IMF Expected to Lower Pakistan’s Tax Collection Target for This Fiscal Year
The International Monetary Fund (IMF) is likely to revise Pakistan’s tax collection target for the current fiscal year, reducing it to Rs. 12,480 billion, which is Rs. 490 billion less than the original target of Rs. 12,970 billion.
The IMF is expected to recommend that the Revenue Division lower the target to below Rs. 12.5 billion. Additionally, the IMF may ask the finance ministry to either reduce government spending by Rs. 500 billion or introduce measures such as a mini-budget to generate additional tax revenue.
The government is expected to make a decision on how to proceed in policy-level talks scheduled to begin next week.
Tobacco Industry’s Concerns Over Tax Hikes
Representatives from the tobacco industry met with the IMF review mission and requested a 25% reduction in the Federal Excise Duty (FED) on cigarettes, along with the introduction of a third tax tier. They argue that the sharp increase in FED has led to a decline in tax-paying cigarette sales and an increase in illegal trade.
The tobacco industry reported a rise in tax collections from Rs. 148 billion in 2021-22 to Rs. 277 billion in 2023-24. However, the industry predicts a decline in tax collections to Rs. 243 billion by June 2025 and further drops to Rs. 223 billion by 2026-27.
Impact of Lowering Tobacco Taxes
Officials from the Federal Board of Revenue (FBR) warned that approving the tobacco industry’s request could result in a Rs. 50 billion revenue loss. They pointed out that the decline in tax-paying cigarette volumes is due to increased smuggling and tax evasion, costing the national treasury an estimated Rs. 300 billion ($1.1 billion) annually.
Despite FBR’s belief that it can meet its original target by addressing pending tax cases in higher courts, the IMF remains doubtful. The IMF expects challenges in meeting the tax collection target, particularly in the final quarter of the fiscal year (April to June 2025).
