Pakistan making tax gains, but 'complex' system requires deeper reform: IMF

Pakistan has lifted its general government tax revenues to more than 12% of GDP one year into the IMF-supported Extended Fund Facility, but the country must accelerate tax administration and policy reforms to meet its target of increasing the tax-to-GDP ratio to 15%, the International Monetary Fund said in its latest country report.

“The authorities remain committed to advancing their fiscal revenue mobilization efforts,” the IMF said, noting that both the Federal Board of Revenue (FBR) and provincial governments have contributed to the gains. The Fund said reaching the 15% target would support debt reduction and “expand investment in human and capital development and propel growth”.

'FBR must intensify enforcement and modernization'

The IMF said Pakistan is committed to strengthening FBR operations to meet upcoming revenue goals. The revenue authority has already taken multiple steps, including expanding audits, improving sales and withholding tax collection through greater use of point-of-sale (POS) terminals and digital invoicing, and launching public outreach campaigns to encourage tax filing.

The IMF said the FBR will develop a “comprehensive roadmap” with IMF technical support to prioritize compliance interventions. According to the report, the FBR will “complete all actions necessary to fully implement at least three priority areas” under a new end-March 2026 structural benchmark.

The tax authority has intensified enforcement, including ex-post audits and the deployment of its compliance risk management system. “The system has identified around 840 priority cases,” the report said, adding that more than 250 auditors had been deployed as of Oct. 1 to curb evasion. The number of tax returns rose to over 7 million in FY25, up from 5.2 million the previous year.

Digital invoicing and POS expansion

Efforts to improve sales tax compliance are also expanding. POS terminals currently cover 38% of the largest registered retailers, and the FBR aims to cover all major retailers — about 40,000 — within two years. Authorities also plan to bring three-quarters of invoices from taxpayers with annual sales over PKR 500 million into the digital invoicing system by the end of FY26.

The IMF noted Pakistan’s focus on targeting non-filers who purchased property and filers who declare no tax liability despite significant assets.

Tax Policy Office to lead overhaul

The Fund said Pakistan’s newly established Tax Policy Office (TPO) became operational in October and will be responsible for designing and publishing a medium-term tax reform strategy aimed at overhauling what the IMF described as a “complex” tax code.

The strategy, due by December 2026 under a new structural benchmark, is intended to simplify tax policy, reduce reliance on ad hoc measures and ensure “revenue-neutral reforms with sustained growth in tax revenues,” the report said.

Provinces expand agricultural income tax

The report also noted progress among provincial governments, particularly in implementing agricultural income tax (AIT) reforms. Provinces have introduced new compliance measures, taken steps to address underreporting, and improved communication with taxpayers.

“Provinces have developed comprehensive implementation plans for their new agricultural income tax regimes,” the IMF said, though it warned that significant obstacles persist, especially the need to fully operationalize information sharing between provinces and the FBR.

Provinces have also ensured that all services are subject to the general sales tax (GST) except for a limited “negative list”.

Harmonizing coding and any changes to exemptions will be decided at the National Tax Council.

The authorities aim to complete legal procedures and operationalize data sharing by May 2026, the IMF said.

To ensure sustainable progress, the FBR will prepare a detailed roadmap by December, laying out priority reforms, staffing needs, timelines, revenue impacts and key performance indicators such as the number of audits and the volume of transactions processed through digital invoicing.

The IMF said these steps are essential for Pakistan to continue strengthening revenue administration and to “effectively focus resources” on areas that will deliver the highest compliance gains.