Pakistan, IMF mull raising tax rates on solar panels, internet

ISLAMABAD: Following the rejection of proposals to increase tax rates on fertilizer and pesticides, Pakistan and the International Monetary Fund (IMF) are considering alternative options — raising taxes on rooftop solar panels, internet services and other sectors — as contingency measures in case of a revenue shortfall.

These identified contingency measures are expected to be part of the IMF’s second review report, to be released after the approval of a $1 billion tranche under the $7 billion Extended Fund Facility (EFF). The measures would only be triggered under two conditions: if the revenue shortfall for the first half (July-December) of the fiscal year exceeds projections, and if the Finance Ministry is unable to reduce its expenditures.

According to the contingency taxation measures identified by the Federal Board of Revenue (FBR) and shared with the IMF, one proposal is to increase the General Sales Tax (GST) on imported solar panels from 10 percent to 18 percent, effective from January 2026, if needed. Another proposal under consideration is to raise the withholding tax on internet services from the current 15 percent to 18 percent or 20 percent.

The government’s push to discourage solar panel adoption stems from its reduced reliance on grid electricity, which has led to “capacity payments” estimated to hover around Rs1.7 trillion this fiscal year—a major concern for policymakers. FBR estimates suggest that imported solar panels could generate 25,000 to 30,000 MW of electricity in the coming years. Currently, rooftop solar installations are producing 6,000 MW, a figure that could double at any time. The IMF has agreed to lower the FBR’s overall tax collection target after revising the GDP growth projection down from 4.2 percent to between 3.25 percent and 3.5 percent. However, the FBR’s tax-to-GDP ratio target of 11 percent remains unchanged. Having already faced a revenue shortfall of Rs198 billion in the first quarter (July-September) against a target of Rs3.08 trillion, the FBR must now collect Rs6.695 trillion by the end of December 2025. With the existing 10 percent GST on imported solar panels, the FBR estimates revenue generation of Rs40-50 billion. Increasing the rate to 18 percent could bring in an additional Rs20-30 billion in the remaining period. Earlier in the talks, the IMF opposed Pakistan’s proposal for a flood levy on imported luxury items, while the Pakistani side strongly rejected any move to increase tax rates on fertilizer and pesticides. This led both sides to identify the new contingency tax measures as a fallback option.

On the potential tax hike for internet services, telecom sector experts warn that higher taxes make connectivity more expensive for ordinary consumers, especially those with low or irregular incomes. For many, mobile and internet access is not a luxury but essential for work, education, health and social connection. They argue that increasing taxes like withholding tax or sales tax would disproportionately affect the poor and rural populations, widening the digital divide and excluding those who would benefit most from online access.