Govt plans tax hikes, subsidy cuts under IMF-backed budget
Market analysts caution that IMF-related measures in the upcoming FY2026 budget—particularly new taxes and adjustments in energy prices—may lead to a renewed spike in inflation. PHOTO: FILE
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The government is poised to unveil a tough federal budget for the fiscal year 2025-26, with sweeping reforms likely to trigger a new wave of inflation as the government looks to meet stringent demands set by the International Monetary Fund (IMF), sources claimed.
According to Express News, Virtual talks between Pakistan's economic team and IMF officials are ongoing, focused on increasing tax revenues and narrowing the country's fiscal deficit. The measures being discussed include raising the sales tax on luxury goods above the current 25 per cent threshold and expanding the list of taxable items.
"The government is seriously considering strict fiscal steps to meet IMF targets," a senior official involved in the discussions said.
The IMF has called for greater transparency in the tax system, expanded use of technology to curb evasion, and more authority for tax enforcement agencies. In response, the government is reportedly planning a tenfold increase in penalties for tax evasion via point-of-sale (POS) systems — from Rs0.5 million to 5 million — and may introduce criminal proceedings for serious offenses.
Read more: SAI urges tax reforms in budget proposals
Also under review is the removal of tax exemptions across various sectors, including solar panels. Analysts warn such moves could stifle investment in renewable energy and burden households already grappling with rising costs. "The withdrawal of tax relief for solar products will deal a blow to clean energy efforts," said one energy sector analyst.
Farmers, too, may be hit hard. The proposed budget includes an 18 per cent general sales tax on fertilizers, pesticides, and agricultural equipment, along with possible hikes in federal excise duties on agri-inputs, according to sources.
Economic experts caution that these measures, if approved, will drive up inflation, hamper agricultural productivity, and worsen the cost-of-living crisis. 'These are painful but necessary steps,' an official said. 'The priority is to secure the IMF deal to prevent a deeper economic crisis.'
The budget is set to be presented on June 10.
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Express Tribune
an hour ago
- Express Tribune
Cashless economy at crossroads
Listen to article As Pakistan's informal economy swells to $140 billion, Prime Minister Shehbaz Sharif faces a choice between incentivising people by offering lower taxes to encourage digital payments or imposing higher costs on cash transactions for government payments and utility bills. An expert committee on the cashless economy, made up of public and private sector representatives, recently submitted recommendations to the PM. Their approach centres around a "carrot and stick" policy. If the PM chooses incentives, he will have to lower sales tax and petroleum levies. But if he opts for penalties, people will pay more when making payments to the government or buying fuel and other utilities. Finance Minister Muhammad Aurangzeb is set to announce the new budget on June 10. It will be clarified whether the government will focus on incentivising digital payments or punishing cash use. Previous punishment policies targeting non-filers with higher taxes have failed to deliver results. "It is up to the government whether to incentivise digital payments or punish cash users," said a committee member in background talks. The committee offered four key recommendations, presenting both options to the government. The first calls for mandating acceptance of digital payments by empowering district authorities to enforce the use of the RAAST QR code — an instant payment method — at all retail outlets. Local authorities should ensure the presence of RAAST QR codes and penalise merchants for inactivity. The committee expects that within a year, one million active RAAST QR codes could be operational if enforced effectively. "The solution lies with QR codes, not credit cards," said a committee member. "There are only 2 million credit cards and 50,000 card readers, but Pakistan has five million retail outlets." Merchants charge 1.5% fees on credit card payments, but only 1% on RAAST payments, the member added. The committee estimated that the informal economy makes up 35% of the economy, translating to $140 billion today. The government must choose to incentivise or punish, but past experience shows punishments don't work. One major recommendation is to reduce the sales tax on digital payments from 18% to 5%, along with a three-year tax audit break for digital transactions. The committee also proposed eliminating customs duties on digital payment-related equipment. They believe these incentives could double digital transactions within six months. When the committee approached the Federal Board of Revenue (FBR) about tax cuts, the FBR said the International Monetary Fund (IMF) would oppose it. However, the IMF told the committee it had no objection and threw the ball back in FBR's court. On the punishment side, the committee suggested making cash payments more expensive. They recommended imposing a surcharge on over-the-counter government payments, capping cash-on-delivery payments, and removing sales tax incentives on cash-on-delivery. One punitive proposal is to increase petrol prices by 1% or Rs3 per litre for cash payments. With 12,000 petrol stations nationwide and 70% of customers on motorcycles, this could be a significant deterrent. The committee believes the punishment policy could cut cash circulation by 2% of GDP, about Rs2.6 trillion. It also suggested that all government paymentssuch as