Govt awaits IMF stance on mini-budget

Targets wealthy non-filers hoping to recover Rs7b; crackdown on tobacco tax evasion urged

ISLAMABAD:

As the government awaits the International Monetary Fund's (IMF) position on the mini-budget, the Minister of State for Finance, Ali Pervaiz Malik, announced on Thursday that tax notices are being sent to Pakistan's wealthiest 5,000 non-filers, with an expected revenue collection of Rs7 billion.

Following a desk audit of transaction data for 200,000 non-filers, the top 5,000 high-net-worth individuals will receive notices within two weeks, Malik shared at an event hosted by the Policy Research Institute of Market Economy (PRIME). These individuals reportedly own at least three cars, earn Rs100 million in bank account profits, pay over Rs200,000 monthly on credit card bills, and send their children to private schools.

The estimated combined net worth of these 5,000 individuals is Rs26 billion to Rs27 billion, with an expected Rs7 billion in revenue. "We can say with a high level of confidence that there is a huge tax potential," Malik said, noting that each individual has an average net worth of Rs5.4 million and could potentially pay Rs1.4 million in income tax.

Efforts to bring non-filers into the tax net have been ongoing since 2011, yet no significant breakthrough has been achieved. Malik acknowledged that the non-filer category, introduced over a decade ago, was initially aimed at broadening the tax base but has since evolved into an easy revenue-collection tool. The government's and FBR's lack of effective action has placed a heavy burden on the salaried class, who bear the cost of this tax gap.

Due to the government's failure to create fairness and equity in the tax system, the burden on the existing, limited pool of filers—mainly salaried individuals and the industrial sector—continues to grow each year.

"We, as a country, have tried to explain to the world that by lowering rates, we can increase collection, but we have failed," Malik added.

The deputy finance minister also said that the IMF has not yet provided a stance on the mini-budget, countering recent reports suggesting the IMF agreed that no mini-budget would be required despite a Rs190 billion tax shortfall in the first four months of the fiscal year. Under the $7 billion IMF agreement, Pakistan committed to introducing a mini-budget if the monthly tax shortfall exceeds 1% of the target. This threshold has already been breached, with a Rs190 billion shortfall in just four months.

The tax gap is expected to widen by Rs350 billion by December, and the FBR is working to convince the IMF that the shortfall resulted from inaccurate underlying economic assumptions.

Malik also pointed out that, although the tobacco sector holds a Rs600 billion tax potential, approximately Rs250 billion is lost annually due to illicit cigarette sales. He expressed hope that closer collaboration with provincial authorities could help curb the illicit tobacco trade.

The FBR has introduced multiple measures, including a track-and-trace system, but it has yet to effectively curb tax evasion in the tobacco industry. According to a study by the Institute of Public Opinion and Research (IPOR), "track and trace compliance remains a distant dream," said Tariq Junaid, CEO of IPOR.

The IPOR report noted that the track-and-trace system, initiated in 2021 for the tobacco sector and three others—cement, fertiliser, and sugar—has faced challenges. Since July 2022, selling cigarette packs without track-and-trace stamps has been illegal. However, compliance remains low, with only modest progress since the deadline. The IPOR study surveyed 11 cities across Punjab and Sindh, covering 40 retail outlets in 18 markets with a total of 720 outlets. Out of 264 cigarette brands surveyed, only 19 fully complied with the track-and-trace requirements, including the use of mandated stamps.

Non-compliant brands accounted for 58% of the market, with 65% being locally manufactured, duty-not-paid (DNP) brands and 35% comprising smuggled brands. Violations included the absence of track-and-trace stamps, non-adherence to pricing, and missing health warnings.

Additionally, 197 brands were found selling below the minimum legal price, while 48 brands priced above the minimum legal price were non-compliant with legal requirements. Only 19 brands were fully compliant with all legal stipulations and sold above the minimum legal price.

The study recommended strengthening enforcement at retail levels to limit access to non-compliant brands, raising penalties for violations, and launching public awareness campaigns to inform consumers about the importance of buying compliant products.