IMF seeks Rs15.6tr tax target

Govt resists as Fund proposes ending exemptions on fuel, housing and solar users

ISLAMABAD:

The International Monetary Fund (IMF) has suggested a Rs15.6 trillion new tax target and the withdrawal of sales tax exemptions on fuel and newly constructed homes, but the Pakistani authorities said that they had, thus far, not accepted any of these proposals.

The tax plan that the IMF suggested during the recently concluded round of staff-level talks would require at least Rs400 billion in additional revenue measures for the fiscal year 2026-27, starting from July, the sources said.

The measures that the IMF proposed for the next fiscal year also included imposing sales tax on existing solar panel consumers who were earlier exempted from the new net billing regulations, according to the Pakistani authorities.

The sources said that the IMF sought to increase the Federal Board of Revenue (FBR) tax-to-GDP ratio to 11.3% for the next fiscal year, about 0.3% or Rs400 billion higher than this year's agreed targets. However, the tax authorities were not hopeful of collecting more than 10.7% of GDP, which leaves a wide gulf.

The Washington-based global lender asked the Pakistani authorities that the increase in the tax base should primarily come from revenue measures. Throughout these talks, spanning over one month, the tax authorities stated that the policy space had been fully exhausted and that people could not be overburdened any more, said the authorities.

Pakistan and the IMF last week reached a staff-level agreement, but its final endorsement from the executive board is linked to the FBR's ability to collect Rs322 billion from court cases that have already been decided in the government's favour. FBR officials said that the machinery has so far pooled about Rs280 billion from the court cases.

The IMF will launch another mission to Pakistan in early May to finalise the budget, including tax proposals for the next fiscal year. The sources said that the measures suggested by the IMF as part of its plan to increase the tax base may again come under discussion during the next round.

The FBR's tax base remains fluid, as it is highly unlikely that it would achieve the Rs13.98 trillion downward revised tax target. The tax machinery faces the prospect of missing its target by a huge margin, which would make it impossible to achieve the next fiscal year's 11.3% of GDP or Rs15.6 trillion.

The sources said that the IMF wanted to set the new tax target at Rs15.6 trillion, while the tax machinery showed its inability to generate more than Rs15 trillion, that too depending upon this year's actual collection.

They added that the IMF wanted Pakistan to withdraw or reduce sales tax exemptions on fuel and newly constructed homes. The government is already charging Rs106 per litre petroleum levy on petrol, which is equal to 37% of the landed price of the fuel.

The government is not in favour of imposing GST on fuel, as it would have to share the revenues with the provinces, unlike the petroleum levy that is fully retained by the federal government.

The sources said that imposing an asset-based tax on small and medium enterprises, including traders, was still part of the IMF toolkit. The FBR is resisting the proposal on the grounds that it does not have the wherewithal to determine the asset base of small-scale traders.

According to another politically sensitive proposal, the issue of imposing 18% sales tax on existing solar panel consumers came under discussion during these deliberations, the sources added. The government has recently changed the solar panel regulations by converting them from net metering to net billing of units.

After hue and cry made by consumers and the media, Prime Minister Shehbaz Sharif instructed them to exempt existing consumers from the new regulations. The sources said that the proposal remained on the table for the May round of discussions with the IMF.

The government has also requested the IMF to allow a reduction in tax rates for various segments and businesses. The IMF's view was that any reduction in rates should be offset by new permanent tax policy measures, including the possibility of increasing the standard sales tax rate.

The IMF has taken the position that the next fiscal year's 2% of GDP primary budget surplus target will be sacrosanct and should be backed by permanent tax policy measures, mainly through sales tax and income tax collection from people who are already in the net.