IMF flags unfair tax system

Salaried contribution rises to Rs629b as realty, agriculture and retail stay untaxed

ISLAMABAD:

As Pakistan's tax system becomes more unfair during the first two years of the International Monetary Fund (IMF) programme, the Fund's Regional Director, Jihad Azour, on Tuesday emphasised a fairer and more neutral tax system for improving compliance and business expansion.

The opening speech by Azour during the first day of a two-day conference on the tax system appeared divorced from ground realities, where the salaried class has been squeezed but the retailers, agriculture and real estate sectors largely remained untaxed.

"A fairer tax system can encourage compliance, better services can strengthen trust, and a more neutral tax structure can allow productive firms to expand rather than remain small or informal," Azour said while delivering the opening speech.

He further said that broadening the tax base, strengthening revenue administration, reducing tax expenditures, protecting priority spending and improving public service provision are Pakistan's priorities.

However, during the first two years of the IMF programme, tax contributions by influential sectors such as retailers, agriculture and real estate remained negligible, and IMF management agreed to reduce withholding tax rates for the real estate sector this June. The IMF also endorsed a tax scheme for traders that allowed them to deal in cash and would promote informality in the economy.

Yet retailers remained outside the tax net, and as of October 15 only 137 new retailers joined the scheme against the annual target of one million. According to the Federal Board of Revenue's (FBR) data, income tax collection from the real estate sector dived 38% to a mere Rs35.2 billion in the first three months of the current fiscal year. It was Rs22 billion less than the comparative period of the last fiscal year after the government cut income tax for the realty sector by 50%, which the IMF also endorsed.

In fiscal year 2024, the realty sector had paid Rs200 billion in income taxes, which hardly increased to Rs236 billion in the last fiscal year, but it may now dip even below Rs150 billion after rate cuts.

Punjab and Sindh cumulatively collected Rs5.1 billion in agriculture income tax as of June this year under the new regime introduced as part of the IMF programme. According to details shared with the IMF, in the last fiscal year, the agriculture income tax target was Rs2 billion but the Sindh government collected only Rs1.1 billion. The Punjab government's budget books showed that against the last fiscal year's target of Rs10.5 billion, the collection was only Rs4 billion.

Compared with this, before the start of the IMF programme, the annual contribution of the salaried class was Rs391 billion, which within two fiscal years of the IMF programme increased to Rs629 billion as of June 2026.

In his speech, Azour stated that the tax workshop comes at a critical moment in Pakistan's reform journey. Despite an era of shocks and uncertainty, Pakistan has made important progress toward restoring macroeconomic stability, rebuilding confidence, strengthening external buffers and supporting gradual recovery, he added. The workshop was taking place in the middle of a discussion at the highest level of government on whether the current FBR can deliver. The prime minister has shelved a plan to abolish the FBR, but the discussion reinforced the failure to bring tax broadening reforms.

The regional director stated that the next milestone is to turn this stabilisation into stronger and more durable growth.

"Moving beyond the cycles of adjustment toward a more competitive, investment-friendly and inclusive economy is the ambitious set of reforms that was set clearly by the government and supported by the IMF through the Extended Fund Facility (EFF)," he added.

Azour said Pakistan's exposure to higher energy and food prices, disruption to trade and supply chains, weaker external demand and an abrupt tightening in global financing conditions heightens the premium on preserving stability while supporting the recovery.

In this context, he added, fiscal policy must do more than achieving the primary balance targets and protecting that sustainability.

Planning Minister Ahsan Iqbal has recently questioned Pakistan's economic stabilisation, terming it "stunted and borrowed". In his letter to the prime minister, Iqbal stated that the focus of the economic stabilisation was on fiscal numbers. Azour said Pakistan must reinforce policy credibility, foster the recovery and create space for the public investment and social spending needed to support stronger long-term growth and the well-being of the Pakistani people.

He said tax reform was critical to Pakistan's economic growth agenda and was at the centre of the EFF objectives. A stronger, broader, fairer and more predictable tax system can support fiscal sustainability while reducing distortions that hold back investment, productivity growth and formal job creation, said the regional director. The director said Pakistan's stabilisation gains have been hard won. Credibility now depends on continuing to meet fiscal and external objectives and enhancing resilience, while demonstrating that reforms are sustained and institutionally anchored, he added.

A medium-term tax strategy can serve this purpose if it sets clear objectives, well-designed policies, ambitious sequencing and transparent implementation responsibilities, according to the regional director.

The EFF-supported programme recognises that stabilisation is necessary, but not sufficient. Pakistan needs reforms that raise productivity, improve competitiveness and unlock private investment, he added.

"When the tax system is simpler, more neutral and predictable, it lowers the cost of formality, improves resource allocations and gives businesses greater confidence to invest and grow," according to Azour.

He emphasised that fairness is central to reform's success. Taxpayers are more likely to comply when rules are transparent and when the system does not reward informality or provide preferential treatment, according to the regional director.

But contrary to this concept, Pakistan's tax system has become more unfair, and the government launched an easy tax scheme for traders that promotes informality by allowing them to deal in cash. The scheme has also been endorsed by the IMF.

Azour said many countries have strong reform ideas, but fewer translate them into durable results. Implementation requires ownership, coordination, engagement and communication. Ownership across institutions, coordination between the federal government and provinces, engagement with the private sector and civil society, and a careful communication strategy so that citizens and businesses can understand and trust, he added.