On Thursday, Pakistan announced that it had successfully resolved all outstanding issues with the International Monetary Fund (IMF), paving the way for the approval of a $7 billion loan. This development comes as the country gears up to implement stricter tax regulations, targeting existing taxpayers while conceding to the demands of traders.
The government has introduced amendments that would limit the ability of income tax filers to purchase assets if the declared value of their cash balances and income falls short of the cost of the assets. This measure follows a review conducted by the new chairman of the Federal Board of Revenue (FBR), who found that out of nearly six million income tax return filers, only 45,000 Pakistanis reported annual incomes exceeding Rs10 million.
Finance Minister Muhammad Aurangzeb announced on Thursday that all issues with the IMF had been “amicably resolved,” and the IMF board is expected to finalize the $7 billion Extended Fund Facility this month. This announcement ends months of uncertainty regarding the loan approval.
In Washington, IMF spokesperson Julie Kozack confirmed that the IMF board is scheduled to meet on September 25 to consider the loan package. Pakistan had faced delays in securing a rollover of $16 billion in cash deposits and commercial loans, as well as arranging an additional $2 billion in commercial financing.
The new 37-month IMF deal signals the beginning of a challenging economic journey for Pakistan, with the promise of long-term stability if the agreement is implemented effectively.
As part of the government’s efforts to meet IMF targets, the FBR is preparing to introduce legislation aimed at increasing tax collection. The focus will be on existing taxpayers, particularly those who have under-reported their assets and income in tax filings. The government believes that a significant portion of the six million filers, primarily business individuals, companies, and associations of persons, have not accurately declared their earnings.
The government plans to deny asset purchases to individuals and firms if their declared income and cash balances are insufficient to cover the cost of assets such as homes, plots, and cars. Additionally, they will be restricted from making cash withdrawals if their reported withdrawals are less than the amounts shown in their tax returns.
The FBR aims to implement these stringent legal measures by October 1, granting government departments and commercial banks access to taxpayer data to enforce compliance.
These proposals come in the wake of the government’s decision to exempt retailers from the requirement to disclose their bank accounts and asset details. However, industrialists in Pakistan have started moving their businesses abroad, seeking relief from the increasing tax burden. Salaried individuals and business owners have been particularly affected, with salaried workers paying up to 39% of their gross salary in taxes, while business owners face taxation on 50% of their net income.
Despite the existing tax base bearing the brunt of the country’s financial needs, the government is now considering additional measures to tighten regulations on these taxpayers.
The government is also considering denying non-filers the right to invest in mutual funds, the stock market, and purchase properties. While this move could expand the tax base, it faces resistance from powerful lobbies, and its implementation remains uncertain.
The FBR believes that many current taxpayers are not contributing enough. The tax authority plans to issue notices to filers, detailing their assets, income, and tax liabilities. The first round of notices will target federal, provincial, and state-owned enterprise employees.
As part of the new measures, the FBR will pre-fill income tax returns for approximately two million government employees in an effort to encourage them to pay their full tax obligations. Additionally, the FBR will target business individuals who, despite being filers, have not paid adequate taxes. Of the 3.7 million business filers, 2.4 million paid no income tax last year, while only 20,000 reported annual incomes above Rs10 million.
Among the two million salaried filers, about 630,000 earn less than Rs600,000 annually and are exempt from taxes. However, 15,000 salaried individuals with incomes exceeding Rs10 million paid Rs93 billion in income tax last year. Meanwhile, 1.3 million salaried individuals earning less than Rs10 million paid Rs157 billion in taxes, bearing a disproportionate share of the burden.
The FBR also intends to crack down on registered companies, many of which are under-reporting their earnings. Out of 80,000 companies, fewer than 6,000 declared annual incomes above Rs10 million, contributing Rs940 billion in income tax—99% of the total tax paid by all companies. The FBR will target the 47,000 companies that filed nil returns and the 26,000 that reported incomes below Rs10 million.
Similarly, the FBR is scrutinizing associations of persons (AOPs), of which fewer than 5,000 reported incomes exceeding Rs10 million. These AOPs paid Rs150 billion in income tax, while 60,000 associations declared no income.
Pakistan’s efforts to meet its commitments to the IMF have led to stringent tax measures, placing an additional burden on existing taxpayers. While the $7 billion IMF loan provides hope for economic stability, the government’s approach to expanding its tax base by targeting both filers and non-filers has raised concerns among business owners and salaried individuals alike. The implementation of these measures could bring much-needed revenue, but it may also exacerbate the financial struggles of those already contributing significantly to the nation’s tax pool.
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