Income tax cuts likely in upcoming fiscal plan

ISLAMABAD: The government has informed the International Monetary Fund of its intention to lower income tax rates for salaried individuals and companies in the short to medium term, while also proposing new revenue measures for the next fiscal year to offset the impact of any relief.

According to the plan shared with the IMF, the estimated revenue effect of the proposed tax relief ranges from more than Rs400 billion to Rs950 billion, depending on when the cuts are introduced and how extensive they are. Detailed discussions with the IMF mission have not yet started and are expected only after approval from the lender’s headquarters.

The government wants substantial relief for salaried taxpayers, a reduction in corporate income tax, the abolition of advance tax on exporters, a cut in super tax with a gradual phase-out, and the removal of capital value tax and inter-corporate dividend tax.

Sources said the government believes annual income up to Rs1 million should not be taxed, income up to Rs2 million should face a 5% rate, and the top rate should be 35% for income above Rs7 million. The proposal would effectively widen the number of tax slabs and ease the current threshold structure, under which the highest income tax rate of 35% plus a 10% surcharge applies. The government also wants the 10% surcharge to be abolished entirely, which would bring the highest rate down to 35%.

For corporate taxation and super tax, the government is seeking IMF agreement on a five-year reduction framework, sources said.

Budget and IMF discussions

An IMF mission headed by Iva Petrova is in Pakistan to finalise the budget for the next fiscal year and discuss matters linked to the power sector, including payments under contracts with foreign firms, as well as the gas sector circular debt plan, sugar policy and financial sector strategy.

Pakistan has committed to the IMF that it will introduce additional revenue measures to make up for losses arising from relief to any sector. There is also a view within the government that the IMF should allow some flexibility in the primary budget surplus target of 2% of GDP for the next fiscal year. Any reduction in that target could help absorb the cost of income tax relief. However, it remains unclear how strongly the finance ministry will press this point, particularly after the IMF indicated that Pakistan should remain on the path of fiscal consolidation.

The government has also assured the IMF that it will take additional revenue steps worth Rs215 billion. Of this amount, it plans to raise Rs50 billion by moving fast-moving consumer goods to the third schedule of the sales tax law.

FMCG tax proposal and enforcement steps

Under the third schedule, sales tax is charged on the printed market price rather than at each stage of value addition. The proposal to expand the third schedule has also been discussed in detail by a committee led by Deputy Prime Minister Ishaq Dar.

Pakistan adopted the value-added sales tax model under IMF-World Bank conditions 35 years ago, but since 1990 successive governments have managed to cover only about 25% of the tax base, according to the IMF’s latest staff-level report.

Moving FMCGs to the market-price tax regime may also reduce extra taxes imposed on sales to unregistered persons and help curb leakages. In addition to the standard 18% sales tax, the government currently collects a 4% further sales tax and a 2.5% withholding tax from manufacturers on sales to unregistered persons. The responsibility for registering businesses lies with the Federal Board of Revenue, though this burden has effectively been shifted onto companies.

The IMF report said that a broad range of essential goods remains exempt or concessionally taxed, historical zero-rating in export sectors has narrowed the base, and the post-devolution split of GST on services has created compliance and administrative complications through four separate provincial systems.

As part of enforcement measures aimed at generating another Rs215 billion, the government has told the IMF it will expand the digital invoicing system that automatically calculates sales tax liability. According to the FBR, improved monitoring and tax calculation through this system is expected to bring in Rs46 billion in additional revenue in the next fiscal year.

The FBR is also introducing production monitoring in sectors with the largest tax gaps, particularly textiles. There is an estimated Rs160 billion sales tax gap in the sugar, cement, tobacco, beverages and fertiliser sectors. The government also plans to collect an additional Rs48 billion next fiscal year through monitoring of production lines.