IMF urges fairer tax system as key sectors remain under-taxed

IMF urges fairer tax system as key sectors remain under-taxed

International Monetary Fund (IMF) Regional Director Jihad Azour on Tuesday called for a fairer and more neutral tax system in Pakistan, stressing that better compliance, stronger public services and a business-friendly taxnternationals uld support economic growth.

His remarks came as Pakistan’s tax burden continues to fall heavily on salaried individuals, while retailers, agriculture and real estate have contributed relatively little despite their economic significance.

Addressing the opening session of a two-day conference on the tax system, Azour said a fairer tax structure could improve compliance, strengthen public trust and help productive businesses expand rather than remain small or operate informally.

He identified broadening the tax base, improving revenue administration, reducing tax expenditures, protecting priority spending and enhancing public services as key priorities for Pakistan.

However, tax collection figures indicate persistent challenges in bringing influential economic sectors into the tax net during the first two years of Pakistan’s IMF programme.

The government has also reduced withholding tax rates for the real estate sector, a move endorsed by the IMF in June. The Fund also backed a tax scheme for traders that allows cash transactions, raising concerns about the expansion of informality.

Retailer registration under the scheme has remained far below expectations. By October 15, only 137 new retailers had joined, against an annual target of one million.

Federal Board of Revenue (FBR) figures show that income tax collection from the real estate sector fell 38% to Rs35.2 billion during the first three months of the current fiscal year. The amount was Rs22 billion lower than the corresponding period last year, following a 50% reduction in income tax rates for the sector.

Real estate income tax collection stood at Rs200 billion in fiscal year 2024 before rising modestly to Rs236 billion in the previous fiscal year. Following the latest tax cuts, annual collection could fall below Rs150 billion, according to the figures cited.

Agriculture income tax collection has also remained weak. Punjab and Sindh together collected Rs5.1 billion under the new regime by June, despite efforts to increase revenue from the sector under the IMF programme.

Figures shared with the IMF showed that Sindh collected Rs1.1 billion against its Rs2 billion agriculture income tax target for the previous fiscal year. Punjab collected only Rs4 billion against a target of Rs10.5 billion, according to the provincial government’s budget documents.

The figures highlight the challenge facing Pakistan as it seeks to broaden its tax base while reducing the disproportionate burden on salaried taxpayers and encouraging greater participation from under-taxed sectors.