IMF rejects govt move to cut tax rates, grant concessions

• IMF refuses restoration of export proceeds into fixed tax regime.
• Fund wants all incomes to be treated under normal tax framework. 
• Lender accepts govt's request for abolishing GST on textbooks.

ISLAMABAD: The International Monetary Fund (IMF) has refused to grant concessions on the majority of items proposed in the Finance Bill 2024-25.

The Fund, so far, has agreed on abolishing the goods and services tax (GST) on textbooks, restoring rebates for professors, and researchers, withdrawing Federal Excise Duty (FED) on cement and some other technical changes.

As alternate options for reducing the FED on cement, the government has decided to enhance the Federal Excise Duty (FED) on air tickets for abroad and the rate might be doubled in the Finance Bill.

The IMF has so far refused to allow the government to restore export proceeds into a fixed-income tax regime, as the exporters were lobbying hard against going into a normal tax regime.

The government has forwarded this proposal for restoring a fixed regime for exporters with enhanced rates from 1 to 2 or 3% to the IMF to secure its assent. The IMF, however, has refused to grant its permission. The Fund high-ups want treatment of all incomes under the normal taxation regime, including earnings of exporters.

The government is all set to prepare the Finance Bill which will be tabled before the National Assembly within this week.

A question arises how the government will adjust the fiscal space of Rs250 billion created through reduction in Public Sector Development Programme (PSDP), reducing it from Rs1,400 billion to Rs1,150 billion from budgetary resources. Will this cushion be used to reduce the tax rates? The IMF seems not letting the government do so.

Pakistan and the IMF continued virtual parleys in the last few days. The government asked the Fund for the withdrawal of GST on stationery items. The IMF has agreed to withdraw the GST on textbooks only but all other items might remain at 18% GST, including items such as pencils, sharpeners and exercise books.

The government had proposed enhanced FED on cement from Rs2 to Rs3 per kilogram in the budget, but now the IMF has granted its assent for not increasing the enhanced rate on cement.

At present, the Finance Bill 2024-25 proposes that persons deriving income from exports have to pay 1% tax on their export proceeds, which is the final tax.

On the principle of horizontal equity that taxpayers with equal income should pay equal tax, it is proposed income from exports be subjected to normal rates with 1% tax collection on their export proceeds treated as minimum tax. The IMF has given stiff resistance to this proposal, and the government might not be able to please the exporters.

On the property and tax rates for salaried and non-salaried class, the IMF has rejected all requests and there might be no major changes in the already proposed Finance Bill.

The IMF is opposing the move for withdrawal of a gradual GST rate of 6% for FATA/PATA. It is not yet clear how the government is going to convince the IMF of this highly politicised decision. A cabinet member has convinced the decision-making forum for continuation of exemptions of all taxes till June 2025.

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

The federal budget proposes abolition of this rebate. The rebates of 25% are expected to be restored.

Originally published in The News