The Federal Board of Revenue (FBR) has alerted the government that the tax shortfall could escalate to approximately Rs400 billion by the end of December, highlighting the authorities’ ongoing struggle to capture real-time sales data even from parliament’s cafeteria, located nearby.

The FBR has recommended to the finance minister that the heavy taxation on the real estate sector, which has led to a slowdown in property transactions, be reconsidered. However, no proposals were made to alleviate the income tax burden of up to 39% on the salaried class, who are already grappling with high tax rates. During a briefing with Finance Minister Muhammad Aurangzeb, senior FBR officials projected an additional shortfall of Rs50-60 billion in December. This comes on the heels of the FBR missing its July-November revenue target by Rs341 billion, despite implementing record tax measures exceeding Rs1.5 trillion in the budget.

The finance minister was assured that efforts would be intensified to meet the monthly tax target of Rs1.373 trillion, though officials admitted the likelihood of a Rs60 billion deficit. To bolster revenue, the FBR suggested revisiting the steep taxes on the real estate sector, but any reduction would require approval from the International Monetary Fund (IMF). Despite enlisting foreign-funded consultants, greenlighting new vehicles, and distributing cash incentives among tax officials, Prime Minister Shehbaz Sharif’s government fell short of the five-month revenue target. Recently, the cabinet endorsed additional funding for the FBR without addressing the issue in a full quorum meeting.

By November’s end, the FBR had collected Rs4.295 trillion against a target of Rs4.64 trillion, marking a 23% growth. However, achieving the annual target of nearly Rs13 trillion necessitates a 40% growth rate, which seems increasingly improbable. The IMF is set to evaluate December’s tax collection performance before deciding on a new tax-heavy budget. While the IMF acknowledged that direct tax collection remains on track, it expressed significant concerns over shortfalls in three key indirect taxes: sales tax, federal excise duty, and customs duty. The FBR attributed the revenue gap to a disparity between the assumptions used to set targets and actual first-quarter outcomes.

Initially, the FBR had estimated a tax shortfall of Rs325-350 billion for the first half of the fiscal year. However, by the end of the fifth month, this estimate proved overly optimistic. Prime Minister Sharif acknowledged that trillions of rupees in taxes are being evaded with the complicity of tax officials but noted that resolving these systemic issues will take time. The problem is compounded by the government’s own inaction. For example, parliament’s cafeteria, managed by a private contractor, is not linked to the FBR’s computerized system. Instead, it operates on cash transactions without generating Point of Sale (POS)-based receipts, further eroding potential revenue.

Meanwhile, the government has lauded its increased withholding tax collection from traders under Section 236H compared to the previous year. However, many traders continue to evade entering the formal tax system, opting instead to pass the 2.5% tax burden onto consumers. This reluctance to comply with tax net requirements underscores deeper challenges in addressing revenue shortfalls. The government introduced the Tajir Dost Scheme with the aim of generating an additional Rs50 billion from traders. However, the scheme has seen disappointing results, bringing in barely Rs1 million in three months.

During a briefing to the National Assembly Standing Committee on Finance, the finance secretary confirmed that Pakistan has so far failed to meet several key IMF conditions. These include achieving tax collection targets, increasing expenditure on healthcare and education, extending the maturity of domestic debt, and getting provinces to approve agricultural income tax laws. In response, the Ministry of Finance issued a press release asserting that “the IMF programme is proceeding smoothly, with no disruptions,” and reiterated the government’s commitment to meeting all conditions of the 37-month programme. The ministry emphasized that Finance Minister Aurangzeb has consistently prioritized macroeconomic reforms and stability. It dismissed any speculation about implementation challenges as baseless and unsupported by credible evidence.

The government reaffirmed its focus on economic stability and compliance with the IMF’s requirements, aiming to establish a foundation for sustainable, inclusive growth. However, a mini-budget appears inevitable, as the Federal Board of Revenue (FBR) has failed to meet its monthly revenue collection target for the fourth time in just five months. The revenue gap has triggered blame-shifting between institutions. The FBR attributes the shortfall to overly optimistic estimates during target-setting for FY25, while the finance ministry criticizes the FBR for lacking the determination to meet its goals, despite a Rs32 billion incentive package announced last month. The annual tax target of Rs12.97 trillion—40% higher than the previous year’s collection—is widely viewed as overly ambitious. The government’s fiscal tightening measures, including significant spending cuts, further complicate achieving this target. Only 6.6% of the targeted 26% Public Sector Development Programme (PSDP) spending was utilized in the first five months of the fiscal year, which directly impacts revenue collection. It’s obvious that cutting spending reduces taxable economic activity, which in turn lowers tax collection.

The government’s aggressive target appears to be a desperate attempt to secure the IMF’s $7 billion bailout. The projected 40% increase in revenue, or Rs3.659 trillion, hinges on assumptions of 3% GDP growth, 3.5% growth in large-scale manufacturing, and a 16.9% rise in imports. Experts, however, predict actual revenue collection will not exceed Rs12 trillion, potentially leaving a shortfall of over Rs900 billion. With the IMF set to review the half-yearly collection soon, a mini-budget seems unavoidable. Measures to bridge the tax gap and meet IMF requirements are expected to impose additional financial burdens on an already struggling population, further tightening the belts of ordinary citizens.