Pakistan, IMF mull Rs700bn tax measures in budget talks

ISLAMABAD: Pakistan and the IMF are contemplating options for taking taxation and enforcement measures in order to fetch additional Rs700 billion in the upcoming budget for 2025-26.

With the announcement of the budget for 2025-26 on June 2 in the Parliament, the government has asked the IMF for rationalisation of taxes for the salaried, tobacco, and beverages sectors.

The IMF has raised objections over reduction in tax rates for the salaried class and inquired about a higher revenue impact if rates are revised downward for middle-income earners between Rs0.2 to Rs0.4 million per month. The Annual Plan Coordination Committee (APCC) is scheduled to meet on May 26 to recommend the macroeconomic framework and development budget to the National Economic Council (NEC) for the upcoming budget.

On tobacco sector, there is possibility of jacking up Minimum Legal Price (MLP) standing at Rs162.25 per packet as currently over 80 per cent brands are selling below the MLP or slightly over the MLP so one of the option is to increase the MLP without changing the existing two tiers and Federal Excise Duty (FED) rates.

The Ministry of Finance and FBR have pitched the annual revenue collection target of Rs14307 billion for the next budget. However, both the IMF and the Pakistani side could not reconcile the figure of revenue collection target owing to differences based on nominal growth. There is a difference of Rs300 billion owing to differences in the nominal growth projections. The government has projected that the nominal growth will result in securing Rs13556 billion, but the IMF insists that the FBR could not fetch beyond Rs13200 billion, arising differences of over Rs300 billion in the projections. In case of agreement on FBR’s tax target of Rs14307 billion and base collection of Rs13556 billion, then the government will have to fetch Rs700 billion through a combination of additional taxation measures and effective enforcement.

About enforcement, the monitoring of advance tax payment at Green Leaf Threshing (GLT) for unprocessed tobacco could be a revenue potential area. The MLP might be considered for increase in the upcoming budget. The tobacco industry is grappling with a significant challenge, keeping in view the constant violation of the minimum legal price. This issue is exacerbated by the proliferation of illegal cigarette brands below or slightly above the MLP posing serious health risks and economic repercussions.

In the beverages sector, there are discussions on the reduction in the tax rates, but the IMF raised objections about how the FBR would deal if refunds were generated in this sector. The FBR does not want to take any steps to create refunds in any sector.

On Friday, the IMF side from Turkiye in a virtual meeting related to the provincial government of Balochistan, as well as some expenditures of the federal government.

Meanwhile, Pakistan marked a major milestone in sustainable finance on Friday with the launch of its first-ever Sovereign Domestic Green Sukuk worth Rs30 billion at the Pakistan Stock Exchange (PSX).

The Islamic bond, dedicated to financing climate-resilient and environmentally sustainable projects, was unveiled during a gong ceremony at the PSX. The three-year Sukuk, structured on an Ijarah basis with a variable rental rate, aims to support Pakistan’s shift toward clean energy and long-term, low-cost financing. Issued under the Sustainable Investment Sukuk Framework approved by the Cabinet, the proceeds will fund key green infrastructure projects, including the construction of three dams vital for water security and climate adaptation. Speaking via video link, Finance Minister Muhammad Aurangzeb said the Green Sukuk reflects growing investor confidence and represents a strategic pivot in Pakistan’s debt management—from short-term borrowing to more sustainable, long-tenor instruments. He also hinted at upcoming innovative financing products for both domestic and global markets as part of Pakistan’s broader debt diversification strategy. Aurangzeb noted the government’s ongoing efforts to convert short-term debt like Treasury Bills into longer-term options such as Pakistan Investment Bonds (PIBs), reducing short-term debt’s share from 24pc to 21pc in 2024. He expressed interest in emulating Malaysia’s debt model to enhance fiscal sustainability.

The Sukuk issuance also raises the share of Shariah-compliant debt in Pakistan’s domestic portfolio to 14pc, equivalent to Rs5 trillion out of Rs37 trillion total domestic debt. The auction is open to retail, institutional, corporate, and overseas investors, including non-resident Pakistanis and Roshan Digital Account holders.

The launch coincided with Youm-e-Tashakur (Thanksgiving Day) and followed a record PSX 100 Index high of 119,961.91 points. Aurangzeb voiced optimism about the country’s financial outlook, citing encouraging feedback from global investors during his recent visit to London. He stressed that macroeconomic stability, energy sector reforms, and restructuring of state-owned enterprises are key to sustaining investor confidence.

Khurram Schehzad, Advisor to the Finance Minister, highlighted progress on key indicators, including a reduction in the debt-to-GDP ratio from 74pc to 65pc and a rise in the tax-to-GDP ratio from 9.5pc to 10.6pc within 15 months. He projected the tax ratio to reach 11pc by FY2026 and announced plans to issue a Panda Bond in the Chinese market by late 2025. The Green Sukuk aligns with Vision 2028 and supports Pakistan’s climate goals by offering a Shariah-compliant route to fund renewable energy and water infrastructure. It also positions Pakistan as a potential leader in global green Islamic finance. PSX Chairperson Dr Shamshad Akhtar lauded the launch as a landmark event, stating: “This marks not just the debut of a new financial instrument, but the beginning of a new chapter—one rooted in sustainability, inclusion, and accountability.”

In a related development, Indian Defence Minister Rajnath Singh said Friday the International Monetary Fund (IMF) should reconsider a one-billion-dollar loan to Pakistan alleging it was “funding terror”, a move denounced by Islamabad as proof of New Delhi’s desperation.

“I believe a big portion of the $1 billion coming from IMF will be used for funding terror infrastructure,” Singh told troops at an air force base. “I believe any economic assistance to Pakistan is nothing less than funding terror.” However, despite India’s objections, the IMF last week approved a loan programme review for Pakistan, unlocking a $1 billion payment, which the state bank said had already been received. A fresh $1.4 billion loan was also approved under the IMF’s climate resilience fund. India, a member on the IMF board, abstained from the review vote with a statement from its finance ministry stating, “concerns over the efficacy of IMF programmes in case of Pakistan given its poor track record”. However, Pakistan’s foreign ministry spokesman Shafqat Ali Khan told reporters that India once again failed to stop IMF programme for Islamabad. “India was the lone country which tried to stop it and it failed. It again reflects Indian frustration. Trying to criticise an institution like IMF speaks about this desperation,” the spokesperson said.