IMF has shifted its focus in the new budget primarily towards additional tax measures and rebalancing the National Finance Commission award. This comes as the government struggles to find any room to offer relief to the salaried class and the real estate sector.
The salaried class has been particularly hard hit, with recent reports showing they paid a staggering Rs437 billion in income taxes over just 10 months of this fiscal year. This figure is up by Rs150 billion compared to last year.
On Thursday, the IMF urged Pakistani authorities to heed its experts rather than relying on arguments about ground realities or the Laffer Curve tax theory, according to sources. The authorities pointed to low revenues stemming from high tax rates, a stance that the IMF did not find convincing.
In a separate session, the IMF also questioned the Federal Board of Revenue’s approach to cutting taxes for the salaried class, as per government sources. They noted that the IMF believes the proposed tax rate reductions for the salaried class could lead to significantly more relief than the government has suggested. The FBR is currently revising the taxation slabs for this group.
Sources indicated that during the initial meeting with Finance Minister Muhammad Aurangzeb on Thursday regarding budget approval, the IMF’s outgoing mission Chief Nathan Porter focused on four key areas.
The IMF’s top priority is to implement revenue measures that support the Rs14.307 trillion tax target and to rebalance the distribution of fiscal resources under the NFC without disrupting the constitutional framework. Additionally, the talks will also cover potential savings from government downsizing and the privatization agenda for the upcoming fiscal year.
The provinces are set to receive 57.5% of the federal tax revenue, but the government has been trying to withhold some of that money without making any changes to the Constitution. In a meeting last week, a cabinet minister suggested that the provinces should contribute 50% of the extra defense spending, especially given the rising tensions following India’s aggressive actions towards Pakistan.
Meanwhile, the IMF team kicked off discussions on the new budget from Turkey on Wednesday. They’re planning to head to Islamabad next week for the final round of talks, which will wrap up on May 23rd.
According to sources, during the initial meeting, Pakistani officials brought up concerns about high tax rates that are resulting in low revenue collection in some regions. In response, the outgoing chief of the IMF mission suggested that they should heed the advice of his experts. The IMF team didn’t seem too impressed with the Laffer Curve economic theory.
In a meeting focused on taxation with the FBR, the authorities presented a proposal to lower taxes for salaried individuals. Sources indicated that the government is looking to raise the income tax exemption limit from Rs600,000 to Rs1.2 million per year.
The proposal included new slab rates of 10%, 25%, 33%, and 35%, along with an upward adjustment of the income levels at which these rates would kick in. However, the IMF expressed concerns that this could significantly impact revenue.
Recent reports indicate that salaried individuals contributed a staggering Rs437 billion during the July-April period of this fiscal year, which is Rs150 billion more than the previous year. With just two months left, this additional contribution is expected to rise to around Rs190 billion, compared to the Rs75 billion the government claimed last June.
It’s only fair that the burden on the salaried class be reduced by at least Rs100 billion, as anything less would fail to address the ongoing discrimination against this group.
Sources have indicated that the government lacks the fiscal space to provide substantial relief to the real estate sector. The initial plan is to cut withholding taxes on property transactions by just 0.5% each. The FBR suggested that these reduced taxes be treated as a final liability, but the Finance Minister preferred to keep them adjustable.
There was also talk of introducing a new capital gains tax slab for higher earnings from property, according to the sources.
This week, discussions within the government also touched on the possibility of lowering the sales tax on packaged milk. Some FBR members proposed reducing the rate from 18% to either 15% or 17%. However, no decision was reached, with one senior official recommending that the rate remain unchanged.
It’s worth noting that the 18% sales tax on packaged milk is the highest in the world, despite the high levels of malnutrition in Pakistan. When considering a tax reduction on milk, FBR officials seemed unclear about the current market price of packaged milk.
The tax authorities had suggested imposing a federal excise duty on biscuits, but there was no consensus within the government on this matter. The idea of introducing a new tax on biscuits, especially at the finance minister’s level, highlights the government’s lack of sensitivity.
Sources indicate that the government is weighing two options regarding the removal of tax-free status for the previously federally administered tribal areas. One option is to implement a standard 18% tax rate, while the other is to go for a 10% rate. Ultimately, the senior leadership of the PML-N will make the final call, according to the sources.
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Q1: What is the IMF’s main focus in Pakistan’s new budget?
The IMF is focusing primarily on additional tax measures and rebalancing the National Finance Commission (NFC) award to support Pakistan’s fiscal goals.
Q2: Why is the government struggling to provide relief to the salaried class?
The government lacks sufficient fiscal space due to rising revenue targets and increased tax contributions from the salaried class, making it difficult to offer significant relief.
Q3: How much tax did the salaried class pay in the current fiscal year so far?
The salaried class has paid approximately Rs437 billion in income taxes over 10 months, which is Rs150 billion more than the previous year.
Q4: What is the IMF’s stance on the Laffer Curve theory in Pakistan’s context?
The IMF is skeptical of the Laffer Curve argument used by Pakistani authorities, urging them to rely more on expert advice rather than this economic theory.
Q5: What changes are proposed for the income tax slabs for salaried individuals?
The government proposed increasing the exemption limit from Rs600,000 to Rs1.2 million and adjusting tax rates to 10%, 25%, 33%, and 35%, but the IMF has expressed concerns about potential revenue loss.
Q6: How is the National Finance Commission award being addressed in the new budget talks?
The IMF emphasizes rebalancing the fiscal resource distribution under the NFC award without violating constitutional provisions.
