Pakistan faces Rs3.3 trillion revenue black hole, says IMF

Published: January 14, 2016
Country’s tax capacity estimated to be 22.3% of GDP, revenue gap of over 11%. PHOTO: AFP

Country’s tax capacity estimated to be 22.3% of GDP, revenue gap of over 11%. PHOTO: AFP


Due to administrative weaknesses, lower tax compliance and under-reporting, Pakistan is bleeding Rs3.3 trillion a year in revenue – an amount that is higher than this year’s total tax collection target – revealed an International Monetary Fund (IMF) report.

“Pakistan has the potential to mobilise additional tax revenues by an amount as much as, if not more than what it currently collects,” said the IMF in a ‘Selected Issues Paper’ that it released on Tuesday along with the ninth IMF review report.

Pakistan’s revenue collection surpasses target

Pakistan’s tax capacity is estimated to be 22.3% of Gross Domestic Product (GDP), which implies a tax revenue gap of more than 11% of GDP or Rs3.3 trillion, according to the report.

Pakistan’s current tax-to-GDP ratio is 11.5% and the difference between this ratio and the potential is the gap.

The Rs3.3 trillion revenue gap is six times higher than the amount of Rs500 billion that was mentioned for the first time by former finance minister Shaukat Tarin in 2009.

“Narrow tax base, extensive use of tax concessions and exemptions, weaknesses in revenue administration, low taxpayer compliance through informal economic activity and underreporting of formal income results in substantial loss of revenue relative to potential,” said the IMF.

Machiavellian approach to increase tax collection

The IMF added that the tax revenues in terms of the total size of economy peaked to 12.4% in 1996 during the PPP government, belying the claim of the incumbent government that the peak was achieved during its 1997-1999 tenure.

It also suggested Pakistan to broaden the tax base instead of burdening the existing taxpayers.

However, the IMF’s practical steps are contrary to its advice as it recently forced Pakistan to introduce a Rs40 billion mini-budget to bridge the shortfall that emerged against this year’s tax collection target.

“Simply aiming to increase revenue by further taxing already compliant taxpayers would worsen inequalities, undermine tax morale and cause distortions in economic activity,” noted the IMF.

Since June 2013, the PML-N government has imposed Rs940 billion additional taxes – an unprecedented figure.

The report further said that sustainable domestic revenue mobilisation would require a concerted agenda of well-defined reform efforts. “The government plans to increase the tax revenue-to-GDP ratio to 14.5% by 2020 to strengthen debt sustainability and resilience to fiscal shocks.”

Pakistan agrees to slap billions in new taxes

In its manifesto, the PML-N had vowed to increase tax-to-GDP ratio to 15% by 2018.

Intricate details

While highlighting tax gaps, the IMF said that the number of people registered for Personal Income Tax (PIT) was over 3.6 million in 2014, but it is still a very small figure compared to 56.5 million people employed in Pakistan. Furthermore, the number of active PIT filers is only 982,525, significantly below the number of 5.7 million people reportedly earning above the income tax threshold of Rs400,000.

The number of Corporate Income Tax (CIT) filers is 25,551 out of more than 60,000 companies registered for the CIT. Furthermore, the number of active CIT filers is a mere 0.8% of the number of commercial and industrial electricity users, which represent an illustrative pool of potential entities liable for taxation.

Likewise, the number of entities registered for the General Sales Tax (GST) is 178,190 out of about 1.4 million retailers and 3.4 million commercial and industrial electricity users.

“In order to improve taxpayer compliance and curb tax avoidance and evasion, the reform efforts must aim to modernise and bolster the effectiveness of tax administrations at federal and provincial levels, suggested the report.

Pakistan’s corporate tax rate third highest in world

It said that for every property and financial transaction there should be a requirement to disclose a tax identity number. This would also help deal with the potential problem of using remittance transfers as a means of tax evasion.

While suggesting a way forward, the IMF said that fighting tax evasion should initially focus on a comprehensive list of high-wealth individuals and corporate entities.

It also advised on lowering the current income tax exemption threshold of Rs400,000. Since this is almost four times per capita income, a significant share of employed people does not pay any income tax at all.

There is also a need to strengthen the capital gains tax regime by adopting a common rate schedule for all financial assets and eliminating exemptions for real estate transactions.

Published in The Express Tribune, January 14th, 2016.

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Reader Comments (9)

  • Jan 14, 2016 - 9:32AM

    NO PROBLEM! Hello IMF! This is is Ishaq Dar from MinFin Islamabad! How are you this sunny morning? We need a loan PRs. 3.3 trillion, please oblige! Your terms. Bibi Recommend

  • abdullah
    Jan 14, 2016 - 12:53PM

    @nkali.he should not do that if you start paying taxes.criticism is very easy but when it comes to paying taxes we dont want too.This nation is full of liars.every one evades taxes and thinks the criminal are zardaris and sharifs alone.Recommend

  • ishrat salim
    Jan 14, 2016 - 1:35PM

    Details pertaining to Rs 40 billion has already been issued by the finance ministry, which has been making round has been imposed on luxury items which the 60% + population does not use, so making this issue is irrelevant. As far as IMF is concerned, they put different proposals & it is upto the govt to accept those suggestions, which is our case, the govt of the day implements what they feel is easy due to political expediency & short terms, because their vision is short term.Recommend

  • Anserali Khan
    Jan 14, 2016 - 2:41PM

    The recommendations made by Tax Reform Commission should be urgently and seriously implimented.FBR needs serious reformsRecommend

  • Fuzail
    Jan 14, 2016 - 3:24PM

    I tend to agree with Mr. Abdullah; we don’t want to pay our taxes but love to criticize our neighbors for the same crime.
    The Government should make it impossible for everybody to buy any capital goods, unless the buyer is a tax payer. Charge a hefty Advance/Adjustable tax on buying cars, air tickets, real estate, consumer goods, everything, even prize bonds, companies’ shares, etc.. Tax evader will really have to keep his money in hard cash.
    How about cancelling Rs5,000 and Rs.1,000 denominations of currency notes? Maybe even Rs.500 note. This will force people to pay through debit and credit cards, which means the government can figure out the amounts and sources of incomes. Tax thieves will be forced to do cash transactions with monies exchanged in large bags. How bad is that?Recommend

  • Faraz
    Jan 14, 2016 - 4:48PM

    The more articles I read regarding the economy and finance matters of Pakistan, the more it is exposed that the perception of PML-N being good for economy is just a myth. Important economic figures like Investment, Exports, FDI, Tax-to-GDP ratio, etc all seem to go down during their terms. Recommend

  • Jan 14, 2016 - 5:55PM

    Fuzail n Abdullah, please stop being nostalgic n emotional. Today being told to pay taxes is a homily. If u read regularly the articles written by scholars n hi-class analysts, you won’t make these comments. Pakistan needs a massive inside-turning-outside churning…economically and culturally. Have a nice day. SalamsRecommend

  • Humza
    Jan 15, 2016 - 3:30AM

    @Faraz: Why are international analysts all positive on the economy and overall situation in Pakistan improving? Is it possible that we as a nation are not ready to appreciate good news after being so critical of government for so long? We all love to complain about others not paying taxes but what about our own behavior. I know this sickness does not exist in just Pakistan but all Muslim countries but Pakistan is one of the Muslim states which are democratic and where criticism is allowed or media is free.Recommend

  • Metlo
    Jan 15, 2016 - 4:12AM

    Pakistan must introduce inheritance tax also. Recommend

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