Pakistan assures IMF of Rs200b tax measures

Revenue steps will be taken if FBR misses Dec target or expenses rise above limits

ISLAMABAD:

Pakistan has assured the International Monetary Fund (IMF) that it will take Rs200 billion worth of additional tax measures in January to compensate any slippages in the budget surplus by increasing the income tax rates on landline and mobile phones and cash withdrawals from banks.

The measures will only be triggered following lower-than-targeted revenues and higher-than-agreed expenses in July-December of the current fiscal year, according to the Pakistani authorities.

Government sources told The Express Tribune that other measures, which were part of the contingency plan, included increase in sales tax on solar panels and expanding the web of federal excise duty (FED) to confectioneries and biscuits.

Tax authorities said that the choice for the government was between increasing the standard sales tax rate to 19% to collect Rs225 billion annually or taking those measures on account of withholding tax, sales tax and FED to keep the IMF programme on track.

The nature of the measures suggested that the existing classes of taxpayers would again be exposed to additional taxes and the FBR's plans to broaden the base only remain on papers.

It comes on the heel of Sindh and Punjab governments' decisions to defer the collection of agriculture income tax at the enhanced rates up to 45% for one year.

Sources said that the Pakistani authorities had communicated to the IMF that they were ready to take the additional revenue measures, if the FBR missed its end-December target or the expenditures rose above agreed limits.

The commitment paved the way for a staff-level agreement between Pakistan and the IMF for the completion of the second review of a $7 billion bailout package.

When contacted, the FBR did not officially respond to a set of questions, including the justification of taking such regressive steps and their implications for the broader economy.

But a senior FBR official said that the government was still trying to convince the IMF to reduce the annual primary budget surplus target of 1.6% of GDP, which was equal to Rs2.1 trillion.

The IMF refused to lower the target during talks in October but promised to review it once the final estimates of flood losses were available. The World Bank has already revised upwards its economic growth forecast for Pakistan to 3% after the flood losses remained lower than initial estimates.

On the sidelines of the UN General Assembly in September, Prime Minister Shehbaz Sharif had also requested IMF MD Kristalina Georgieva to relax the fiscal conditions.

Sources said that the total annual quantum of the agreed measures was Rs200 billion and half of it was expected to be recovered during January-June 2026.

Subject to final approvals, they said, the government may increase the withholding tax on cash withdrawals to 1.5%, an increase of almost 100%. Doubling the cash withdrawal rate is expected to generate an additional Rs30 billion annually for the FBR, which has failed to bring retailers in the tax net.

The government currently charges 0.8% on cash withdrawals from a person whose name does not appear in the active taxpayers' list.

The regressive measure may contribute to increase in currency in circulation, which was already equal to 34% of the total cash deposits of banks as of June 2025. According to the central bank, the currency in circulation amounted to Rs10.6 trillion with nearly 5% growth in a year.

According to another back-up measure, Pakistan has informed the IMF that it may increase the withholding tax on landline phones from 10% to 12.5%, a surge of 25% in the tax burden on households having landline connection. It is expected to generate Rs20 billion annually.

On average, the government is already collecting Rs10 billion per month from telephone subscribers, where the monthly bill exceeds Rs1,000.

In another regressive measure, which will hurt every individual, the government may increase the withholding tax on cellular calls from 15% to 17.5%. This is expected to generate an additional Rs24 billion every year, said the sources.

Curbing the use of solar panels to generate power by households remains a priority of the government. It has now proposed to increase the sales tax from 10% to 18%. Sources said that another proposal was to impose 16% FED on confectioneries and biscuits to raise Rs70 billion in revenue every year.

The proposals to impose FED on all processed foods — including chips and biscuits — were also part of the last budget. Effectively, the 16% FED means the sales tax will increase to 32%, and after adding further tax and withholding taxes, the overall cost of taxation will jump to 38%.

Sources said that if the IMF did not agree to the reduction in the primary surplus target, there was a likelihood that the government would either kick in those measures or cut expenses.

The FBR is already struggling to meet its target. It faced a Rs198 billion shortfall in the first three months, which is expected to significantly widen by the end of October. Tax collection as of October 29 remained at Rs3.65 trillion and the FBR required Rs460 billion more in 48 hours to hit the four-month target.