The IMF rejects the government’s move to cut tax rates and grant concessions

• The IMF rejects the return of export revenues to a fixed tax regime.
• The Fund wants all income to be treated under the normal tax framework.
• The lender accepts the government’s demand to scrap GST on textbooks.

ISLAMABAD: The International Monetary Fund (IMF) has refused to grant concessions on most of the items proposed in the Economic Bill 2024-2025.

The Fund, so far, has agreed to abolish the Goods and Services Tax (GST) on textbooks, restore deductions for teachers and researchers, withdraw the Federal Excise Duty (FED) on cement and some other technical changes.

As alternatives to reducing the FED on cement, the government has decided to enhance the Federal Excise Duty (FED) on overseas air tickets and the rate may be doubled in the Finance Bill.

The IMF has so far refused to allow the government to return export revenues to a flat income tax regime, as exporters have lobbied hard against a regular tax regime.

The government has advanced this proposal to restore a stable status for exporters with enhanced rates of 1 to 2 or 3% to the IMF to secure its approval. The IMF, however, refused to give its permission. Senior officials at the Fund want to treat all income under the normal tax regime, including exporters’ profits.

The government is ready to prepare the Finance Bill to be tabled in the National Assembly within this week.

A question arises as to how the government will adjust the fiscal space of Rs 250 billion created through the reduction of the Public Sector Development Program (PSDP), bringing it down from Rs 1,400 billion to Rs 1,150 billion from fiscal resources. Will this cushion be used to reduce tax rates? The IMF doesn’t seem to let the government do it.

Pakistan and the IMF have resumed virtual talks in recent days. The government has asked the Treasury to withdraw GST on stationery items. The IMF has agreed to withdraw VAT only on textbooks, but all other items may remain at 18% VAT, including items such as pencils, sharpeners and exercise books.

The government had proposed enhanced FED on cement from Rs 2 to Rs 3 per kg in the budget, but now the IMF has given its consent not to increase the enhanced rate on cement.

Currently, the Finance Bill 2024-2025 proposes that people who earn export income must pay 1% tax on their export income, which is the final tax.

Based on the principle of horizontal equity that taxpayers with equal income should pay equal tax, it is proposed that export income be subject to normal rates with a levy of 1% tax on their export earnings to be treated as a minimum tax. The IMF has strongly resisted this proposal and the government may not be able to please the exporters.

Regarding the tax rates for employees and the self-employed, the IMF has rejected all requests and there may not be any significant changes in the already proposed Finance Bill.

IMF opposes move to phase out 6% GST rate for FATA/PATA. It is not yet clear how the government will convince the IMF of this highly politicized decision. A cabinet member convinced the decision-making forum to continue exemptions from all taxes until June 2025.

Clause 2 of Part III of the Second Schedule to the Income Tax Ordinance 2001 grants full-time teachers and researchers employed in non-profit educational or research institutions or universities recognized by the Higher Education Commission a tax credit equal to 25% of the tax which is paid on their salary income.

The federal budget proposes to abolish this deduction. The 25% discounts are expected to be restored.

Originally published on The news