IMF asked to lower tax rates for major sectors

ISLAMABAD: Amidst downward revision in annual tax collection target, the Federal Board of Revenue (FBR) has proposed to IMF for making downward adjustments in tax rates for tobacco, real estate/construction and beverages sectors for the next three months.

With reduction in tax rates on these major sectors, FBR projected that volume and transactions of these sectors witnessed a massive dip at existing tax rates. The tax machinery is projected to fetch more than Rs100 billion additional into the national kitty over three months (April-June) of the current fiscal year. 

The Pakistani authorities say they have informed the IMF, but did not know whether these cuts in tax rates would become effective within the ongoing fiscal year, or it would be made part of the 2025-26 budget.

The IMF has assessed that with full-fledged enforcement and recovery, FBR’s tax collection could touch Rs12,480 billion till end of June 30 against fixed target of Rs12,970 billion. The FBR high-ups presented simulation under historical trends of revenue collection made in the last four months over a certain timeframe. They made all-out efforts that with recovery in the stuck-up revenue cases in the courts, the annual tax collection target could be materialised.

After hearing the Pakistan side, IMF’s fiscal team incorporated all the available data and details in its model. They came up with an assessment revenue collection could maximum touch Rs12,480 billion against the desired target of Rs12,970 billion, so, there will be a shortfall of Rs490 billion. During these discussions, FBR high-ups proposed Federal Excise Duty (FED) on cigarettes needs to be revised downward by 25pc. They quoted the industry’s projected tax collection could go up by Rs44 billion in the last quarter of the current fiscal year based on a projection decline in volume, which would be shifted towards tax-paying cigarettes.

For the real estate/construction sector, FBR has proposed transaction cost on real estate needs to be rationalized, as withholding tax on seller and purchaser under 236C and 236K might be adjusted downwards. The FBR has projected a cut in withholding rates on property, tax collection could go up by Rs20 billion.

The IMF was told that an unprecedented hike in tax rates resulted in buying and selling on stamp papers, and without payment of duty and taxes.

Same scenario applied to the beverages sector, where the volume of the tax-paying sector witnessed a major drop arising from the need for reduction in FED rates for beverages.