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Pakistan registers a million new taxpayers ahead of IMF review

Terms of $6bn loan create headwinds for growth and business confidence

Efforts by Pakistan's Federal Board of Revenue have increased the tax roll and chipped away at the country's image of being rife with tax cheats.   © Reuters

ISLAMABAD -- Pakistani tax officials have a million reasons to smile.

For the first time, they have registered one million new taxpayers over the course of a year, putting at least 2.5 million Pakistanis on the tax roll.

"This is no small success. We went aggressively after people who never declared their incomes and forced them to sign up as regular taxpayers," said one senior official of the Federal Board of Revenue, who spoke to the Nikkei Asian Review on condition of anonymity. "If we can keep up the momentum, Pakistan's tax collections will improve in time."

The news comes ahead of the International Monetary Fund's first review of the country's economic progress in October under a three-year $6 billion loan package approved in July. And it may help Pakistan begin to shed its image as a land of rampant tax evasion, where less than 1% were registered as taxpayers before the release of the latest figures.

Ernesto Ramirez Rigo, head of the IMF team responsible for monitoring the country's economic progress, said in a statement earlier in September that there has been "significant improvement in tax revenue collections with taxes showing double-digit growth." Rigo noted that "the FBR is undertaking significant steps to improve tax administration and its interface with taxpayers."

Still, despite increased tax collections, the country's sluggish economy may make the good cheer short-lived. The IMF expects Pakistan's growth rate to hit about 2.4% in the financial year to June 2020 -- about half the rate achieved between 2005 and 2015. The slowdown will likely continue due to tight controls on government spending that the IMF demands in order to reduce the fiscal deficit.

"The IMF program will cause a slowdown of Pakistan's economy. The result is going to make it harder for the government here to raise tax collections in ways like collections on customs duty," said one Islamabad-based economist, who also spoke on condition of anonymity. "Imports are already shrinking so customs duty collection is going to be lower."

Critics warn that a 10% fall in targeted tax collections in July and August could endanger the IMF deal. Consistently failing to meet targets would result in the IMF losing faith and modifying -- or dropping altogether -- the loan before the end of the program.

"Pakistan has historically faced a fiscal problem and that problem hasn't gone away," Sakib Sherani, a former adviser to the finance ministry, told Nikkei. "For the IMF program, achieving the [tax targets] will be very important," he added.

One issue that has plagued successive governments is a long-standing policy that exempts the agriculture sector from taxes.

Politically influential owners of large farmlands have routinely resisted attempts by governments to force them to pay income tax. Senior tax officials told Nikkei that many businesspeople and industrialists purchase farmland to reduce their tax exposure.

One cabinet minister told Nikkei that around 60% of parliament comprises members whose constituents depend on agriculture for their main source of income. "This [resistance on taxing the agricultural sector] is the only area where politicians from different parties -- whether in government or the opposition -- find common cause," he said.

Business leaders are also concerned about the aggressive tax collection policies, warning that business confidence has plunged due to Khan's anti-corruption campaign, which includes ferreting out tax dodgers. Since being elected prime minister in 2018, Khan has thrown his support behind the National Accountability Bureau, a government watchdog that is hounding opposition leaders, government officials and businesspersons suspected of malfeasance.

"Until these [bandits] and plunderers who have brought the country to the brink of bankruptcy and burdened it with debts are sent to jail, the country can't progress," Khan said in a July speech to his ruling Pakistan Tehreek-e-Insaf political party.

One business leader in Karachi, the country's main economic hub, told Nikkei that the NAB has spooked the business community. "Pakistani businessmen are scared of making large investments in the country," he said, explaining that weak business confidence has hindered growth possibly resulting in less future tax revenue.

He concluded that even if more people joined the tax rolls, the IMF's tax targets would not be met. "Pakistan's economy is just not going to move quickly enough," he said.

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