Pakistan selects McKinsey for tax collection overhaul

In a bid to fully digitalise its federal tax authority, Pakistan has signed a deal with McKinsey & Company, which will spearhead the design and roll-out of the new system.

The announcement came from Pakistani Finance Minister Muhammad Aurangzeb during a meeting in Riyadh, Saudi Arabia, hosted by the World Economic Forum (WEF).

The proposal from McKinsey & Company for the digitalisation of the Federal Board of Revenue (FBR), Pakistan’s central tax collection agency, was approved by a committee tasked with overseeing the project and chaired by Finance Minister Aurangzeb.

After a thorough review of the technical and financial aspects involved with the digitalisation project, McKinsey was considered the top bidder. After that, McKinsey presented the committee with their final and comprehensive proposal for the project, which was approved.

The digitalisation of the FBR project is part of a package of reforms that Pakistan is pushing forward in order to get a new bailout loan from the International Monetary Fund (IMF). The IMF has granted Pakistan bailouts 24 times already – but the loans require the country to enact reforms packages.

“Digital transformation is a key priority for the government, and this collaboration [with McKinsey] underscores the government’s commitment to improving tax collection for promoting sustained economic growth. We look forward to seeing the positive impact of this initiative on Pakistan’s economy,” said Aurangzeb in a statement.

The FBR admitted that they have a “very narrow tax base”. The FBR noted that out of a population of about 240 million people, only a mere 5.2 million people pay taxes. The plan is to add 1.5 million new taxpayers to that base by next year.

Estimates put the percentage of the labour force that files tax returns at only 4.1%, while only about 1% of the rest of the population is thought to pay taxes. Part of the reason for that is because huge swaths of the population earn well below the minimum taxable income or earn money irregularly.

Cash is still dominant in Pakistan as the day-to-day payment preference for around 40% of the population. That means that a significant percentage of payments made every day are untaxed, a persistent problem that also affects many other countries around the world.

Pakistan suffers from a chronic balance of payments crisis. The country is looking at a deficit of around $24 billion in payments for debt and interest servicing in 2024. That is thought to be around three times the central bank’s current foreign currency reserves.

Besides expanding the tax base, Pakistani authorities are looking to bolster public finances in other ways too. The current round of reforms also includes perusing fiscal consolidation, improving tax administration, and working to improve the country’s debt sustainability.