IMF Conditions Pose Challenge for Prime Minister with 18% Sales Tax on Everything
The International Monetary Fund (IMF) has put Pakistan in a tight spot with its condition to impose an 18% sales tax on nearly all goods, including medicines, for the new bailout package.
According to sources, Prime Minister Shehbaz Sharif has not given immediate approval for tax-related conditions in the budget but instead directed the finance ministry to prepare again. Under these conditions, the Federal Board of Revenue (FBR) will have to set a tax collection target of nearly Rs 12.9 trillion, around 40% more than the expected Rs 9.23 trillion for this fiscal year.
The target of Rs 12.9 trillion means that the FBR will have to collect an additional Rs 3.7 trillion in just one year, which is almost impossible due to the troubled economy. Previously, the finance ministry had informed the prime minister that the tax target for the next fiscal year is Rs 12.4 trillion, which has been increased to Rs 12.9 trillion.
Shortly after returning from the IMF mission on Friday, the finance ministry gave its first comprehensive briefing. Last week, the prime minister was briefed on the overall size and expenditures of the budget by the IMF.
Sources revealed that in the upcoming bailout package, other conditionalities include an increase in electricity prices from July, adjustment of gas prices, and obtaining IMF approval for the new budget. According to sources, the prime minister was informed that if Pakistan does not implement the condition to withdraw sales tax cuts, an 18% sales tax will be imposed on all items sold in Pakistan, except for essential food and drink items and self-sustained industries.
The prime minister was told that it is impossible to conclude any agreement with the IMF without implementing all conditions. The prime minister did not make an immediate decision after learning about the IMF’s conditions but instructed the finance ministry to reconsider these measures. Another meeting with the IMF is expected next week.
The estimated annual cost of the sales tax cut is Rs 2.9 trillion, including Rs 1.4 trillion in sales tax cuts on petroleum products. There is a proposal to impose a 5% sales tax on all petroleum products because the remaining effects of the sales tax are being collected through petroleum levy. In the next budget, at least Rs 1.5 trillion will have to be recovered through sales tax cuts.
The IMF mission’s return on Friday was considered important. However, the mission ended without reaching an agreement due to the level of contractual terms of the extension program reaching the executive board. The IMF has linked the agreement to the approval of the IMF’s executive board.
The IMF team also met with US Ambassador Donald Blome at the IMF’s residential representative’s residence last Wednesday for breakfast.
Important government officials told Express Tribune that the purpose of the IMF’s visit was to assess Pakistan’s budget preparations and see if its next fiscal year’s economic framework ensures financial and external sector stability.
The coalition government led by the Muslim League (N) is making efforts to maintain economic stability amid increasing political temperatures. It had expressed hope of finalizing the bailout package soon, but the IMF has tied any agreement to the approval of the next budget.
Porter said the government’s reform program aims to take Pakistan towards strong, comprehensive, and resilient economic growth. Pakistan is planning to stabilize public finances for comprehensive development so that the economy can be improved and weaknesses can be reduced.
Porter further stated that Pakistan will have to move towards lower and stable inflation through appropriate monetary and exchange rate policies. The head of the mission added that the IMF and Pakistan will continue discussions for the necessary financial assistance.
