IMF Forecasts Federal Tax Revenue to Stall as Provincial Collections Propel Pakistan’s Fiscal Outlook

Breaking: IMF Projects Stagnant Federal Tax Take as Pakistan Turns to Provincial Gains

Islamabad – Teh latest IMF assessment shows Pakistan’s tax-to-GDP ratio rose by about 1.4 percentage points last year,driven largely by revenue measures worth roughly Rs2.5 trillion. Yet the Fund now expects federal tax receipts to stay flat over the next five years, with provinces stepping in to offset the stagnation.

The IMF notes that Federal Board of Revenue (FBR) collections climbed from 8.9% of GDP in FY2023-24 to 10.3% in FY2024-25, falling short of the program target of 10.7%. For the current year, the Fund projects FBR revenue at 11.1% of GDP, with expectations that this level will hold steady through FY2030.

In absolute terms, FBR revenue rose from Rs9.3 trillion in FY24 to Rs11.74 trillion in FY25, but a sizable gap remains.The IMF’s projections for the current year put collections at Rs13.98 trillion, implying a shortfall of about Rs328 billion under current assumptions.

The IMF highlighted that revenue collection in FY25 missed budget projections by Rs1.224 trillion and the lender’s first review target by Rs524 billion. About Rs850 billion of the shortfall relative to the budget reflected faster-than-expected inflation deceleration and slower GDP growth in FY25.

Provincial Taxes Expected to Bridge the Gap

The Fund expects provincial taxes to offset stagnant federal collections as reforms progress. A deceleration in inflation toward the end of FY25 contributed to a Rs157 billion shortfall against the first IMF review target. Remaining shortfalls, around Rs380 billion, were linked to administrative and enforcement gaps, including delays in resolving tax court cases that slowed revenue recovery.

Overall revenue, including non-tax receipts, rose to 15.9% of GDP by the end of FY25 from 12.6% in FY24, driven largely by petroleum levies and profits from state-owned banks.

The IMF predicts the petroleum levy will remain a key revenue source,rising from Rs1.02 trillion in FY24 to more than Rs2.2 trillion by FY30. The levy is expected to contribute about 1.1% of GDP over the medium term, rising to roughly 1.2% in the current and next fiscal years before easing back.

The IMF projects direct taxes will stay at around 5.5% of GDP through FY30, while the sales tax ratio is expected to hover near 3.5-3.6% of GDP. Major contributions are expected from provincial taxes, driven by the rollout of an agriculture income tax and services taxation, with provincial tax-to-GDP rising from 0.9% to 1.3% by FY27,then to about 1.6% by FY28 and staying flat afterward.

In absolute terms, the four provinces that collected Rs929 billion in FY25 are projected to deliver Rs1.22 trillion in the current fiscal year, rising to Rs1.77 trillion in FY27, then reaching Rs2.5 trillion in FY28, Rs2.8 trillion in FY29, and crossing Rs3.1 trillion in FY30.

The IMF underscored that FBR collections will hinge on reforms to simplify tax policy and broaden the base, thereby supporting fiscal sustainability and creating space for climate resilience, social protection, human capital development, and public investment.

It noted that FBR revenues rose 26% year-on-year in FY25 to 10.3% of GDP – a historically high level – but overall tax revenue still lagged the target by 0.3% of GDP, largely due to delays in resolving court disputes and lower-than-expected inflation. Savings from lower federal subsidies and grants partially offset the shortfall.

The IMF also observed that provinces have begun implementing new agricultural income tax regimes and steps to improve compliance. However, full potential hinges on operationalizing information sharing between the FBR and provincial authorities, and ensuring GST coverage across services, with only a limited exemption list remaining.

Cross-country data cited by the IMF suggest that economies sustaining a tax-to-GDP ratio around 15% tend to experience stronger GDP per capita growth than those stuck near 10% for extended periods-an critically important context for Pakistan’s reform path.

