Pakistan inches closer to IMF programme revival

• FBR officials hold meeting with IMF team
• FBR identifies Rs150b worth of income tax exemptions that could be withdrawn
• Economic team told to fulfil IMF prerequisites 

With the Imran Khan government deciding to increase the power tariff by about 25% to 30% and abolish up to Rs200 billion income tax exemptions for the corporate sector, Pakistan is inching closer to a revival of the International Monetary Fund (IMF).

According to a report in The News, the top political leadership has directed the economic team to fulfil prerequisites of the stalled programme under the $6 billion Extended Fund Facility (EFF). A top official told The News that the power tariff will be raised gradually to fulfil the IMF condition.

Read more: Pakistan's active taxpayers list crosses 3m benchmark for the first time

The IMF package has been stalled since February after the COVID-19 outbreak. The second review is now under completion and it is yet to be seen whether the second and third reviews will complete simultaneously, or done separately.

The board has identified Rs150 billion worth of tax exemption that may be withdrawn through a presidential ordinance or a mini budget by moving a fresh finance bill in the second half of the current fiscal year.

A top FBR official told The News if the exemptions are withdrawn in the current fiscal year, the results will appear in the next fiscal year. Its working has showed that the corporate sector enjoyed up to Rs200 billion income tax exemptions and it is yet to be seen how much exemptions would be abolished in the next phase of legislation approval process.

A virtual round of talks between the IMF and the Federal Board of Revenue (FBR) occurred Monday night and explored the possibility of abolishing the corporate sector income tax exemptions.

Another top FBR official said “there is agreement on a number of clauses, but there are significant areas of divergence as well. the next meeting is expected in January 2021 because currently there are Christmas and New Year holidays.”

The IMF team inquired about the income tax exemptions granted to the Chinese companies under the CPEC arrangement. The Pakistani side told the IMF officials that these exemptions were meant for 25 to 30 years and could not be withdrawn.

The IPPs exemptions are going to end after expiry of 30 years probably next year and both sides have agreed that no further exemptions would be provided. “Now the ball is in the government's court, and when Islamabad moves towards fulfillment of pre-requisite conditions, the IMF will accomplish second review and its board will grant approval for release of a third tranche of $450m probably in February or March 2021,” said top official sources.

When this reporter contacted IMFs Resident Chief in Pakistan Teresa Daban Sanchez seeking her comments, she replied, “The Pak authorities and IMF team remain closely engaged. Discussions are going on and both teams are working very hard and non-stop to bring the programme review to a positive conclusion”.

On the possibility of withdrawal of income tax exemptions, the sources said Pakistan and the IMF had explored possibilities to abolish corporate sector income tax exemptions.

Also read: Close economic links enable illicit fund transfers between UK and Pakistan, finds British report

Important exemptions of corporate sector that can be considered to be abolished in next piece of legislation include tax credit for investment in balancing, modernization and replacement of plant & machinery (corporate manufacturing sector) Rs65.168 billion tax credit for enlistment in Stock Exchange (Companies opting for enlistment in a registered stock exchange) (Rs357 million), tax credit for newly established industrial undertakings, corporate industrial units (including corporate dairy farming) Rs5.573 billion, tax credit for industrial undertakings established before the first day of July, 2011 (Corporate industrial units including corporate dairy farming) Rs6.486 billion, income tax exemption on any income derived by a Sukuk holder and other exemptions.