those to Benazir Income Support Programme (BISP) beneficiaries or contractorsshould be made digitally. This would require mandatory installation of RAAST QR codes at all government payment points within six months and creating digital wallets for every government disbursement, starting with BISP. If successful, this could add 20 million new bank accounts within 18 months, the committee said. The government introduced the non-filer category in 2013 to broaden the tax base. However, over 12 years, it has become a tool to extract higher taxes rather than expand the base. Utility bills are also being used to collect taxes, hurting sectors like telecommunications. The telecom industry demands exemption from withholding tax deductions, similar to the banking sector. Telecom companies face deductions on thousands of transactions, such as electricity bills for cell towers. This raises compliance costs and administrative burdens. Verifying tax claims on these bills is also difficult for authorities, adding to the operational load. The industry argues withholding tax on telecom services should not be treated as a minimum tax, which applies even during loss-making years. Current harsh recovery measures disrupt business and undermine taxpayer confidence. CMOs pay advance or withholding tax on hundreds of thousands of transactions, including electricity bills and imports. Maintaining documents and handling audits demand significant effort and cause verification issues. They want the 4% withholding tax on telecom services to be adjustable rather than a minimum tax. The shift from adjustable income tax to minimum tax has effectively turned income tax from direct to indirect, the industry said. The sector also demands removal of the 10% advance income tax on auctions or renewals of telecom licenses. This advance tax raises business costs and capital expenses, hindering 4G/5G expansion and rural coverage. Further, the telecom sector wants the 75% advance tax on non-filers abolished, along with measures like SIM blocking, which have not produced meaningful results. Operators would need costly and time-consuming billing system upgrades to manage two tax rates. Since telecom services are essential, SIM blocking could deprive people of basic access. In April 2024, mobile operators were ordered to block SIM cards of over 500,000 non-filers. The Finance Act 2024 increased the advance income tax rate for non-filers to 75%. Additionally, non-compliance carries penalties of Rs50 million for the first offence and Rs100 million for subsequent violations. These punishments have failed, with the FBR shifting responsibility onto others. The withholding tax under Section 236 rose from 10% to 15% in the 2021 supplementary Finance Act. It applies only to tax filers, yet most telecom consumers are non-filers. The industry wants this rate reduced to 12.5% in the next budget.
Business Recorder
an hour ago
- Business Recorder
Budget consultation with IMF
EDITORIAL: Prime Minister Shehbaz Sharif while speaking to a group of journalists in Peshawar stated that ongoing negotiations on the budget 2025-26 with the International Monetary Fund (IMF) under the ongoing 7 billion-dollar Extended Fund Facility (EFF) programme have been successful. He did not elaborate, thereby prompting several analysts to define success as the Fund agreeing to the government proposals on at least three major components of the budget where there was reported disagreement. First, reducing the tax on the salaried people, which was raised in the current year's budget, accounts for no feel-good factor in spite of the consumer price index plummeting to 0.3 percent in April, though there was an upward revision last month to 3.5 percent. The Fund's first review documents stipulate that EFF tax target was surpassed to reach 10.7 percent of GDP instead of the budgeted 10.6 percent of GDP, which can be sourced to the decline in GDP to 2.6 as opposed to the projected 3.2 percent. However, next fiscal year the Fund projects direct tax collections at 5 percent of GDP, against 3.8 percent this year, which would necessitate considerable widening of withholding taxes levied in the sales tax mode, an indirect tax whose incidence on the poor is greater than on the rich, which account for nearly 70 to 75 percent of all direct tax collections. This, in turn, may again be a challenge to the feel-good factor by the salaried people, especially as inflation is projected to rise between 5 to 7 percent next year. Second, discussions between the Pakistani authorities and the Fund have reportedly centered on the need to end the traditional fiscal incentives to specific industries and to desist from procuring farm products, particularly wheat after announcing a support price. In this context, it is relevant to note that the Ministry of Industries is proposing fiscal and monetary incentives in order to fuel the wheels of industry, given that the large-scale manufacturing sector has been registering negative growth for the past three to four years. Additionally, wheat prices have plummeted this year due to provincial governments being barred from procuring wheat as per EFF condition and it is feared that next year's crop would not be able to meet domestic demand as farmers shift to growing more profitable crops. Subsidies therefore may be more than the budgeted target next year to forestall public discontent at higher wheat prices. Reports also indicate that the Fund has agreed not to insist on doubling the federal excise duty on fertilizers — from 5 to 10 percent but again this would imply that taxes would have to be generated from another source, which historically has implied widening the net of indirect taxes. And finally, the Fund in its uploaded documents envisaged a decline in current expenditure as a percentage of GDP from 18.9 percent of GDP this year to 17.8 