As Pakistan grapples with an economic crisis marked by inflation, a widening fiscal deficit, and increasing debt, the Federal Board of Revenue (FBR) has announced a major crackdown on tax evasion. Starting October 1, 2024, non-filers of income tax returns will face significant restrictions, marking a pivotal step in the government’s efforts to improve tax compliance and broaden the tax net. This measure is part of a broader strategy to enhance revenue collection and meet the International Monetary Fund’s (IMF) demands for fiscal discipline.
The Federal Board of Revenue (FBR) has revised its tax collection target for the upcoming fiscal year (2024-25) downward from an ambitious Rs12,970 billion to a more achievable Rs12,913 billion. This decision follows an agreement reached with the International Monetary Fund (IMF).
Despite the adjustment, the FBR has demonstrated its capability to meet and even surpass revenue targets. In the recently concluded fiscal year (2023-24), the FBR comfortably achieved its revenue collection goal of Rs. 9,252 billion, raking in a total of Rs. 9,306 billion. This impressive feat translates to a surplus of Rs. 54 billion and a remarkable 30 percent growth compared to the previous year.
This ambitious target is a result of increasing demands from the IMF, under its loan program, to enhance fiscal responsibility. By improving the tax-to-GDP ratio, Pakistan seeks to stabilize its economic footing amidst rising debt and external borrowing.
New Restrictions for Non-filers
FBR Chairman Rashid Mahmood Langrial recently outlined the government’s plan to impose restrictions on non-filers of tax returns starting from October 1. He highlighted that 15 specific activities will be restricted for individuals who fail to file their income tax returns, with an initial focus on five key areas. These five restrictions include:
- Purchase of motor vehicles: Non-filers will be barred from registering any motor vehicle in their name, curtailing their ability to own or transfer ownership of cars, bikes, and other vehicles.
- Property transactions: Individuals who do not file tax returns will be prohibited from purchasing immovable property, including residential or commercial land, houses, or apartments.
- Bank loans and financing: Access to bank loans, mortgage facilities, and other forms of credit will be restricted for non-filers, limiting their ability to secure financing from formal financial institutions.
- Foreign travel: Non-filers may face difficulties in obtaining travel documents, including passports, or could be barred from traveling abroad altogether.
- Utility connections: Non-filers will also face restrictions in obtaining new utility connections, such as gas, electricity, or water services.
Langrial emphasized that these restrictions are just the beginning, with further measures set to be implemented in stages. The broader plan includes tighter controls over luxury spending, the imposition of withholding taxes on certain goods and services, and increased scrutiny of bank accounts and financial transactions.
The government’s decision to tighten the noose around non-filers is not only driven by internal fiscal pressures but also by the conditions set forth by the IMF under its loan program. The IMF has consistently stressed the need for Pakistan to reform its tax collection system and broaden the tax base. In particular, the IMF has pushed for:
- Increasing tax revenue to reduce Pakistan’s fiscal deficit.
- Reducing reliance on indirect taxes, such as sales taxes, which disproportionately affect lower-income groups, in favor of progressive direct taxes like income tax.
- Eliminating tax exemptions and loopholes that benefit the wealthy.
As part of the negotiations for the $3 billion IMF loan program in 2023, the Pakistani government committed to undertaking reforms to enhance tax compliance. The restrictions on non-filers are a direct response to the IMF’s recommendations, designed to ensure that more individuals and businesses are brought into the tax net.
The FBR’s recent announcement is just one part of a larger strategy to improve tax collection and enforce compliance. The following measures have been taken to date:
- Automation and digitalization: The FBR has invested in the automation of tax returns and digitalization of the tax collection system, making it easier for individuals and businesses to file their taxes. The government has also launched a mobile app to facilitate the submission of tax returns, making the process more accessible to a wider audience.
- Data sharing and integration: The government has initiated data-sharing agreements with financial institutions, utilities, and property registries to identify non-filers and assess their taxable income. By cross-referencing data from multiple sources, the FBR can more effectively track individuals and businesses evading taxes.
- Awareness campaigns: To encourage voluntary compliance, the FBR has launched public awareness campaigns, emphasizing the importance of filing tax returns and the consequences of non-compliance.
Despite these efforts, challenges remain. Enforcement of existing tax laws has been inconsistent, and there is a lack of comprehensive monitoring mechanisms to ensure compliance. Moreover, the informal economy, which constitutes a significant portion of Pakistan’s total economic activity, remains largely untaxed.
The business community and various stakeholders have responded to the government’s move with mixed reactions. The Pakistan Business Council (PBC), one of the largest business advocacy groups in the country, has expressed cautious optimism about the initiative. A spokesperson for the PBC said, “It is essential to bring more people into the tax net, especially given Pakistan’s economic challenges. However, the government must ensure that these restrictions are implemented fairly and transparently to avoid undue hardships on legitimate businesses.”
On the other hand, some small business owners and taxpayers have raised concerns about the potential for misuse of these restrictions. They argue that while the intention behind the policy is good, the FBR’s history of bureaucratic inefficiency and corruption could lead to harassment of individuals who are already paying their taxes. “If the FBR can ensure that these restrictions are only applied to genuine non-filers, it could be a game-changer,” said one Lahore-based trader. “But the risk is that tax authorities will target small businesses while large corporations continue to evade taxes.”
While the restrictions on non-filers are seen as a step in the right direction, there are some shortcomings in the current system. For one, the enforcement of these restrictions relies heavily on the FBR’s ability to accurately identify non-filers, a task that has proven difficult in the past due to the size of the informal economy. Moreover, the system does not fully address the issue of tax evasion among high-net-worth individuals and corporations, who often use legal loopholes and offshore accounts to shield their income from taxation.
Nevertheless, the government’s efforts to impose restrictions on non-filers are a positive development in Pakistan’s ongoing struggle to reform its tax system. If implemented effectively and paired with broader reforms, these measures could help Pakistan achieve its revenue targets, reduce its fiscal deficit, and put the country on a more sustainable economic path.
The views expressed in this article are the author’s own and do not necessarily reflect Coverpage’s editorial stance
