Key Highlights of Upcoming Budget 2025–26 – Tough Measures to Tackle Tax Evasion in Pakistan
Pakistan is gearing up for a significant overhaul of its tax system, with plans to eliminate the “non-filer” category in upcoming budget 2025–26 as part of negotiations with the International Monetary Fund (IMF) to strengthen fiscal discipline and broaden the tax base. The move comes as the government prepares to finalize the federal budget for the 2025-26 fiscal year, aiming to address tax evasion and improve compliance.
Key Developments in Tax Reforms in Upcoming Budget 2025–26
- Stricter Measures for Non-Compliance: The government has signaled that the upcoming budget will include tougher restrictions for individuals who fail to file tax returns. Proposals under consideration would block non-filers from purchasing property, vehicles, or engaging in significant financial transactions, pushing them toward compliance with the tax system. The elimination of non-filer category is a key reform in the Budget 2025–26 aimed at broadening the tax base and improving compliance.
- Success in Withholding Tax Initiatives: During recent discussions with the IMF, Pakistani officials highlighted the effectiveness of increased withholding taxes on unregistered traders. This measure has led to a 51% rise in registered traders and wholesalers, a marked improvement over previous trader-friendly schemes that fell short of revenue goals.
- Enhanced Enforcement Through Technology: To crack down on tax evasion, the Federal Board of Revenue (FBR) is leveraging third-party data analytics and expanding its Compliance Risk Management System. Initially implemented in Karachi and Lahore, this system is set to roll out to corporate tax units across the country, enabling more precise identification of tax dodgers.
- Potential Relief for Salaried Class: As part of the budget talks, the government is exploring options to ease the tax burden on salaried employees. One proposal includes raising the income tax exemption threshold to cover annual salaries of approximately PKR 1 million to 1.2 million (roughly USD 3,600–4,300), offering relief to middle-income earners.
Context of IMF Negotiations
These reforms align with Pakistan’s ongoing commitments under the IMF’s Extended Fund Facility (EFF) program, which emphasizes structural changes to enhance revenue mobilization and fiscal sustainability. The IMF has long urged Pakistan to address its low tax-to-GDP ratio, currently around 10.8%, significantly below the South Asian average of over 19%. By phasing out the non-filer category and tightening enforcement, the government aims to meet IMF targets while addressing domestic economic challenges.
The finance ministry is working closely with IMF officials to finalize revenue and expenditure plans for the 2025-26 budget, expected to be announced in June. Discussions are ongoing, with the government pledging to address any revenue shortfalls by adjusting spending, including potential cuts to the Public Sector Development Programme (PSDP).
Broader Implications
The push to eliminate the non-filer category reflects a broader strategy to integrate previously undertaxed sectors, such as retail and real estate, into the tax net. Additionally, the government is addressing IMF demands to harmonize agricultural income tax regimes across provinces, with legislative changes set to take effect by January 2025. These measures aim to create a fairer and more efficient tax system, reducing reliance on regressive indirect taxes that disproportionately burden lower-income groups.
As Pakistan navigates these reforms, challenges remain, including political resistance and enforcement hurdles. However, the government’s commitment to digitalization and data-driven compliance strategies signals a determined effort to modernize the tax system and secure long-term economic stability.
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Conclusion
Pakistan’s decision to phase out the non-filer category marks a pivotal step toward a more equitable and efficient tax system. By tightening enforcement, leveraging technology, and offering relief to compliant taxpayers, the government aims to enhance revenue generation while addressing long-standing issues of tax evasion. These reforms, aligned with IMF requirements, signal a commitment to fiscal discipline and economic stability, though their success will depend on effective implementation and political will.
Disclaimer: This article draws on recent reports and public discussions regarding Pakistan’s tax reforms and ongoing negotiations with the IMF. For the most accurate and up-to-date information, please consult official sources from the Government of Pakistan or the IMF.
