IMF Eyes New Steps as Pakistan Faces Tax Revenue Shortfall

Pakistan is once again confronting a major Pakistan tax revenue shortfall, raising concerns within the government and intensifying discussions with the International Monetary Fund (IMF). With the Federal Board of Revenue (FBR) falling behind its collection targets in the first quarter of FY2025–26, the IMF is expected to push for new fiscal measures unless Pakistan demonstrates credible progress in boosting revenue. The widening gap between targets and actual collections poses a serious challenge for the country’s already fragile fiscal stability.

FBR’s Lower-Than-Expected Tax Collection Performance

According to official sources, the issue of the Pakistan tax revenue shortfall dominated the agenda during the ongoing policy-level talks between Pakistani authorities and the IMF mission.

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During the first quarter (July–September) of FY2025–26, the FBR collected Rs 2,885 billion against a target of Rs 3,083 billion, leaving a significant shortfall of Rs 198 billion. For September alone, the monthly target was set at Rs 1,368 billion, but actual collections stood at Rs 1,230 billion, creating an additional gap of Rs 138 billion.

If the current trend continues, sources warn the FBR could face a total shortfall exceeding Rs 400 billion by the end of the fiscal year. Such a deficit would make it nearly impossible to achieve the government’s ambitious target of Rs 14.13 trillion without new tax measures.

Government Pushes Back Against New Taxes

Despite mounting pressure, Finance Minister Muhammad Aurangzeb has categorically ruled out introducing a mini-budget. He stated that no new taxation measures are being considered at present. Senior officials echoed this stance, confirming that “no working on new taxes has been started”.

Instead, the government claims it is focusing on long-term structural reforms that will modernize the FBR, expand the tax base, and improve efficiency. These reforms, however, will require time to yield results, whereas the IMF seeks immediate assurances to stabilize Pakistan’s deteriorating fiscal position.

FBR’s Transformation Plan and Reform Measures

To mitigate the Pakistan tax revenue shortfall, the FBR highlighted several ongoing reforms during its briefing to the IMF:

• Hiring of 1,600 auditors to enhance audit and enforcement capabilities.

• Introduction of digital production monitoring across key sectors such as sugar, cement, beverages, fertilizer, poultry, tobacco, and textile.

• Integration of economic data sources to identify tax evasion.

• Utilization of AI-driven audit selection for more targeted enforcement.

• Expansion of digital invoicing and POS systems for greater transparency.

• Launch of the Faceless Customs Appraisement System, which has already increased revenue per GD by 17.3%.

As a result of these initiatives, Pakistan’s tax-to-GDP ratio improved from 8.8% in 2023–24 to 10.24% in 2024–25. The FBR also reported an eightfold increase in enforcement-based revenue compared to the previous year, indicating that reforms are beginning to deliver results.

IMF’s Contingency Measures Worth Rs 216 Billion

Despite acknowledging these improvements, the IMF remains concerned about the persistent Pakistan tax revenue shortfall and is prepared to activate eight contingency revenue measures agreed during the earlier SBA review. These measures have a combined potential of generating Rs 216 billion annually and include:

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1. Raising the sales tax rate on tier-1 textile & leather from 15% to 18%.

2. Imposing a FED of Rs 5 per kg on sugar.

3. Increasing advance income tax on machinery imports by 1%.

4. Raising advance income tax on industrial raw materials by 0.5%.

5. Increasing advance income tax on commercial raw materials by 1%.

6. Increasing withholding tax on supplies by 1%.

7. Increasing withholding tax on services by 1%.

8. Increasing withholding tax on contracts by 1%.

If enforced, these measures would directly impact industries and consumers, increasing the overall cost of doing business in Pakistan.

Government Requests Reduction in FBR’s Tax Target

In a significant development, Prime Minister Shehbaz Sharif has requested the IMF to approve a downward revision of Pakistan’s tax collection target for FY2025–26.

The current target of Rs 14,307 billion has been proposed to be reduced by Rs 250 billion, lowering it to Rs 14,057 billion. This request was made to avoid the imposition of new taxes and prevent an economic burden on already struggling citizens and businesses.

Sources revealed that the FBR anticipates a potential Rs 1,170 billion revenue shortfall due to lower economic growth and declining inflation—two critical factors that significantly affect tax revenue.

IMF’s Revised Projection: Rs 13.98 Trillion

The IMF’s second review under the Extended Fund Facility (EFF) acknowledges Pakistan’s improvements but also highlights the risks of a widening revenue gap. The Fund has now lowered its own projection for Pakistan’s FY2025–26 tax collection to Rs 13,979 billion—slightly below the government’s revised proposal.

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The IMF emphasized the need for Pakistan to continue raising its tax-to-GDP ratio toward 15%, which is crucial for long-term debt reduction, economic stability, and development spending.

FBR’s Future Roadmap: A Push Toward Compliance

To strengthen compliance and increase revenue sustainably, the FBR is preparing a comprehensive roadmap, supported by IMF technical assistance. The plan includes:

• Enhanced monitoring of taxable goods.

• Wider implementation of POS and digital invoicing.

• Automated data integration with provincial and federal agencies.

• Completion of at least three major compliance initiatives within an accelerated timeline.

Conclusion

The growing Pakistan tax revenue shortfall presents a serious challenge that could define the country’s economic direction in FY2025–26. While the government hopes reforms will gradually improve performance, the IMF is insisting on immediate measures to keep Pakistan’s fiscal program on track.

The coming weeks will be critical as Islamabad negotiates between avoiding painful new taxes and meeting the IMF’s conditions to secure financial stability. The outcome will directly impact businesses, consumers, and Pakistan’s broader economic trajectory.