ISLAMABAD:
The International Monetary Fund (IMF) has opposed several of the Pakistani government’s proposed tax measures, notably a capital value tax (CVT) on movable assets and a 5% federal excise duty (FED) on one-day-old chicks. These proposals reflect what critics describe as a “business-as-usual” approach by the Federal Board of Revenue (FBR), lacking innovation in tax policy.
However, the IMF has approved the introduction of a tax on digital services, which is expected to generate Rs10 billion in revenue, according to FBR insiders.
Tax Adjustments Under Consideration
The upcoming budget may include an increase in the tax rate on dividend income from mutual funds—from 15% to 20%—as well as a similar hike in withholding tax on interest income.
The FBR is also considering eliminating income tax exemptions for venture capital firms and cinema businesses. Despite pressure, the highest income tax bracket of 35% and a 10% income surcharge on monthly incomes above Rs500,000 are likely to stay.
Nevertheless, the IMF has agreed to provide some relief to middle-income earners by reducing tax rates for four of the five income slabs below Rs500,000 per month. While the Fund rejected raising the income tax exemption threshold to Rs1.2 million, it accepted a rate cut from 5% to 1% for the lowest slab.
IMF Rejects Wealth Tax on Movable Assets
The government had proposed reintroducing a wealth tax in the form of CVT on all movable assets—excluding publicly listed shares—targeting items such as gold and bank cash holdings. The plan was reportedly discussed at the highest level, including with Prime Minister Shehbaz Sharif.
However, the IMF turned down the idea, emphasizing that income should be taxed, not wealth. Officials noted the FBR aimed to tap into cash reserves in bank accounts to boost revenue.
Notably, a previous 1% CVT on foreign assets exceeding Rs100 million (introduced in the Finance Act 2022) is already under legal challenge.
Prime Minister Briefed, Budget Locked with IMF
On Tuesday, PM Sharif received a briefing from the finance ministry and FBR on the budget framework and tax measures approved by the IMF. Unresolved matters reportedly include relief for the real estate sector and the final stance on the CVT.
President Asif Ali Zardari has scheduled the National Assembly session for June 10, when Finance Minister Muhammad Aurangzeb will present the federal budget. The Economic Survey will be released on June 9, during the Eid holidays.
Controversial Excise Duty on Chicks Rejected
The FBR also sought to impose a 5% FED on one-day-old chicks, but the IMF dismissed the proposal. The Fund criticized the contradiction of taxing essential food items while claiming to address high food inflation, calling the move narrowly targeted and lacking in broader economic impact.
Sources indicated the proposal stemmed from a single tax dispute with a poultry firm, exposing the weakness of the rationale behind it. A similar FED on all processed foods—including snacks and biscuits—was also discussed. If implemented, it would raise the effective sales tax to 23%, with the overall tax burden reaching 29% after adding other levies.
Fertiliser and Pesticide Tax Under Review
Despite Prime Minister Sharif’s reservations, the IMF has pushed for a doubling of the FED on fertiliser to 10%, along with a proposed 5% excise tax on pesticides. Talks on this matter remain ongoing.
Fiscal Targets and Spending Limits Finalised
Officials say budget figures have now been finalized in coordination with the IMF. The FBR’s tax collection target is expected to be Rs14.13 trillion, while non-tax revenue is projected at Rs4 trillion—bringing total revenue to Rs17.1 trillion.
The government is permitted to allocate Rs1.186 trillion in subsidies, including Rs1.036 trillion for the power sector. Development spending at the federal level is projected at Rs873 billion, with provinces set to spend around Rs2.1 trillion—Rs700 billion less than provincial governments had initially planned.
The IMF has capped total current expenditure by federal and provincial governments at Rs22 trillion, with total fiscal outlays estimated at Rs25 trillion for the 2025–26 fiscal year.