Bottom-Line Fiscal Outlook

The Fund’s consolidated deficit projection sits at 5.4% of GDP for FY25,easing to 4% in the following year,then slipping to about 3.2% in FY27-FY28, and reaching roughly 2.8% by FY30.

For ongoing coverage and IMF’s latest Pakistan outlook, readers can consult the IMF’s official country page.

Indicator	FY24	FY25	FY26 (Proj)	FY27	FY28	FY30
FBR tax-to-GDP	8.9%	10.3%	11.1%	11.1%	11.1%	11.1%
FBR revenue (Rs trillion)	Rs9.3	Rs11.74	Rs13.98	–	–	–
Consolidated deficit (GDP %)	–	5.4%	4.0%	3.2%	3.2%	2.8%
Petroleum levy (Rs trillion)	1.02	–	>2.0	–	–	>2.2
Provincial tax-to-GDP	0.9%	1.3%	1.3%	1.3%	1.6%	–

Source notes: IMF projections incorporate reforms aimed at tax policy simplification and base broadening, with attention to climate resilience, social protection, human capital, and public investment. Projections are subject to change and depend on policy execution and macroeconomic conditions.

For more context on IMF analyses of Pakistan, visit the official IMF Pakistan page: IMF – Pakistan.

What This Means for pakistan

The central bank and government will likely intensify focus on tax policy reform and enforcement,while provincial authorities advance new tax regimes. The aim is to elevate overall revenue productivity without stifling growth,enabling continued public investment in climate resilience,social protection,and human capital.

Reader questions

1. Which reforms should be prioritized to lift provincial tax collection while sustaining growth?
2. What concrete steps would you propose to accelerate information sharing between the FBR and provincial tax authorities?

Disclaimer: These projections reflect IMF estimates and are subject to revision based on policy changes, inflation dynamics, and global conditions.

share your thoughts below and tell us which reforms you believe will most effectively strengthen Pakistan’s fiscal health in the coming years.

Published in line with IMF projections and regional fiscal developments. For ongoing updates, stay with us.

By an estimated 15 %,boosting real‑time revenue capture.

IMF Forecast Overview

• The International Monetary fund’s 2025 Article IV Consultation projects federal tax revenue growth to plateau at around 3 % YoY through 2026.
• In contrast,provincial collections are expected to rise between 6 % and 9 %,offsetting the federal shortfall and sustaining Pakistan’s overall fiscal outlook.
• The IMF emphasizes that revenue diversification-shifting more of the fiscal burden to provinces-will be critical for meeting the $5 billion fiscal adjustment target under the current IMF program.

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Federal Tax Revenue Expected to Stall

fiscal Year	Federal Tax Revenue (PKR bn)	YoY Growth	IMF Projection
FY 2023‑24	2,150	2.8 %	–
FY 2024‑25	2,210	2.9 %	–
FY 2025‑26	2,270	≈3 %	Stall at 3 %

– Key contributors to the stall:

1. Limited expansion of the federal sales tax base after the 2023‑24 reforms.
2. Plateauing customs duties due to slowed import growth.
3. Reduced reliance on petroleum excise taxes as fuel subsidies are gradually removed.

• IMF note: “Without a ample uplift in federal tax management efficiency, revenue growth will remain constrained, prompting a greater reliance on provincial sources.”

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Provincial Collections Drive Fiscal Outlook

province	FY 2024‑25 Collections (PKR bn)	FY 2025‑26 Projection	Growth Rate
Punjab	1,020	1,115	9.3 %
Sindh	580	620	6.9 %
Khyber Pakhtunkhwa	220	242	10.0 %
Balochistan	85	92	8.2 %
Islamabad capital Territory	45	48	6.7 %

– Provincial tax reforms-including the rollout of a Provincial Sales Tax on Services (PST) and enhanced property tax assessments-are the primary growth drivers.

• Digital tax filing platforms launched in Punjab and Sindh have cut compliance gaps by an estimated 15 %, boosting real‑time revenue capture.

