IMF Urges Broad Tax Reforms as Retail Sector Struggles with Compliance

The International Monetary Fund (IMF) has emphasized the urgent need for comprehensive tax reforms in Pakistan, pointing to the country's inadequate revenue generation and its over-reliance on formal sectors for taxation.

Speaking at the “Retail Reimagined: Innovate, Collaborate & Thrive” conference, IMF Resident Chief Mahir Binici highlighted that many sectors contribute minimally to the country’s tax pool, which leads to an excessive tax burden on compliant salaried individuals and businesses.

Finance Minister Muhammad Aurangzeb supported these views, noting that while the retail sector contributes 19% to Pakistan's GDP, it only accounts for 1% of tax revenue. He warned that the current system, where compliant sectors subsidize non-compliant ones, is not sustainable. The government is determined to enhance tax compliance, particularly in agriculture, wholesale/retail, and real estate—industries that have long been under-taxed.

Aurangzeb also revealed that artificial intelligence (AI) would be used to improve tax collection, particularly targeting the Rs9.4 trillion circulating outside the formal economy. Although bringing informal businesses into the tax system will be a gradual process, the government is committed to moving in this direction.

On the country’s economic outlook, the finance minister noted that macroeconomic stability has improved, with a stable currency, higher foreign reserves, reduced inflation, and a significant drop in the KIBOR rate from 23% to 11%. He added that foreign investor confidence is returning, with capital inflows increasing in both debt and equity markets.

At the conference, Asfandyar Farrukh, Chairman of the Chainstore Association of Pakistan (CAP), revealed that only 10% of the retail sector is registered for tax, leaving 90% off the books and making it difficult for compliant businesses to compete.

Meanwhile, Saleem Ullah, Deputy Governor of the State Bank of Pakistan (SBP), announced plans for Pakistan’s full digital payment system rollout within five years. FBR Member Legal Mir Badshah Wazir disclosed that 12,249 Tier-1 retailers are now connected to the Point of Sale (POS) system, generating 660 million receipts in the last fiscal year.

Wazir also acknowledged that the Tajir Dost Scheme (TDS) had not met expectations but noted that policy changes had led to more tax filings from the retail sector.

FBR Member Inland Revenue Operations Hamid Ateeq Sarwar stated that while the IMF's conditions led to the removal of tax concessions for Tier-1 retailers, there is room for a reduced tax rate if no input adjustments are claimed—pending IMF approval.