Pakistan introduces new fossil fuel surcharges to boost tax revenue and meet IMF commitments

The Pakistani government plans to introduce new surcharges on fossil fuels and expand the provincial tax base, coupled with enhanced enforcement measures, to achieve a tax-to-GDP ratio of 13.7% by the fiscal year 2028-29, reported nukta.com, adding that these initiatives are part of the country’s commitment to the International Monetary Fund (IMF) under a $7 billion Extended Fund Facility.

According to the annual report from the Federal Board of Revenue (FBR), Pakistan’s tax collection authority, it is anticipated that 11.1% of the targeted tax-to-GDP ratio will result from these policy and enforcement initiatives, while 2.6% will stem from the newly introduced surcharges and increased non-tax revenue.

In the fiscal year 2023-24, FBR tax revenues experienced a significant 30% growth, raising the tax-to-GDP ratio from 8.54% to 8.77%. The implementation of various policy and enforcement measures by the FBR, along with the efforts of its leadership, has contributed to a substantial rise in tax revenues. Continued progress in tax revenue is expected to further enhance the tax-to-GDP ratio in the coming years, with direct taxes increasing from 3.10% of GDP in FY21 to 4.27% in FY24.

This trend toward a larger share of direct taxes and a reduced reliance on indirect taxes represents a positive shift in Pakistan’s tax framework. The tax-to-GDP ratio is an essential indicator that compares a country’s tax revenue to the size of its economy. It serves as a measure of tax policy effectiveness and allows for international comparisons. Growing tax revenues enable countries to allocate more resources to critical sectors such as infrastructure, healthcare, and education. The World Bank emphasizes that tax revenues over 15% of GDP are critical for fostering economic growth and reducing poverty.

Through these initiatives, Pakistan aims to establish a more resilient and efficient tax system that supports the nation’s economic progress.