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Television viewers in Pakistan this winter have been bombarded with a series of threatening advertisements: pay your taxes, or risk losing your cell phone, gas or electricity connections.
The advertisements, which were run by Pakistan’s tax authority, point to a persistent challenge for the government: the country is one of the world’s worst performers on income tax collection.
Islamabad’s failure to improve its tax haul, which has forced the country to face perennially high fiscal deficits, could jeopardise a $3bn IMF rescue bailout programme that staved off an economic crisis, and risks plunging the country back into turmoil ahead of elections next year, analysts have warned.
The IMF deal provided short-term relief after a balance of payments shortfall raised fears of a foreign default. But it required Islamabad to broaden its tax base and increase certain levies, measures that politicians were loath to adopt.
Kristalina Georgieva, the IMF’s managing director, earlier this year urged Pakistan to undertake steps “to be able to function as a country and not to get in to a dangerous place where its debt needs to be restructured”.
“Those who can, those that are making good money, public sector, private sector, they need to contribute to the economy,” she said.
Pakistan’s tax-to-GDP ratio in 2021 was just over 10 per cent, marginally better than Laos and roughly half of the average across the Asia-Pacific region, according to an OECD report.
The Federal Board of Revenue has set a tax revenue target of Rs9.4tn ($33bn) in consultation with the IMF for the current financial year ending June 2024, up from Rs7.1tn in taxes in the previous year, which was short of its Rs7.6tn goal.
But promises to get tough with known tax evaders have yet to translate into action, and economists pointed to the government’s historic failure to close loopholes. Less than two per cent of the population are registered taxpayers, according to two FBR officials, a figure that includes government employees.
One group that enjoys longstanding exemptions is agricultural landowners, a powerful lobby whose output contributes about 24 per cent of Pakistan’s economy, according to the Pakistan Bureau of Statistics.
“Once you give immunity to a certain class, others also get the message that they can stay out of the [tax] system,” said one western economist who spoke on condition of anonymity.
For years, Pakistan’s tax shortfalls have been offset by foreign assistance for the government’s support of western security priorities in neighbouring Afghanistan. According to Pakistani officials, the country has received up to $20bn in economic and military assistance since the September 11 2001 attacks, though they claim it has been outweighed by losses from terrorism and capital flight.
Shabbar Zaidi, former head of the FBR under ex-prime minister Imran Khan, attributed the failure to strengthen tax compliance to “a shortage of intent” by the country’s ruling class rather than a lack of “the means available” to enforce compliance.
Successive governments have stopped short of adopting tough tax enforcement measures for fear of upsetting powerful business interests with links to political parties as well as the wider population, analysts said.
Officials must be seen to be working “in a fair and transparent manner” if they hope to encourage compliance to meet its collection targets, said Abid Hasan, a former World Bank adviser in Islamabad.
With parliamentary elections due in February, caretaker prime minister Anwar ul Haq Kakar’s government has little time to follow up on Islamabad’s commitments.
A western diplomat in Islamabad who requested anonymity said the main political parties “don’t have the appetite” to undertake radical tax reforms.
“For them, [reforms] would be too much of a risk, causing a backlash” inside their own parties, the diplomat added.
Undercutting the public messaging, the FBR has permitted its staff to extend a November tax filing deadline by a month, drawing accusations of double standards.
“Giving relief to tax officials instead of common taxpayers is not only against the transparent and trust-building policies of FBR but also creates a negative impact on FBR’s efforts to broaden the tax base,” the Pakistan Tax Bar Association wrote in a letter to the FBR seen by the Financial Times. Two FBR officials confirmed to the FT they were extending the deadline so they could cast the net wider.
Anwar Kashif Mumtaz, a tax expert who heads the PTBA said there is “plenty that can be done to close down on tax evasion”.