Pakistan faces tax losses surge, IMF negotiations intensify

In the current fiscal year, Pakistan has experienced a significant increase in tax losses due to various exemptions, totaling a record Rs3.9 trillion. This surge, representing a 73% rise from the previous year, has become a point of contention in negotiations with the International Monetary Fund (IMF).

According to the Economic Survey of Pakistan 2024, efforts to withdraw tax concessions have not curbed the rising amount of tax exemptions. These exemptions, protected by existing tax laws, have led to a substantial increase in losses compared to the previous fiscal year.

Many of these exemptions serve as essential measures or substitutes for other taxes. For instance, the 18% sales tax exemption on petroleum products amounts to Rs1.34 trillion, partially offset by a petroleum levy generating around Rs1 trillion in revenue for the government. The total tax losses from exemptions have exceeded the planned development spending for the upcoming fiscal year.

The government aims to end the 1% fixed income tax regime for exporters to ensure fair taxation. However, influential exporters are resisting this change, favoring the status quo. The IMF has recommended withdrawing all exemptions except those under sovereign agreements or for export purposes. Negotiations are ongoing regarding exemptions for sectors like agriculture, fertilisers, pesticides, medicines, and essential food products.

Sales tax exemptions, particularly on petroleum products, account for 74% of total tax losses. The government's maintenance of a 0% sales tax on petroleum products, coupled with a fixed levy, has resulted in substantial revenue losses. The IMF suggests standardizing tax rates on goods like packaged milk to address these challenges.

Income tax exemptions have also risen, with certain allowances decreasing following the withdrawal of benefits. The government has granted tax credits and exemptions under different schedules, with the IMF targeting these areas for reform. Customs duty exemptions have slightly increased, with losses from concessions in sectors like automobiles, oil and gas exploration, and CPEC showing a decrease due to reduced imports.

The issue of tax exemptions and concessions remains a critical topic in discussions between Pakistan and the IMF. Efforts are underway to tackle escalating tax losses and establish a more sustainable revenue system for the country's economy.