Pakistan and the International Monetary Fund (IMF) are exploring various options for implementing taxation and enforcement measures aimed at generating an additional Rs700 billion in revenue for the upcoming 2025-26 budget.
With the budget for 2025-26 scheduled for announcement in Parliament on June 2nd, the government has requested the IMF to rationalize taxes for the salaried, tobacco, and beverages sectors.
The IMF has raised concerns regarding the proposed reduction in tax rates for the salaried class and has inquired about the potential higher revenue impact if rates are revised downwards for middle-income earners in the range of Rs0.2 to Rs0.4 million per month.
The Annual Plan Coordination Committee (APCC) is set to convene on May 26th to recommend the macroeconomic framework and development budget to the National Economic Council (NEC) for the upcoming fiscal year.
For the tobacco sector, there is a possibility of increasing the Minimum Legal Price (MLP), which currently stands at Rs162.25 per packet. This consideration arises from the fact that over 80% of brands are currently selling at or slightly above the MLP. One potential option is to raise the MLP without altering the existing two-tier structure and Federal Excise Duty (FED) rates.
The Ministry of Finance and the Federal Board of Revenue (FBR) have proposed an annual revenue collection target of Rs14,307 billion for the next budget.
However, the IMF and the Pakistani side have yet to reconcile their figures for the revenue collection target due to differing projections of nominal growth.
A difference of Rs300 billion exists between their projections of nominal growth. The government has projected revenue collection of Rs13,556 billion based on its nominal growth forecast, while the IMF insists that the FBR will not be able to collect more than Rs13,200 billion, resulting in a discrepancy of over Rs300 billion.
Should an agreement be reached on the FBR’s tax target of Rs14,307 billion and a base collection of Rs13,556 billion, the government will need to secure an additional Rs700 billion through a combination of supplementary taxation measures and effective enforcement.
Regarding enforcement, enhanced monitoring of advance tax payments at Green Leaf Threshing (GLT) for unprocessed tobacco presents a potential area for revenue generation. An increase in the MLP for tobacco products is also under consideration for the upcoming budget. The tobacco industry is currently facing a significant challenge due to the persistent violation of the minimum legal price, a problem exacerbated by the proliferation of illegal cigarette brands selling below or slightly above the MLP, posing serious health risks and economic consequences.
In the beverages sector, discussions are underway regarding a potential reduction in tax rates. However, the IMF has raised objections concerning how the FBR would handle potential refunds in this sector, as the FBR is averse to implementing any measures that could lead to refunds in any sector.
