The report issued on 12 September says: “The new government feels strongly that the previous fiscal path was unsustainable and is committed to a process of fiscal consolidation . The authorities view the FY2013/14 budget, approved by parliament on June 27, 2013, as a significant step in that direction. The authorities are more optimistic than staff about the potential for short-term revenue gains via improvements in tax administration.”

The report adds: “While agreeing on the need to eliminate many SROs (Statutory Regulatory Orders) to reduce tax loopholes, they were less enthusiastic about eliminating the ability to issue new SROs, which they see as a flexible and quick-response tool for addressing tax policy needs. Staff noted that SRO authority could be eliminated for creating new concessions or exemptions, while retaining it for other policy purposes. On fiscal federalism reforms, the authorities noted that significant constitutional and political barriers exist to a wholesale overhaul of the system.”

The report observes that Pakistan's tax revenue-to-GDP ratio, at about 10 percent of GDP, remains among the lowest in the world among non-oil exporters. 8 Tax loopholes, exemptions and concession have left a small pool for taxation. For example, agriculture is mostly outside the tax net, and the number of taxpayers filing income tax returns is very small relative to the size of the population (about 1 percent).

It contends that the implementation of a full Value Added Tax (VAT) remains the first-best option to raise tax revenue, but if this remains politically unfeasible, other permanent tax policy measures could be considered to come closer to it by wholesale reductions in exemptions and concessions, and by fully incorporating services into the tax net.

The report suggests: “The administrative authority to grant tax exemptions via Statutory Regulatory Orders (SROs) should be eliminated to prevent further degradation of the tax net. Income tax should integrate income from all sources, concessions and exceptions should be eliminated, withholding should be adjustable, with the minimum tax on turnover remaining as a control for deductions.”

IMF staff has suggested that Pakistan administration should develop and implement a strategy to strengthen tax administration, with the technical assistance of the Fund and the World Bank. While key elements of the strategy will need to be defined, it should include significantly stepping-up the Federal Board of Revenue's (FBR's) enforcement activities and improving its legal authority (such as to facilitate asset seizures for tax evaders and to presumptively bill taxpayers). The anti-money laundering framework will need to be fully applied in this effort.