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After months of uncertainty, Pakistan last week inked a staff-level agreement with the International Monetary Fund (IMF) for a $3 billion stand-by arrangement covering a nine-month period. Pending approval by the IMF Executive Board, the deal is a stopgap to avert default, with expectations that whichever government emerges after the next elections will pursue the 23rd bailout since 1958 to achieve economic prosperity. In a statement confirming the latest deal, the global lender stressed on the need to avoid “unbudgeted spending” or “tax exemptions” while improving “domestic revenue mobilization,” i.e. tax collection.
Local media has made it clear a key reason for the bailout’s revival were Prime Minister Shehbaz Sharif’s personal efforts, taking the reins from Finance Minister Ishaq Dar, who waffled between blaming the IMF’s “inflexible” attitude and “geopolitics”—the U.S.’ ongoing conflict with China—for his failure. However, for this stand-by arrangement to succeed, Pakistan must achieve a budgetary surplus that requires the form of efficient tax collection the country has struggled to achieve.
In December 2022, Pakistan’s tax revenue as a percentage of its GDP was reported at 5.6%, little better than the 4.3% recorded in 2018. The country’s overall tax-to-GDP ratio hovers around 10% of GDP, with a majority of collection—roughly 60 percent—coming from indirect taxation. The bulk of the direct taxation comes from personal and the corporate income tax, contributing about 92 percent, with two significant sectors—retail and agriculture—evading taxation with little apparent concern from successive governments who don’t wish to alienate the vote-bank when it is far easier to continue raising collections from the salaried class.
According to recent estimates, the value of Pakistan’s retail market exceeds $152 billion, the third-largest contributor to the country’s GDP and its second largest employer. Testifying before the Senate Standing Committee on Commerce and Textiles in 2019, the Federal Board of Revenue said 41,000 persons filed sales tax statements, adding out of “over 3.5 million traders only 312,361 have been filing tax returns,” with “104,219” of these coming from major markets of Karachi, Lahore, Islamabad, Rawalpindi and Faisalabad. Taxing this sector appropriately is essential to overcoming the economic doldrums that have forced the country to seek support from lenders, and should be topmost priority of the next government when it assumes power after general elections due later this year.