IMF budget talks begin next week

Talks between Pakistan and the International Monetary Fund (IMF) to secure approval for next year's budget before its presentation in the National Assembly are set to begin on Wednesday, including finalising proposals to impose about Rs230 billion in net additional taxes.

The government will also share a new tax scheme for traders with the IMF, which envisages imposing 1% of turnover as income tax. The threshold for small traders who would fall under the scheme may be set at around Rs300 million in annual sales, but there will be different categories within the overall threshold. The IMF mission is arriving in Islamabad on Tuesday and will stay for one week to finalise taxation measures and the main expenditure heads for fiscal year 2026-27, sources added.

The discussions will also revolve around the IMF's condition to ensure the presentation of a fiscally tight budget in the National Assembly, and Prime Minister Shehbaz Sharif's desire to win some relaxations in income tax rates for the salaried class and Pakistan's corporate sector, the sources said. However, the government has already committed to the IMF that any tax relief for any sector would be compensated by increasing the tax burden on other segments to achieve a net zero impact. The sources said that in addition to measures to neutralise tax relief, the government must take net additional revenue measures of Rs230 billion. Those net measures are part of the IMF's plan to set the FY2026-27 tax collection target at about Rs15.3 trillion.

Nigel Clarke, Deputy Managing Director of the IMF, said on Friday, "Amid a more challenging and highly uncertain external environment since the onset of the war in the Middle East, Pakistan needs to maintain strong macroeconomic policies while accelerating reform efforts, which are critical to managing further shocks and fostering higher sustainable medium?term growth."

The sources said the IMF has already set tight benchmarks for the new budget. These include limiting the overall budget deficit to 3.5% of GDP (about Rs4.9 trillion) and producing a primary budget surplus of Rs2.8 trillion (2% of GDP). The tight numbers align with the IMF and the finance ministry's plans for a fiscally tight budget but may run contrary to the official desire to give some relief.

The prime minister will convene a meeting to finalise tax relief measures, which will be presented to the IMF budget mission. The prime minister's wish is to abolish the super tax, withdraw the capital value tax and reduce the corporate income tax rate to about 22% over the medium term. He is also seeking a reduction in income tax rates for the salaried class across all slabs, with maximum relief for middle?income groups.

Meanwhile, Tola Associates, a chartered accountancy firm, has proposed that for salaried individuals earning up to Rs200,000 per month, a nominal tax of Rs100 per month (Rs1,200 per annum) should be levied. For income above that threshold, the tax slab should be capped at a maximum of 30%. The firm also suggested amending Section 111 of the Income Tax Ordinance to allow taxation of undeclared benami (hidden) assets in the year they are discovered, rather than the year they were acquired. The limitation period should start from the year of discovery, not acquisition.

The sources said the Federal Board of Revenue (FBR) will share the new revenue measures with the IMF on Wednesday, and subsequent meetings will take place during the week starting May 18. Overall, the IMF has asked Pakistan to keep the FBR's revenue target consistent with further revenue mobilisation. It has imposed a condition to further increase the tax?to?GDP ratio by 0.3% to 11%, to be achieved primarily through reducing sales tax exemptions and introducing a new scheme for traders.

Traders scheme

The government is planning to reintroduce a simple scheme for traders that would set a 1% tax liability on the basis of annual sales, said sources. For registered traders who may wish to join the scheme, their tax liability would not be less than the previous year. These traders would be exempt from point?of?sale registration and would file a one?page simple tax return. The new scheme is planned to apply from the current fiscal year 2025-26.

The IMF has also set tight parameters for expenditure in the next budget. It has imposed a condition that the increase in current expenditure for the next fiscal year should not exceed the projected inflation rate of 8.4%. However, this ceiling does not apply to health, education and social protection, which will continue to increase as a share of GDP in line with IMF programme targets. Power subsidies cannot exceed Rs890 billion for the next fiscal year, including Rs300 billion for managing circular debt flows, said the sources.

Tola Associates has again proposed introducing a minimum asset tax by extending the capital value tax to domestic and worldwide assets of resident individuals exceeding Rs50 million. The tax should be applied on fair market value and should be adjustable against income tax liability, with a proposed rate of 1% of the amount exceeding Rs50 million.