percent next year. Given the projected growth rate next fiscal year of 3.6 percent, one percent higher than this year, the Fund envisages current expenditure to decline from 14 percent of GDP this year to 12.7 percent next year — a decline that would nonetheless consist of a rise in total terms — from this year's projection of 16.15 trillion rupees to 16.86 trillion rupees next year. This implies in actual terms the government has reduced current expenditure from what was budgeted for this year by one trillion rupees or an exact match to the shortfall in FBR revenue collection for the first eleven months. It is unclear whether the Fund's projections will be reflected in the budget due next week. Prime Minister Shehbaz Sharif, supported by the Fund and his economic team leaders, reiterated that economic stability has been achieved. This is supported by data relating to foreign exchange reserves held by the State Bank of Pakistan (11.5 billion dollars on 23 May though rollovers by friendly countries are of 16 billion dollars), the trade deficit remains sustainable even though it has risen to 21.3 billion dollars July-April 2025 against 19.6 billion dollars in the comparable period the year before (but remains lower than the average of previous years), and the rupee-dollar parity continues to fluctuate within a narrow range with the fund urging the SBP towards 'a more flexible exchange rate should be an integral part of Pakistan's policy framework facilitating a smooth adjustment of the economy in the face of external and domestic shocks.' To conclude, the time for complacency is not at hand and as the Fund states the 'gains are still fragile and policy and reform efforts need to be sustained to strengthen public finances, rebuild external buffers. Copyright Business Recorder, 2025
Business Recorder
an hour ago
- Business Recorder
Economic realities and export
While macroeconomic indicators have achieved feeble stability over the past year, on-the-ground conditions remain as hopeless as they were a year ago. There's abundant rhetoric about increasing exports, but it's nothing new. If rhetoric and targets were all it took, Pakistan would be the largest exporter in the world. In fact, the impracticality of plans like Uraan Pakistan is that it envisions at 6 percent CAGR and US$50 billion in exports over the next 5 years. Starting from US$373.08 billion GDP in 2024, 6 percent CAGR lands us at US$499.27 billion GDP in 2029. With US$50 billion exports, that is around 10 percent in export to GDP, which is the around same as where we are today, and 25 years ago. To build an export-based economy, economic activity must become disproportionately export-oriented, and export growth must consistently outperform GDP growth by a significant margin. If something as fundamental is overlooked in a plan prioritizing exports as its first pillar, it raises serious concerns about the coherence and effectiveness of the framework. The plan ignores another major ground reality: Pakistan is straight-jacketed in a very stringent IMF programme, with no control over its economic policies or space to give incentives for export. In fact, the programme specifically withdrew existing incentives and concessions given to exporters, and with good reason. The most fundamental issue in Pakistan's economy is it was one day decided that these are going to be our export sectors, and these are going to be our domestically oriented sectors. The export sectors were showered with subsidies and concessions to make them competitive in international market, and domestic sectors were showered with protection to shield them from international competition in the domestic market. The result is that neither the export nor the domestic sectors have achieved the productivity and innovation necessary to compete globally. While Pakistan champions itself a textile and apparel exporter, which comprise over half of its total exports, its share in global textile and apparel exports is only 1.5-2 percent. It's not that Pakistan is a major exporter of textiles; rather, Pakistan happens to export a bit of textiles and not much else because all other sectors have been so heavily protected from imports that they never bothered working on improving production efficiency and quality. This kind of policymaking has brought us to the point where the IMF has forced a complete withdrawal of all incentives and concessions for export. The May 2025 Staff Report reads, 'The adoption of the FY25 budget marks an important first step and its high-quality revenue measures targeting general sales taxes, personal income tax, and the corporate income tax of exporters and developers are initial milestones for enhancing fairness, transparency, and revenue collection.' The rationale is that if you select export sectors and give them special treatment with no sunset, they will never be able to stand on their own, and neither will any of your other sectors ever become competitive in export markets. The rationale behind the aggressive tariff rationalisation is similar — either become competitive or exit the market is the message across the board. The IMF has also made it clear that Pakistan must look for exports beyond the traditional sectors like textiles. In addition to withdrawing existing incentives for exporters, new schemes must focus on non-traditional sectors. Regarding the Export Finance Scheme being shifted to EXIM Bank, for example, the IMF 'will implement an action plan, setting ambitious goals for the E-EFS to support non-traditional exports and new markets, aiming to move beyond traditional beneficiaries of the schemes.'