- According to insiders, the relocation is expected to streamline the issuance of green bonds and enable access to more affordable loans from multilateral institutions.
- There are indications that the withholding tax on bank transactions for non-filers might be increased, as part of a strategy to encourage compliance and expand the tax base.
- It is anticipated that a fiscal adjustment of Rs1.6 trillion will be achieved through the implementation of additional revenue measures and the privatization of certain assets.
ISLAMABAD: The government is considering the implementation of a carbon tax on petroleum and similar items, as part of its efforts to adopt a comprehensive general sales tax (GST) system. This move is being encouraged by the International Monetary Fund (IMF) in order to fully realize the benefits of a value-added tax (VAT) and improve documentation and digitization.
According to sources, the introduction of a carbon tax could also help in securing international financial support for various aid programs, including green and e-bonds, as well as obtaining cheaper loans and grants from multilateral institutions. The future development program is already being aligned with climate public investment management benchmarks, as per the sources.
The IMF has recommended the reintroduction of a standard GST on petroleum products, along with a petroleum levy of up to Rs60/litre, as part of its broader objectives to transform the existing GST scheme into a universal VAT system that applies to consumption across all sectors of the economy, without any exceptions or preferential treatment.
However, the authorities have proposed either reintroducing the carbon tax or increasing the threshold for the petroleum levy in the upcoming budget, potentially up to Rs100/litre. This is aimed at generating greater revenue from petroleum products, as the proceeds from the carbon tax remain entirely in the federal government’s coffers, unlike the GST which is primarily allocated to the provinces.
According to sources, implementing the carbon tax had proven to be a beneficial measure in terms of gaining international support, earning carbon credits, and obtaining cheaper finances. The revenue generated from this tax could then be allocated towards environmentally-friendly expenditures, which would help replace carbon-emitting practices and reduce greenhouse gas emissions. It was proposed that both the petroleum levy and carbon tax would be implemented simultaneously if a final decision was made.
The officials argued that utilizing federal revenue instruments such as the petroleum levy and carbon tax would be more convenient in terms of collection and addressing financial constraints, as opposed to rebalancing the National Finance Commission (NFC), which had a greater focus on provincial resources in the divisible pool.
Furthermore, with the withdrawal of federal financing for provincial development projects under the public sector development program, the central government would not need to engage in politically sensitive actions, such as undoing fiscal devolution.
These sources also mentioned that the government and the IMF have discussed expanding the size and reach of various social welfare initiatives under the Benazir Income Support Program (BISP), as well as linking monthly stipends to inflation in order to mitigate the adverse effects of high inflation rates. Both parties agree on the importance of improving targeting methods and gradually phasing out beneficiaries through income-generating schemes.
Taxation measures
Officials have stated that the focus of the revenue effort will be on digitization and documentation, using both incentives and penalties. Retailers will be encouraged to voluntarily register under the Tajir Dost Scheme, but those who do not comply will face fines and other punishments through new legal measures in the income tax laws. Non-filers will also face higher withholding tax on bank transactions, potentially increasing from 0.6% to 1% in the upcoming budget.
Last year, a set of measures was introduced in the finance bill but later withdrawn due to concerns of being too harsh and prone to misuse by tax officials. These measures are now being reconsidered for the next year. The 24th IMF bailout is expected to aim for a 3% increase in the tax-to-GDP ratio, reaching around 12% with an annual growth rate of 1%.
To meet the necessary fiscal adjustment of at least 1.5% of GDP, approximately Rs1.6 trillion, additional revenue measures, expenditure rationalization, and privatization will be implemented in the upcoming budget. The finance minister has already announced plans to reform pensions as part of the expenditure rationalization measures, with reduced allocations for development spending.\
The government has committed to the fund to ensure timely adjustments in gas and electricity tariffs from the upcoming fiscal year onwards. Additionally, efforts will be made to reduce energy costs and involve the private sector in tackling circular debt. The continuation of a strict monetary policy and transition to a market-based exchange rate are also part of the plan, along with the reinforcement of social security and State-Owned Enterprises (SOEs). Despite the IMF’s concerns about potential risks due to political instability and geopolitical factors, these measures are aimed at supporting the reform program.
