The government of Pakistan, led by Finance Minister Muhammad Aurangzeb, has declared a decisive “war on cash” as part of an effort to target the estimated Rs9.3 trillion in currency circulation and maximize tax revenues. During a press conference, the minister emphasized that the recent financial policies may cause “short-term pain” for citizens, but large corporations are already benefiting from emerging macroeconomic improvements.
Addressing the Tax Gap and Evasion
Accompanied by Federal Board of Revenue (FBR) Chairman Rashid Mehmood Langrial, the finance minister outlined the pressing need to address a potential Rs7.1 trillion tax gap. While debunking the common misconception that Rs2.7 trillion in taxes remain stuck in legal battles, Langrial noted that this gap could be closed using technology, rigorous audits, and better enforcement of tax laws.
Both officials acknowledged the complexity of current tax return forms, noting that even experienced taxpayers struggle to navigate the system without professional help. The government plans to simplify these forms in the next budget cycle. Despite the current challenges, the FBR has reaffirmed that the tax return deadline of September 30 will not be extended, though there are rumors of a brief grace period.
Tackling Non-Filers and Tax Evasion
According to Aurangzeb, individual tax evasion is estimated to be around Rs1.3 trillion annually. He stressed the importance of eliminating cash-based transactions to achieve the country’s ambitious goal of joining the G20, highlighting that such progress will only be possible if financial dealings are fully documented.
Aurangzeb claimed that the Pakistani economy has the potential to be valued at over $700 billion, significantly higher than the current estimate of $325 billion. He asserted that tax evasion costs the government over Rs7 trillion annually and pledged that stricter documentation measures will be enforced moving forward.
Penalties for Non-Compliant Individuals
The finance minister warned that individuals who evade taxes will face severe restrictions. They will be barred from purchasing vehicles, real estate, investing in mutual funds, opening bank accounts, withdrawing cash, and may even encounter issues with deposits. A new digital system will be introduced to monitor all financial transactions and cross-reference them with declared income, with spending limits imposed on those who fail to comply.
Utilizing Lifestyle Data for Tax Compliance
To minimize harassment from tax authorities, Aurangzeb explained that a transparent interface would be used to ensure citizens’ declared incomes align with their actual spending habits. “We already have access to lifestyle data, and we will now properly utilize this to enhance the tax-to-GDP ratio,” he said.
He also reported a significant increase in tax filings by September 29, with over 3.2 million submissions compared to 1.6 million the previous year. Additionally, there were 723,000 new tax filers this year, up from 300,000 last year. “This is evidence that we are making progress,” he added.
Expanding Tax Registration and the KYC Scheme
Aurangzeb pointed out that out of 300,000 manufacturers in the country, only 14% are registered for General Sales Tax (GST), while only 25% of wholesalers are registered. To address this, the government plans to expand registration and implement a “Know Your Customer” (KYC) scheme similar to the banking sector. This will ensure that manufacturers only supply goods to registered wholesalers.
The FBR will also leverage data and advanced algorithms to boost the tax-to-GDP ratio. Businesses that fail to register will face penalties, including blocked utilities, property seizures, and closures of non-compliant premises.
Fighting Smuggling and Revenue Losses
Digital checkpoints will be established along sea routes to curb smuggling, which costs the country over Rs750 billion annually. These checkpoints will be part of the government’s larger strategy to reduce revenue leakage and improve tax compliance across various sectors.
A Defining Moment for Pakistan’s Economy
Finance Minister Aurangzeb described the current situation as a “defining moment” for Pakistan, with the potential to stabilize the macroeconomic environment and introduce long-overdue structural reforms. He stressed the need to transition the economy from being import-led to export-led, a shift that could prevent the country from repeatedly facing balance-of-payment crises whenever GDP growth exceeds 4%.
Aurangzeb emphasized that achieving sustained growth requires laying a strong foundation through the implementation of the IMF-backed structural reforms, which have been delayed for years. “This moment will determine the direction in which we move forward,” he said, noting that both domestic expertise and international assistance will be essential to pushing the tax-to-GDP ratio into double digits and securing Pakistan a place in the G20.
Monetary Policy Adjustments and Fiscal Improvements
He also highlighted the recent 450 basis-point reduction in the central bank’s policy rate, which has led to a more favorable borrowing environment for industries and corporations. The effective interest rate has dropped to 15-16%, compared to the previous policy rate of 17.5%.
In light of these positive developments, the government has rejected several domestic borrowing offers, including treasury bills and bonds, signaling to the financial sector that the government is no longer in a position of fiscal desperation. “If we borrow, it will be on our terms,” Aurangzeb asserted, adding that the banking sector must now focus on lending to private businesses.
Provinces Align with National Fiscal Pact
As part of the IMF’s “whole of government approach,” all four provinces have committed to improving their tax contributions through a National Fiscal Pact. This pact calls for the introduction of uniform tax rates across provinces, new legislation to tax the agricultural sector, and the assumption of additional expenditure responsibilities in line with the 18th Amendment.
Closing the Revenue Gap
FBR Chairman Langrial provided insights into the Rs7.1 trillion revenue gap for the year, which includes Rs3.4 trillion in GST, Rs2 trillion in income tax, and over Rs700 billion in losses due to smuggling. Despite the removal of certain exemptions, the addition of new taxable items, and an increase in the GST rate from 16% to 18%, total GST collections have stagnated at Rs3.1 trillion over several years, pointing to widespread tax evasion and corruption.
Langrial explained that a significant portion of the Rs2.7 trillion in tax cases are procedural in nature, with FBR officials filing appeals against appellate decisions. The remaining amount represents a lower recovery rate due to the limited success of FBR cases in court.
Conclusion
Pakistan’s “war on cash” is a bold move aimed at addressing the country’s deep-rooted tax evasion issues. By implementing digital tracking systems, simplifying tax return processes, and expanding the scope of tax registration, the government aims to bring more revenue into its coffers. As structural reforms continue, the hope is that Pakistan will not only stabilize its economy but also achieve sustained growth and, ultimately, a place among the world’s top economies.