IMF Chief Kristalina Georgieva’s recent call for Pakistan to collect taxes from the wealthy has once again highlighted the country’s deeply flawed tax system. This system lies at the root of many of Pakistan’s economic challenges, including an unsustainable fiscal deficit, high inflation rates, low levels of investment, and a precarious balance-of-payments situation.
During her meeting with caretaker Prime Minister Anwaar-ul-Haq Kakar on the sidelines of the UN General Assembly session, Georgieva expressed her belief that her message resonated with the aspirations of the Pakistani people. She emphasized the importance of implementing strong policies aimed at achieving economic stability, fostering sustainable and inclusive growth, prioritizing revenue collection, and protecting the most vulnerable segments of Pakistan’s population.
Specifically, Georgieva urged Pakistan to increase taxes on the wealthy while safeguarding the interests of the poor. This is not the first time she has made such a recommendation. In February, she underscored the necessity for Pakistan to ensure that high earners contribute their fair share of taxes, while subsidies primarily benefit the less affluent.
Unfortunately, previous governments, including the PML-N-led ruling coalition, have failed to heed Georgieva’s advice. The recent budget, presented in June, missed an opportunity to address the core issue of dwindling tax revenues. It avoided bringing undertaxed and untaxed sectors like real estate, agriculture, and retail effectively into the tax net, fearing potential political backlash. Instead, the budget imposed a greater tax burden on “captive taxpayers,” including salaried individuals and the organized corporate sector, to meet the revenue targets set by the IMF for a new bailout program.
Some of the tax measures introduced in the budget, such as the differentiation between filers and non-filers, run counter to the broader objective of formalizing the economy and discourage tax compliance. These measures perpetuate the risks to the long-term sustainability of Pakistan’s economic structure.
Pakistan currently maintains one of the world’s lowest tax-to-GDP ratios, standing at just 8.6 percent. This low ratio has resulted in a fiscal deficit exceeding 7 percent for several years, primarily due to the government’s reluctance to broaden the tax base. Consequently, the country has found itself ensnared in a debt trap, continually seeking shrinking handouts from global lenders to cover its bills and provide some relief to its inflation-burdened populace.
It is imperative for Pakistan’s policymakers to heed Georgieva’s persistent calls for reform. To transform Pakistan into a functioning entity, they must implement comprehensive tax reforms that include direct taxation of all income sources, regardless of their origin, while reducing reliance on indirect taxation.
Reforming the tax system is not just a matter of fiscal responsibility; it is crucial for achieving sustainable economic growth and ensuring that the burden of taxation is distributed fairly across all segments of society. By embracing these reforms, Pakistan can unlock its economic potential and pave the way for a more prosperous future for its citizens.