The International Monetary Fund (IMF) has identified serious administrative weaknesses in Pakistan’s tax machinery after a significant revenue shortfall last fiscal year. The findings are detailed in the IMF’s latest review of Pakistan’s economic performance.

According to the IMF report, the Federal Board of Revenue collected Rs1.2 trillion less than the target set in the federal budget during the last fiscal year. This shortfall highlighted structural and administrative challenges within the tax system.

The IMF noted that sales tax and import tax were responsible for the largest portion of the revenue shortfall. Weak enforcement and compliance issues further compounded the gap in collections.

Target partially achieved

The report stated that the IMF review target was missed by Rs524 billion. While part of the target was achieved, overall performance fell short of expectations set under the IMF program.

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Out of the total revenue gap, Rs850 billion was attributed to low inflation and weak economic growth, according to the IMF. Sluggish economic activity reduced taxable transactions and imports.

Administrative weaknesses

The IMF identified that the remaining Rs380 billion shortfall resulted from administrative problems and weak implementation by the FBR. These issues included ineffective enforcement and limited follow-through on tax measures.

The report also pointed to delays in the disposal of tax-related cases, which negatively affected revenue realization. Prolonged litigation and backlog were described as key administrative bottlenecks.

Tax collection shows improvement

Despite the shortfall, the IMF acknowledged that tax collection improved by 26% in 2024–25 compared to the previous year. The increase indicates progress, though the Fund stressed the need for stronger administration and reforms.

Also Read: IMF makes new demands from Pakistan under $7bn loan program

The IMF emphasized that improving administrative capacity, enforcement, and institutional performance at the FBR is essential for meeting future tax targets. Strengthening implementation remains a central requirement of Pakistan’s ongoing economic reform agenda.

Tax scrutiny of major exporters

On the other hand, the FBR has raised concerns over a sudden drop in the taxable income reported by major exporters across Pakistan. Field offices have been instructed to review tax returns meticulously, with legal consequences for underreporting without valid justification.

Following recent amendments to the Income Tax Ordinance, particularly Section 154, the FBR has directed its field formations to identify and scrutinize between 10 and 30 major exporters from Karachi, Lahore, and Islamabad.

Meanwhile, the series of demands from the IMF continues, as new conditions linked to Pakistan’s $7 billion loan program have come to light, potentially impacting the country’s growing electric and hybrid vehicle industry.

According to sources, the IMF has demanded the abolition of sales tax exemptions on locally manufactured electric vehicles and electric bikes. The proposal calls for the imposition of the standard 18% General Sales Tax (GST) from the 2026–27 fiscal year.

Hybrid electric vehicles also targeted

The IMF has also urged Pakistan to end tax exemptions on locally manufactured hybrid electric vehicles, sources revealed. Currently, these vehicles enjoy tax relief under special provisions aimed at promoting cleaner transportation.