Exporters Tax Regime in Limbo Amid IMF Negotiations

Exporters Tax Regime in Limbo Amid IMF Negotiations

Karachi, June 27, 2024 – The government of Pakistan remains undecided on the implementation of the new normal tax regime for exporters, set to begin on July 1, 2024, amidst considerable opposition from the sector, sources revealed on Thursday.

Sources indicate that the International Monetary Fund (IMF) has refused to grant concessions on most items proposed in the Finance Bill 2024-25. However, the IMF has agreed to certain changes, such as abolishing the General Sales Tax (GST) on textbooks, restoring rebates for professors and researchers, and withdrawing the Federal Excise Duty (FED) on cement. Additionally, some technical amendments have been accepted.

To offset the reduced FED on cement, the government has decided to increase the FED on international air tickets, potentially doubling the rate in the Finance Bill. Despite intense lobbying by exporters for a fixed income tax regime, the IMF has firmly rejected this proposal, insisting on the treatment of all incomes under a normal taxation regime, including export earnings.

The government’s proposal to restore a fixed regime for exporters with increased rates from 1% to 2% or 3% was forwarded to the IMF but was not approved. The IMF’s position remains that all income, including that of exporters, should be subjected to the normal taxation regime.

The Finance Bill, which will be tabled before the National Assembly within this week, includes significant fiscal adjustments. The government had reduced the Public Sector Development Programme (PSDP) budget from Rs1,400 billion to Rs1,150 billion, creating a fiscal space of Rs250 billion. However, it remains unclear if this cushion will be used to reduce tax rates, as the IMF appears unwilling to allow such changes.

Pakistan and the IMF have engaged in virtual negotiations over the past few days. The government requested the withdrawal of GST on stationery items, but the IMF has only agreed to remove GST on textbooks. Other stationery items, such as pencils, sharpeners, and exercise books, will continue to have an 18% GST.

The Finance Bill 2024-25 initially proposed increasing the FED on cement from Rs2 to Rs3 per kg, but the IMF has approved maintaining the current rate. The bill also suggests that individuals deriving income from exports should pay 1% tax on their export proceeds as final tax. To ensure horizontal equity, it was proposed that income from exports be subjected to normal rates, with the 1% tax on export proceeds treated as a minimum tax. However, the IMF has strongly resisted this proposal, indicating the government may not be able to accommodate exporters’ demands.

Regarding property and tax rates for salaried and non-salaried classes, the IMF has rejected all requests for changes, suggesting no major amendments will be made to the already proposed Finance Bill.

The IMF also opposes the gradual GST rate withdrawal of 6% for FATA/PATA regions. The government is yet to clarify its strategy to persuade the IMF on this politically sensitive issue. A cabinet member has advocated for the continuation of all tax exemptions in these areas until June 2025.

Additionally, the federal budget proposes abolishing a 25% tax rebate for full-time teachers and researchers employed in non-profit educational or research institutions recognized by the Higher Education Commission. However, this rebate is expected to be restored following further deliberations.

The ongoing negotiations and decisions will significantly impact the fiscal landscape, particularly concerning the IT and export sectors, as the government navigates IMF stipulations and domestic economic pressures.