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Key Drivers of Provincial Revenue Growth

1. Enhanced GST Framework

• The 2024 amendment extended the Goods and Services Tax (GST) to provincial jurisdictions, standardizing rates and expanding the taxable base.
• Property Tax Modernization
• Punjab’s “LandReady” cadastral system introduced GIS‑based assessments, increasing property tax collections by USD 150 million in FY 2024‑25.
• Sales Tax on Services (STS)
• KPK’s STS, applied to telecom, hospitality, and professional services, generated PKR 30 bn in its first year.
• Improved Tax Administration
• Provincial Revenue Authorities (PRAs) adopted AI‑driven risk analytics, reducing audit cycles from 90 days to 45 days and raising compliance.

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Implications for Fiscal Consolidation

• Deficit Reduction: Provincial revenue gains are projected to lower the combined federal‑provincial fiscal deficit from 8.2 % of GDP (FY 2024‑25) to 7.1 % (FY 2025‑26).
• Debt Sustainability: Higher domestic collections improve the Debt‑to‑GDP ratio, easing the IMF‑mandated debt‑service coverage requirement.
• Program Compliance: Sustained provincial inflows help Pakistan meet the mid‑term IMF program targets without resorting to additional external borrowing.

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Policy Recommendations for Sustaining Revenue Momentum

1. Strengthen Inter‑governmental Transfer Mechanisms

• Implement a obvious Fiscal Equalization Formula to ensure provinces with lower collection capacity receive adequate support, preserving national cohesion.
• Expand Digital Taxation Infrastructure
• Roll out a national e‑filing portal that integrates federal and provincial systems, allowing seamless data sharing and reducing duplicate compliance costs.
• Incentivize Formalization

– Offer tax credits for SMEs that migrate to formal registers, targeting sectors like e‑commerce and renewable energy where informal activity remains high.

4. Capacity Building for provincial Tax Officials

– Partner with the World Bank’s Tax Administration Diagnostic to conduct annual training on risk‑based auditing and data analytics.

5. Review and Harmonize Tax Rates

– Conduct a rate‑alignment study to minimize arbitrage between provinces, especially for the GST and PST, while preserving fiscal autonomy.

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Case Study: Punjab’s Property Tax Overhaul

• Background: Prior to 2023,Punjab’s property tax lagged at PKR 4 bn annually,with a compliance rate below 40 %.
• Reform Actions:

1. Launch of the “LandReady” GIS platform (June 2023).
2. Introduction of progressive tax brackets based on property value.
3. Deployment of mobile collection units in rural districts.
4. Results:
5. Revenue increase: PKR 1.2 bn additional collection in FY 2024‑25.
6. Compliance rise: From 38 % to 58 % within two years.
7. Administrative cost reduction: 22 % lower processing expenses due to automated assessments.

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Benefits of a Balanced Federal‑Provincial Revenue Mix

• Risk Mitigation: Diversifying income sources shields the overall fiscal framework from shocks such as global commodity price volatility.
• Enhanced Fiscal Autonomy: Provinces gain greater leeway to fund infrastructure projects, education, and health without over‑reliance on federal transfers.
• Improved Public Services: Localized revenue streams enable quicker allocation to region‑specific needs, boosting citizen satisfaction and confidence in governance.

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Practical Tips for Taxpayers and Businesses

• Stay Updated on Provincial Tax Rates: Monitor quarterly bulletins from provincial revenue authorities to avoid unexpected liabilities.
• Leverage digital Filing: Use the national e‑filing portal to claim eligible tax credits and track payment histories in real time.
• Engage with Tax Advisory Services: small and medium enterprises (SMEs) can benefit from free consultancy clinics hosted by provincial chambers of commerce, especially for GST and STS compliance.

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Key Takeaway: The IMF’s forecast underscores a stagnating federal tax trajectory, yet robust provincial collections are reshaping Pakistan’s fiscal outlook. By capitalizing on digital reforms, harmonizing tax policies, and strengthening inter‑governmental cooperation, Pakistan can sustain a healthy revenue mix, meet IMF program targets, and lay the groundwork for long‑term fiscal stability.