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Imran Khan walks tightrope to revamp Pakistan's tax collection

Reforms seen as essential to IMF assistance but face obstacles in parliament

Imran Khan, expected to become Pakistan's next prime minister, plans ambitious tax reform measures.    © Reuters

ISLAMABAD -- Pakistan's new government, led by incoming Prime Minister Imran Khan, is planning to implement bold reforms in how the country collects taxes.

The reforms are seen as a precondition for international assistance, necessary for the government to escape a balance of payments crisis.

But they entail great political risk. Khan faces one of the strongest opposition forces confronting a Pakistani government in recent history, political watchers say.

There is evidence of widespread tax evasion across the country, where less than 1% of Pakistan's roughly 200 million people pay income taxes.

Pakistanis cheat the taxman in other ways as well. A senior officer at the Federal Board of Revenue said it is common for people who sell property to report the sale price to be a third or half what it actually was. "In daily business transactions," the officer said, "it's very common for the actual amount to be under-declared so that tax payments are massively evaded."

Asad Umar, a close ally of Khan who has been named finance minister, told the Nikkei Asian Review that "reforming tax collections will be central to our economic policies."

According to Umar, more than 90% of tax revenue comes from indirect taxes, which hit everyone uniformly; only 10% comes from income tax. "This has to turn around," the incoming finance chief said.

Although Khan's tax reform plan remains unclear, the government is already moving to expand the tax base.

On Monday, tax officials began sending notices to more than 700 affluent Pakistanis who own properties in the United Kingdom -- the first exercise of its kind on such a scale. Unless the recipients can prove their assets were bought with legitimately earned wealth on which Pakistani taxes were paid, the officials said, the government will hit them with hefty fines.

Khan, once a global cricket star, made a series of promises while campaigning, such as lifting people out of poverty. But analysts say these pledges will be difficult to fulfill, given Pakistan's economic reality.

Pakistan's foreign currency reserves are also in trouble. They have rapidly declined in recent months as higher oil prices push up the costs of imports. A lack of exports does not help the situation, which has leaders drawing up plans to seek a bailout from international lenders, notably the International Money Fund,

Getting more Pakistanis to pay income tax, therefore, is crucial, senior western diplomats in Islamabad said.

But experts warn that the new government will face stiff opposition from a citizenry that has grown accustomed to pooh-poohing tax laws.

Shabbar Zaidi, one of Pakistan's leading tax experts, said tax officials do not have detailed records of up to 70% of bank accounts in the country.

"The government will have to significantly expand its knowledge in areas such as bank account details," Zaidi said. "There are approximately 40 million bank accounts in Pakistan, but the government has information on just 12 million. Unless you can document the full scale of information surrounding the assets of individuals, there will be no progress."

The Pakistan Muslim League-Nawaz, or PML-N, ruled Pakistan till April and has now emerged as Khan's main opposition in parliament. Its key leaders have urged Khan's party, the PTI, to continue with a raft of tax "reforms" they introduced rather than coming up with a new collection system.

The main feature of the PML-N's tax reform was lowering the top tax rate to 15% from 30%.

"The best option for the next government will just be to go with reforms that we have already left behind," said former Finance Minister Miftah Ismai, who stepped down in April, ahead of last month's elections. "Fresh discussion of new tax proposals in parliament will just delay the reforms."

The business community smells risks ahead. Said the president of a Karachi-based Pakistani company: "The main outcome of an IMF program will be a slowdown of Pakistan's economy. The IMF will force the next government to raise revenue through unpopular measures like higher tariffs for electricity and gas. And there will also be a push for more taxes. All these are unpopular measures."

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