Strategy Note /

Pakistan 'super-tax' hits narrow tax base but brings IMF closer

  • Pakistan collects about half the tax revenue it should but again turns the screws on this narrow tax base

  • Corporate 'super-tax' (10% on large scale industries) the latest fiscal measure to help re-track IMF loan

  • A reminder of the governance reform challenge even less likely to be met post-Khan, but much risk is already priced in

Pakistan 'super-tax' hits narrow tax base but brings IMF closer
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
24 June 2022
Published byTellimer Research

Pakistan's 'super tax', announced on 24 June, of 10% on large scale industries and 4% on smaller ones, will not the be the last one-off supplemental tax.

For now, the Shehbaz Sharif-led PLMN-PPP government is scrambling to re-track the IMF loan, and other bilateral assistance conditional upon the IMF loan.

But the continuing pain from high imported fuel and food prices, rising sovereign debt servicing costs, and very dim prospects of governance reform under this government means that this is likely not the last hike, whether one-off or not, to Pakistan's extremely narrow personal and corporate tax base.

Similar to the recent windfall tax dropped on the largest corporates in Hungary, the equity market reaction has been swift and negative. The KSE 100 equity index dropped close to 4%.

Much economic risk is already priced in, with Pakistan the cheapest equity market in Asia EM on trailing and forward PB and PE measures relative to history.

Pakistan's low tax revenue (albeit Bangladesh, India lower)

Perennially narrow tax base

In a January 2016 paper, the IMF quantified the narrow tax base in Pakistan.

  • Active personal income tax filers account for merely c0.5% of the total population, c2% of the total formal workforce, and c20% of the formally employed workforce earning above the income tax threshold.

  • Active corporate tax filers account for c1% of total commercial and industrial electricity users, and general sales tax filers account for c15% total retailers.

  • The IMF estimated that Pakistan's tax-to-GDP potential was about 22%, compared to a realised figure approximately half of that.

Pakistan tax to GDP in the range of 9-13% for two decades

Many economic concerns already priced in

Pakistan equities are now down 22% ytd in US$ total return terms, similar to consensus foreign frontier favourite, Vietnam.

  • Trailing PB of 0.7x (for ROE of 20%) is a c40% discount to the 5-year median.

  • Forward PE is 3.9x (for 17% earnings growth and 10% dividend yield, on current consensus forecasts), a c45% discount to the 5-year median.

In terms of market catalysts, the resumption of the IMF loan could well outweigh a 10% cut to earnings from this new tax for the next couple of years.

Pakistan is the cheapest equity market in Asia EM

But, lost hope on structural reform

In the medium term though, the prospects of improving those desultory tax base statistics have likely evaporated, along with most of the rest of the agenda to structural reform governance, with the demise of the Imran Khan-led PTI government.

Pakistan's large 'shadow' economy (albeit smaller than India)

Related reading

Pakistan: Crackdown on protests and IMF talks futile, but value reflects crisis, May 2022

Pakistan: DSA and restructuring analysis shows bonds are near recovery value (Curran), June 2022