(May 2025 Staff Report) To become an export-based economy, Pakistan must generate an exportable surplus that is globally competitive. Whether we export rice, cotton, yarn, apparel, solar panels, semiconductors, or financial and technological services is secondary. What matters is having something that can be produced at scale and sold competitively in global markets. This requires making the agricultural, industrial and services sectors globally competitive by lowering the cost of doing business and cutting red tape across the board. But will even this yield any increase in exports? A quick answer: No. We are a commerce-loving nation, addicted to arbitrage profits and averse to adding tangible value. Around 11 percent of GDP comes from large- and small-scale manufacturing, 20 percent from agriculture, and 60 percent from services — of which 20 percent is from wholesale and retail trade. We create roughly half the value from manufacturing of goods as we do from selling goods — both imported and domestic. Employment shares are similar, with around 38 percent in agriculture, 15 percent in industry — including mining and slaughtering in addition to large and small-scale manufacturing — and 14.4 percent in wholesale and retail trade. Not only are we employing more of our labour force in retail and wholesale trade, but these workers are also more productive since their per labour contribution to GDP is higher than that of manufacturing. Meanwhile, despite the strong emphasis on being an agricultural country, Pakistan remains a net food-importing country. Its agricultural productivity is roughly half that of India despite comparable agro-climatic conditions, reflecting market inefficiencies, low mechanisation, limited R&D uptake, and poor water and input use efficiency. These are not the characteristics of an economy headed for an export boom. The economic environment is also not at all conducive to exports, or any kind of business for that matter. Electricity prices for industry are one of the highest in the world, and the recent reductions are not financially sustainable without a major overhaul of the entire power sector. There is also the blatantly and purposefully miscalculated levy on gas consumption of captive power plants, a testament to the gold-standard governance and rule of law that will protect foreigners' investment in Pakistan. Then the strongest incentive of all: if you are a manufacturer for the domestic market, you are required to pay a 1.25 percent minimum turnover tax, adjustable against 29% final income tax plus super-tax. However, if you export, you are required to contribute an additional 1 percent of your entire export proceeds into the fixed tax regime. Together, these subject exporters to an effective income tax of up to 135 percent depending on profit margin. Conversely, you can get into wholesale and retail trade, where the goods are imported and smuggled, business in cash, and 100% of profit, pocketed. It makes one wonders why people aren't rushing to export. Beyond the major economic distortions, there are also the day-to-day barriers — economic, social, cultural and political — that leave little space for any kind of critical and creative thinking, innovation, or interaction with the world, let alone commerce. Pakistan is not just a closed economy; it is a closed country. Imagine a young man from a middle-class background who has developed a fantastic product he now wants to travel to the United States or Europe to find buyers for. First, he must go through a 6-to-12-month hassle to get a visa. In the unlikely scenario his visa gets approved, he must spend a small fortune buying an airline ticket—over half of which is comprised of government fees and taxes. Finally, when he goes through five layers of harassment in the name of airport security and makes it to the gate, he discovers that the airspace has been closed, and flights suspended due to a developing security situation. And the government, rather than streamlining and improving the security process, rooting out corruption, will create a special security regime for young men going to the US/Europe to find buyers. This is why the IMF has gone so hard after exemptions. For women it's even worse — the first response they get at the bank is to bring their husband or father. These are the fateful realities that Pakistanis deal with every day. Unfortunately, our decision-makers continue to believe that exports can be engineered by selecting sectors and setting targets in a boardroom. Rather, exports come from the very fundamental agents of the economy, its people. They come when people are given space to think, create, innovate and interact with the outside world. But in a security-driven state, constantly managing internal instability and external tensions, that space does not exist. Investment hesitates in the face of uncertainty, and trade cannot thrive without peace. A fundamental of trade theory is that countries trade most with their neighbours. Pakistan, however, has virtually no trade with its immediate neighbours, except for imports from China. Without a stable social contract and coherent peace, no export strategy — no matter how well-designed — can deliver sustained results. So, under present IMF constraints and fiscal realities, the best the government can do is to keep its head down and finally clean up a decades-old mess that has kept Pakistan from ever experiencing a real export boom. It is clear where and how policies are being made; the budget will tell more, but the captive gas levy is a strong indicator. Expectations of growth should be kept low for the next two to three years. But even that will not be enough. A far deeper transformation is needed. Our entire economic model, social structure, political incentives, and cultural mindset must be reoriented toward openness, productivity, and value creation. Exports should stop getting such a holy treatment, they will follow naturally. Only then can we hope to become a functioning, engaged participant in the global economy. Copyright Business Recorder, 2025
