. This improvement will fa­cilitate comprehensive monitoring at each stage of the process and through­out the entire supply chain. To equip the FBR with additional tools to improve tax compliance, govt will review Pakistan’s tax penalty regime across various tax type to ascertain its effectiveness, the re­sults of the review will be used to design a General Anti-Avoidance Rule (GAAR).

The government will establish a Tax Policy Office (TPO) under the direct oversight of the Minister of Finance by FY25Q1, thereby allowing the Federal Board of Revenue (FBR) to sharpen its focus on revenue collection. Creating the TPO will enable the FBR to concentrate on detailed revenue analysis. At the same time, the TPO will specialize in tax policy analysis by staff with specialist tax policy skills, with the FBR remaining involved in discussions around tax policy making so that revenue administration aspects are fully considered. Govt will equip the TPO with robust analytical capabilities, including expertise in data modeling and data analytics, revenue forecasting, and assessments of tax expenditure reviews.