VZCZCXRO4872
RR RUEHLH RUEHPW
DE RUEHIL #4831/01 3171517
ZNR UUUUU ZZH
R 131517Z NOV 07
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 3160
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 4125
RUEHNE/AMEMBASSY NEW DELHI 2219
RUEHLO/AMEMBASSY LONDON 6701
RUEHML/AMEMBASSY MANILA 2886
RUEHKP/AMCONSUL KARACHI 8008
RUEHLH/AMCONSUL LAHORE 4035
RUEHPW/AMCONSUL PESHAWAR 2565

UNCLAS SECTION 01 OF 02 ISLAMABAD 004831 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O.  12958:  N/A 
TAGS: EFIN ECON EINV PREL PK
SUBJECT: PAKISTAN EXPECTS TO MEET AMBITIOUS TAX COLLECTION TARGET 
 
Summary 
 
¶1.  (SBU)  The Federal Board of Revenue expects to meet its annual 
tax collection target of Rs.1.025 trillion ($16.8 billion ). The 
first quarter tax (July - September 2007) collection is up by 21.1 
percent, compared to the same period of last year, but falls short 
of the FBR's self-imposed target of Rs.218 billion ($3.57 billion) . 
 The FBR attributes this shortfall to transition to new electronic 
tax filing system, and hopes to recoup the lost revenue in the 
coming months.  FBR maintains that there has been no increase in tax 
avoidance and non-compliance, but admitted it is facing resistance 
from the services sector to any increased taxes.  The FBR has 
contacted with Georgia University to research methods to tax 
under-taxed sectors, in particular the services sector.  End 
summary. 
 
FBR Confident It Will Meet Its Annual Tax Target 
 
¶2.  (SBU)  Econ Officers met Dr. Ather Maqsood, Chief of Research 
Service of the Federal Board of Revenue (FBR), October 30 to discuss 
reports that the FBR will not be able to meet its annual tax target 
of Rs.1.025 trillion ($16.8 billion), due to an increase in 
non-compliance and a drop in the number of tax filers.  Maqsood 
refuted these reports, asserting that the FBR will be able to meet 
its annual tax collection target, provided the economy continues to 
grow at the same pace and there is political stability. (Note:  We 
met with Maqsood three days before the imposition of the state of 
emergency.  End note.)  The government has projected 7 percent GDP 
growth and a 6.5 percent inflation rate.  He explained that, after 
graduation from the IMF program, Pakistan is no longer held to 
binding quarterly tax collection targets. The FBR itself sets 
monthly and quarterly targets, which may be adjusted. 
 
Transition to Modern System Causes Shortfall in the First Quarter 
Tax Collection 
 
¶4.  (SBU)  The Federal Board of Revenue is modernizing its 
collection systems, and moving to an electronic filing and 
collection system.  Maqsood attributed the shortfall in first 
quarter tax collections to the transition and initial operational 
problems with the new computerized system.  He was confident that 
this loss will be recovered in the coming quarters.  The FBR 
collected Rs. 257.85 billion ($4.23 billion) in taxes from 
July-October 27, compared to Rs.212.92 billion ($3.49 billion) in 
the same period last year, an increase of 21.1 percent. 
 
Tax evasion did not increase, but low GDP-tax ratio persists 
 
¶5.  (SBU) Contrary to press reports, there was no increase in tax 
evasion, and Maqsood emphasized that the number of individuals 
filling income tax actually increased by 11.1 percent, from 1.8 
million to 2.0 million in the last year.  He said the low number of 
individuals filing income tax is also due to the fact that some 
income tax payers are not required to file returns, and are not 
counted in the statistics for individuals filing income tax. 
 
¶6.  (SBU)  Maqsood, however, acknowledged that the tax to GDP ratio 
is very low and some sectors are under-taxed.  He cited the example 
of the services sector which comprises 50 percent of GDP, but its 
tax contribution is only 30 percent of GDP.  The financial sector 
only began paying federal excise tax on cash withdrawals and letter 
of credit transactions from last year.  Maqsood said that the FBR is 
facing opposition from the services sector on imposition of new 
taxes.  Lawyers and doctors do not pay taxes on services rendered. 
Whenever the government tried to levy taxes on their services, they 
have resisted it.  Only the telecoms and the banking sectors are 
adequately taxed. There is a 15 percent sales tax on cell phone 
bills, which Maqsood described as a good revenue generator for 
government, given the tremendous increase in the use of cell phones. 
 
 
Studies Underway to Broaden Base and Increase Tax Collection 
 
¶7.  (U)  The Federal Board of Revenue has contracted with Georgia 
State University for a project on tax policy reforms. The project 
will examine the gap between each sector's tax contribution and what 
should it pay. The project is likely to benefit Pakistan in 
improving tax compliance and in generating revenue from the 
under-taxed sectors, particularly the service sector. 
 
Comment 
 
¶8.  (SBU)  Comment:  While the Federal Bureau of Revenue has made 
 
ISLAMABAD 00004831  002 OF 002 
 
 
significant progress over the past few years in generating 
additional tax revenue because of tax policy and administrative 
reforms, it must now focus seriously on broadening the tax base. 
Pakistan is now a services-based economy, so taxation of this 
growing sector is essential to close the government's fiscal 
deficit.  We will be tracking the FBR's revenue collection in the 
coming months to see how the state of emergency and political 
uncertainty affects Pakistan's economy.  End comment.