The financially challenged government initiated discussions with the IMF this week to secure a more substantial and extended bailout. It is widely acknowledged that the continued interaction with the IMF will pose challenges, despite expectations for a more streamlined negotiation process compared to previous encounters.
However, the reports regarding the demands made by the Fund and the alternative proposals put forth by the authorities appear to be quite concerning for the average Pakistani household and salaried classes. For instance, according to a report in this newspaper, the government is contemplating the implementation of a “carbon tax” on petroleum and similar products. This additional levy will be imposed alongside the existing petroleum levy of Rs60 per litre on fuel. The report cites anonymous sources who promote the proposed carbon levy as a means to access global green finance, as well as secure cheaper loans and grants from multilateral institutions.
In reality, the purpose of this levy is to generate revenue for the federal government, much like the petroleum levy that was initially introduced in 2009 to modernize the petroleum supply chain and refineries. Furthermore, there are other revenue proposals that seek to further burden the salaried classes by reducing the highest taxable income limit.
These suggestions form part of the government’s strategy to achieve an IMF target of increasing tax revenues by approximately Rs2tr, surpassing the expected collection by the end of FY24, in the upcoming fiscal year. Additionally, pensions exceeding Rs100,000 per month and income from pension funds may also be subject to taxation in the next budget, as the IMF urges the authorities to raise the tax-to-GDP ratio by at least 3 percent to around 12 percent over the three-year duration of the next program. However, there are indications that the government’s determination to directly tax all incomes, regardless of their source, is waning, despite plans to broaden the tax base by transforming GST into a genuine value-added tax. The focus appears to be shifting towards indirect taxes, which are easier to collect despite their inflationary impact.
The current fiscal position of the federal government is unsustainable, and it is in dire need of increasing its revenues to reduce future borrowing and repay its existing debt. Nevertheless, it granted tax concessions amounting to Rs2.24tr during the previous fiscal year, equivalent to 36.4 percent of the total FBR collection in FY22. This figure does not include the estimated losses resulting from provincial tax concessions. There is no indication of these exemptions being revoked for influential interest groups, including businesses.
Considering that low- to moderate-income households are already struggling under the weight of heavy direct and indirect taxes, with their purchasing power eroded by high inflation, it is crucial for the government to reconsider its tax policy and focus on taxing those who are currently evading or contributing significantly less than they should be.
