Pakistan Poised for Sales Tax Hike and Income Tax Overhaul

Pakistan Poised for Sales Tax Hike and Income Tax Overhaul – Pakistan is preparing to further increase the sales tax rate in the upcoming 2024-25 budget to generate significant revenue for the next fiscal year.

According to a report from The News, the government is considering a 1 percent hike in the General Sales Tax (GST) rate as part of its efforts to comply with conditions set by the International Monetary Fund (IMF).

If implemented, this increase in the GST rate could yield an additional Rs180 billion in revenue for Pakistan. Another proposal under consideration is the removal of different GST rates, aiming to standardize the tax across all sectors.

On the personal income tax (PIT) front, the IMF has recommended raising the tax rate for higher-income earners, suggesting an increase from the current maximum rate of 30 percent to 40 percent. However, a proposal to tax pensioners drawing over Rs100,000 has been temporarily shelved.

The IMF’s draft report, shared with Pakistani officials, outlines stringent measures for the upcoming budget, including the 1 percent GST rate hike and increased tax rates for high-income salaried individuals. A top official in Pakistan noted that the draft report and the Memorandum of Economic and Financial Policies (MEFP) are under discussion, and Pakistan will implement the agreed conditions to facilitate the signing of a Staff Level Agreement (SLA) after budget approval.

The IMF has set a tax collection target for the Federal Board of Revenue (FBR) at Rs12.9 trillion for the 2024-25 budget. However, the FBR is negotiating to lower this target to Rs12.5 trillion.

Additionally, the IMF wants to harmonize the agricultural income tax rate and base with federal tax regulations, repealing the existing SME tax framework under the Fourteenth Schedule for the manufacturing sector, and phasing out the special tax regime for the construction sector. All manufacturers would then be taxed under the standard income tax regimes.

For the salaried class, the IMF proposes reducing the current seven income tax slabs to four. For those with taxable incomes exceeding Rs6,000,000, the tax rate would rise from the current 30 percent to 40 percent, significantly increasing the tax burden on higher earners.

In terms of GST rationalization, the IMF recommends eliminating all zero-rating, except for exports, and bringing all other goods to the standard rate. This includes restricting exemptions to residential property supply and bringing all other goods to the standard rate. The taxation of fuel would also be raised to align with regional and emerging economy averages.

The IMF further suggests removing reduced rates under the Eighth Schedule, standardizing all goods except for essential items like food staples and vital education and health products, which would be taxed at a reduced rate of 10 percent. The Fund also calls for the elimination of compliance-related distortions, including minimum taxes and the removal of the Ninth and Tenth Schedules under the GST Act.

On the income tax side, the IMF wants to repeal the FBR’s discretionary power to award tax incentives for industrial undertakings and the cabinet’s power to award tax incentives. Future tax incentives should be time-bound and subject to regular cost-benefit assessments. If the benefits are lower than expected or the costs higher, the incentives should be withdrawn immediately.

The IMF also recommends transforming remaining incentives into cost-based incentives where possible and reforming the minimum tax to allow for accelerated deductions. It advocates implementing a half-year rule to limit deductions in the year an asset is put to use and repealing the minimum tax over the medium term as corporate income tax (CIT) administration capacity strengthens and CIT revenue increases.

As Pakistan navigates these significant tax changes, the government faces the challenge of balancing revenue generation with economic growth and public sentiment, all while adhering to IMF stipulations crucial for financial stability and future funding agreements.