• FBR chief mulls wealthy taxpayers’ audit instead of burdening public
• Suggests restricting non-filers from land transactions to curb money whitening
• Experts say additional revenue measures may be necessary amid political instability

WITH less than two weeks until the International Monetary Fund’s (IMF) executive board votes on Pakistan’s much-anticipated $7 billion bailout package, concerns are rising over revenue shortfalls, prompting speculation about possible tax hikes or new levies.

While many tax experts advocate for a mini-budget to address the deficit, Federal Board of Revenue (FBR) Chairman Rashid Langrial has proposed an alternative approach to avoid new tax measures while adhering to the terms agreed with the IMF.

Despite a drop in tax collection in the first two months (July and August) of this fiscal year, the government has yet to curtail spending, raising questions about whether it will need to implement additional revenue measures.

A basic rule is that when the revenue shortfall reaches 2.5 per cent, the IMF will ask for new revenue measures. This raises the critical question: can the government avoid burdening existing taxpayers with more taxes?

The FBR chairman told Dawn that he has completed a comprehensive transformation report on tax reforms, which will be presented to Prime Minister Shehbaz Sharif on Saturday (today). The report focuses on structural reforms, enforcement measures and obtaining parliamentary approval to strengthen tax compliance.

Mr Langrial is quite optimistic about remaining within the IMF limits with the alternative proposals, ruling out the need to raise tax rates or impose new ones. However, some economic analysts believe that additional revenue measures will still be necessary to meet the fiscal deficit target set by the IMF.

FBR chief’s strategy

The FBR chief revealed that the tax authority has identified the top 1pc of taxpayers — around 700,000 wealthy individuals — who contribute Rs1.7 trillion in taxes. He estimates that these individuals have the potential to contribute over Rs2tr, suggesting that many either evade taxes or underreport their income.

Of these 700,000 high-net-worth individuals, only 230,000 have filed tax returns, while 470,000 have not. Mr Langrial’s strategy focuses on bringing these non-filers into the tax net, alongside auditing the financial records of all super-rich individuals.

He stated that independent auditors would be appointed to scrutinise these wealthy taxpayers, stressing that even those who have filed returns did not deposit their actual taxes.

“We will go to their doorsteps,” Mr Langrial warned, emphasising that the burden would not fall on those earning less than Rs1 million per year.

One of the most significant changes in Mr Langrial’s proposal is to prohibit non-filers from engaging in land transactions, a move he believes will help economic documentation in the long run and curb the whitening of black money. The current revenue from property transactions involving non-filers ranges from Rs30bn to Rs40bn annually. This policy would be implemented this year, he said.

Additionally, a policy restricting the purchase of property with only known sources of income will be enforced next year. He also listed several penalties and other measures to ensure effective implementation. “We will approach parliament to seek the additional enforcement powers,” Mr Langrial said.

‘Similar to 1990s’

Meanwhile, PM Shehbaz on Friday acknowledged the challenges of implementing the IMF programme, including imposing taxes on the salaried class, which he said may be lifted in the future through lower inflation.

In his address, the premier also urged the country’s five million traders to pay their fair share of taxes, noting that agricultural income is now included in the tax net. He stressed that curbing tax evasion is crucial to getting the country out of the IMF programme, hoping that it would be the last such bailout package.

However, former economic adviser Dr Ashfaq H. Khan argued that the government has no choice but to implement additional revenue measures to address the shortfall. He warned that continued political instability could hamper economic growth, forcing the government to implement quarterly revenue adjustments, similar to the situation in the 1990s.

A source in the Prime Minister’s Office told Dawn that there has been no indication from the IMF regarding further revenue measures.

The government is considering alternatives such as maintaining a higher petroleum development levy rather than fully passing on fuel price reductions to the public. Lower interest rates — currently at 17.5pc and expected to fall further in the coming months — are also expected to provide fiscal relief to the government in the second and third quarters.

To avoid burdening the public with more taxes, the government may also consider severe measures like reducing non-essential spending.

The source said that if the IMF board had convened in October, the situation would have been more dire because the first quarter would have shown a revenue shortfall, leading the IMF to ask for prior actions to reach the agreed-upon target.

The real test, however, lies in whether the government can bring retail shops into the tax net. Since April 2024, retailers have paid an average of only Rs2,000 per shop in taxes. The reluctance stems not from an unwillingness to pay taxes but from fears of harassment by tax officials. The government’s ability to overcome this trust deficit remains a million-dollar question.

Published in Dawn, September 14th, 2024