Centre to sign National Fiscal Pact with provinces to bridge financing gap, expand tax net

The federal government, in collaboration with provincial administrations, is preparing to sign a “National Fiscal Pact” to address Pakistan’s external financing gap by harmonizing provincial taxes and boosting revenue collection. 

This agreement aims to create a unified fiscal framework, focusing on expanding tax revenue from the agriculture sector, growing provincial revenues, and realigning federal expenditures.

Federal Finance Minister Muhammad Aurangzeb, speaking at a news briefing alongside Federal Board of Revenue (FBR) Chairman Rashid Langrial, confirmed the forthcoming pact. “We will sign the National Fiscal Pact with the provinces, which will help address the external financing gap,” he stated.

Tax collection efforts have intensified, with the number of tax filers doubling to 3.2 million, and 723,000 new filers added this year alone. The minister estimated that tax evasion costs the government Rs1.3 trillion annually and called for a “war on cash” to document the informal economy, estimated to be Rs9.3 trillion. 

Aurangzeb highlighted that Rs7 trillion in taxes could be collected by formalizing the economy. The FBR plans to hire 2,000 chartered accountants to strengthen audit capabilities, with tax collectors incentivized to boost revenue collection.

The government also announced the abolition of the non-filer category and will implement a digital system to detect asset under-reporting. 

Currently, only 14% of manufacturers and 25% of traders are registered for sales tax, which the government aims to address through measures such as blocking utilities and bank transactions for tax evaders.

Efforts to combat smuggling, which costs the government Rs750 billion annually, are also being ramped up with the introduction of digital checkpoints at major border crossings to curb illicit trade and enforce tax compliance.

One of the government’s key targets is increasing the tax-to-GDP ratio to double digits, aiming for 13-14%. The finance minister emphasized the need to shift Pakistan’s economy towards an export-led model. Ongoing privatisation efforts and reforms in state-owned enterprises (SOEs) are also part of the government’s strategy to streamline operations and reduce losses.

Aurangzeb further announced plans to reduce the size of the federal government by abolishing six ministries and eliminating 150,000 vacant positions as part of broader SOE reforms.

He identified population growth and climate change as existential challenges for Pakistan. The creation of a climate resilience fund and child stunting, which affects nearly 40% of Pakistani children, are also critical issues on the government’s agenda. Aurangzeb noted that Pakistan plans to participate in an IMF meeting on October 19 to address these challenges.

FBR Chairman Rashid Langrial revealed that the tax gap has widened to Rs7.1 trillion, up from Rs5.9 trillion last year, with a significant gap in General Sales Tax (GST) amounting to Rs2.3 trillion. He highlighted that tax collection in real terms has not increased since 2016, calling for urgent reforms to the FBR and broader tax structure.

Langrial noted that the FBR has reconstituted the board of its technology arm, Pakistan Revenue Automation Limited (PRAL), bringing in private sector experts and reducing human intervention in tax processes. He stressed that the current reforms are essential for creating a strong foundation for Pakistan’s macroeconomic stability.

Aurangzeb also pointed to Pakistan’s improving macroeconomic stability, with a stable exchange rate and increased foreign reserves, allowing the country to improve its import cover. Inflation has dropped from a peak of 38% to single digits, with further decreases expected.

Pakistan signed a new Standby Arrangement (SLA) with the IMF in July 2024, which led to the approval of a 37-month Extended Fund Facility (EFF) worth $7 billion, with $1.02 billion already disbursed. Aurangzeb credited these achievements to a comprehensive program of macroeconomic stability and structural reforms but stressed that continued reform is crucial to avoid future reliance on the IMF.

The minister also highlighted the importance of reducing reliance on the salaried class for tax revenue, emphasizing that more sectors must be brought under the tax net to ensure the sustainability of Pakistan’s economic reforms.