IMF Eyes Tax Target Cuts Amid Pakistan Revenue Shortfall

The International Monetary Fund (IMF) is evaluating a potential reduction in Pakistan’s tax revenue target, bringing it below Rs12.5 trillion due to sluggish economic activity and a persistent revenue shortfall in the first eight months of the fiscal year, as reported by The Express Tribune.

Initially, the Federal Board of Revenue (FBR) had set a revenue goal exceeding Rs12.9 trillion, but the final adjustment will hinge on the Finance Ministry’s ability to manage spending and sustain a Rs1.2 trillion primary budget surplus, a key requirement under the IMF’s loan program.

During a budget performance review meeting on Wednesday, discussions between IMF officials and Pakistani authorities explored scaling back the FBR target to between Rs12.3 trillion and Rs12.5 trillion. While the FBR suggested a Rs579 billion cut, the IMF is inclined to limit the reduction to Rs435 billion.

The lender has warned that reducing tax targets without proportional expenditure cuts could derail fiscal objectives. Given the limited scope for savings, the Finance Ministry is considering further reductions in the Public Sector Development Programme (PSDP). Initially set at Rs1.4 trillion, the PSDP budget was already slashed to Rs1.1 trillion, with further cuts now under consideration.

Despite the shortfall, tax authorities remain hopeful of meeting March’s revenue collection targets, although potential shortfalls in April and May might require compensatory measures in June.

To boost revenue, the FBR has proposed tax rate cuts for tobacco, beverages, and the construction sector, expecting this to generate an additional Rs90 billion. Furthermore, court case recoveries are projected to yield another Rs300 billion.

Earlier, Pakistan had enforced Rs1.3 trillion in additional taxes to meet fiscal commitments, disproportionately burdening the salaried class. Despite these measures, July-February tax collections still fell Rs606 billion short of the target, with Rs450 billion of this gap attributed to slower economic growth. Officials, however, anticipate no further fiscal slippage until June.

To bridge the deficit, the government is pursuing Rs130 billion through advance income tax under Section 147 of the Income Tax Ordinance. So far, advance tax collections for the first seven months stand at Rs929 billion, reflecting a 27% year-on-year increase.

Additionally, Rs90 billion has been recovered through enforcement actions, largely from windfall taxes on banks and an increase in the base tax rate to 44%.

Finance Minister Muhammad Aurangzeb has assured that the government will explore all possible options before imposing additional tax measures.

Meanwhile, the Power Division has committed to keeping circular debt below Rs2.429 trillion, as per IMF agreements. The lender has also requested projections for circular debt in FY 2025-26, signaling a focus on energy sector reforms.

The Pakistan Bureau of Statistics (PBS) briefed the IMF on ongoing socio-economic surveys, stressing the necessity of updated data on poverty, employment, and agriculture.

Currently, the Household Integrated Economic Survey (HIES) 2024-25 is underway, gathering insights on literacy rates, out-of-school children, health statistics, and household income trends. The Labour Force Survey 2024-25 is also in progress, though the government has decided to shift from quarterly reports to an annual publication.

With IMF negotiations continuing until March 14, the final resolution on tax targets, budgetary adjustments, and expenditure reductions will be critical for securing the next $1.1 billion loan tranche under the $7 billion Extended Fund Facility (EFF).