The IMF has urged Pakistan to introduce additional taxes amounting to roughly Rs1.3 trillion in the upcoming budget. If agreed upon, this would elevate the Federal Board of Revenue’s annual target to a significant Rs12.3 trillion.
The additional taxes amounting to Rs1.3 trillion are equivalent to 1% of the projected size of the economy for the next year. According to government sources, the International Monetary Fund (IMF) has requested to recover half of these additional taxes from salaried and business individuals.
The IMF has shared its final Tax Diagnostic report with the government, which includes a recommendation to reduce the number of income tax slabs for salaried individuals to four. If accepted, this recommendation would significantly increase the tax burden on salaried and business individuals.
Discussions regarding the IMF’s demand for the Rs1.3 trillion in new taxes will take place during the upcoming mission-level talks for the next bailout package. The government will negotiate with the IMF, particularly regarding the IMF’s insistence on placing additional burden on the salaried class. The excessive taxation on the salaried class has led to the middle-class segment of society having to ration their expenses. In light of the IMF visit, internal discussions on the budget for the fiscal year 2024-25 have begun, as it has been acknowledged that the current fiscal year’s tax collection target of Rs9.415 trillion is no longer attainable.
The government was notified by the tax authorities that the annual target may not be met due to a shortfall of approximately Rs175 billion to Rs200 billion. This amount is currently tied up in legal battles as petitioners have contested the government’s super tax, real estate tax, and windfall gains imposed on commercial banks.
Nearly half of the Rs415 billion in additional tax measures implemented by the PDM government in the previous budget is now entangled in court proceedings, casting a negative light on the budget planning process.
The FBR has informed Finance Minister Muhammad Aurangzeb that it can achieve a 19% increase in tax collection without implementing any additional revenue measures. The expected collection for this fiscal year is approximately Rs9.2 trillion. Without additional revenue measures, the FBR can potentially collect nearly Rs11 trillion in the upcoming fiscal year.
However, in order to raise the FBR’s tax-to-GDP ratio to 10% in the next fiscal year, the target needs to be set at around Rs12.3 trillion.
If the government agrees to the IMF’s request for slightly under Rs1.3 trillion in tax measures, the FBR’s target for the next year will be approximately Rs12.3 trillion. This would require a 33% increase compared to this year’s collection. In absolute terms, the FBR’s collection target could be around Rs3.1 trillion higher than the current fiscal year – a figure that both the IMF and the government aim to extract from an already struggling economy.
The government has deliberated on potential areas for taxation in the upcoming fiscal year. These may include increasing taxes on retailers, eliminating sales tax exemptions on agriculture inputs and machinery, and discontinuing reduced sales tax rates for businesses registered with the FBR through point of sale (POS), as per insider sources.
Garments-related businesses registered with the FBR through POS are currently subject to a 15% sales tax on their sales. The proposal is to raise this to the standard 18%. The tax rate had been reduced previously to incentivize businesses to register with the FBR. In the previous budget, it was raised from 12% to 18%.
The government is considering the removal of tax exemptions and an increase in the tax burden at a time when the FBR is encountering difficulties in meeting its monthly collection targets and the public is grappling with a 25% inflation rate.
The FBR fell short of its 10-month tax collection goal by Rs52 billion, managing to collect Rs7.362 trillion instead of the targeted Rs7.414 trillion. This collection was Rs15 billion lower than the FBR’s own projections, a shortfall that the authorities attribute to the slow approach taken by officials in response to the Prime Minister’s efforts to eliminate compromised and ineffective personnel.
The FBR failed to meet its monthly target by Rs57 billion, only collecting Rs650 billion in April.
During a meeting with a delegation from a foreign bank, Muhammad Aurangzeb emphasized the importance of expanding the tax base and accelerating the digitization process at the FBR, as reported by the finance ministry.
