Pakistan and the International Monetary Fund (IMF) are reportedly close to reaching an agreement on proposed tax relief for the salaried class in the forthcoming 2025–26 federal budget, as reported by The News on Sunday. However, achieving the ambitious revenue target of Rs14.2 trillion will present a significant challenge, particularly given the expanding shortfall against the revised tax collection goal of Rs12.33 trillion for the current fiscal year.
Following intensive negotiations on Friday night, IMF officials granted in-principle approval for a reduction in income tax rates across various salary slabs. The Washington-based lender estimates that these proposed cuts would provide relief amounting to Rs56-60 billion in the next fiscal year. To compensate for the resulting revenue gap, the Federal Board of Revenue (FBR) will be required to introduce corresponding income tax measures.
“We have proposed certain taxation measures to satisfy the IMF for providing relief to the salaried class in the coming budget,” a top official of the negotiating team confirmed to The News on Saturday. The official stated that the precise reduction in the proposed slabs for the salaried class had not yet been fully finalized. The FBR proposed a mere 1% tax on the first slab, covering annual earners ranging from Rs0.6 million to Rs1.2 million, in contrast to the current rate of 5%.
The existing 5% tax rate for the first slab translates to a Rs30,000 tax. If the proposed 1% rate is agreed upon, the tax paid amount for earnings up to Rs100,000 will be reduced from Rs30,000 to Rs6,000. The IMF is advocating for a 1.5% tax rate from the first slab, which would result in a Rs9,000 tax payment. For the remaining slabs, a 2.5% reduction in each income slab for the salaried class is proposed, with the maximum slab rate decreasing from 35% to 32.5%. However, the exact calculation of the total cost has not yet been definitively ascertained and reconciled between the IMF and FBR high-ups.
When questioned about the fate of the 10% surcharge and the imposition of Super Tax, sources indicated that both the surcharge and Super Tax would be gradually rationalized, and a reduction in tax rates would commence with the next budget. Top official sources confirmed that budget makers were concerned about the proposed tariff rationalization plan on imports. If the plan, envisioned by the Commerce Ministry and National Tariff Commission, were implemented, it could result in a revenue loss of approximately Rs200 billion.
It has been argued that tariff reduction will stimulate sluggish economic activities, thereby boosting revenue collection. Should this argument be accepted, the revenue loss in the upcoming budget would stand at Rs150 billion. FBR high-ups were also perturbed by the tariff rationalization plan, arguing that if tariffs on a multitude of imported items are reduced, it would become challenging for Customs officials to curb misdeclarations. There are growing apprehensions that higher tariff goods might be declared and cleared under lower tariff categories.
Another concern is that the FBR target is potentially being set based on incorrect assumptions. In the first 11 months, the shortfall in revenues widened to more than Rs1 trillion compared to the original target of Rs12,970 billion for the current fiscal year. Although the target was revised downward to Rs12,332 billion with the consent of the IMF, achieving this target by June 30, 2025, appears impossible. In such circumstances, if next year’s target of Rs14.2 billion is based on an inaccurate assumption of Rs12,332 billion for the outgoing fiscal year, the subsequent FBR target would be founded on unrealistic numbers.
The IMF also raised objections regarding the allocation of 2,000MW of electricity for cryptocurrency mining without obtaining prior approval from the Energy Ministry and its Regulator, NEPRA.
