IMF expects Rs490bn shortfall in FBR revenue

• Tobacco industry urges FED reduction to IMF team.
• Illicit cigarette trade causing Rs300bn annual loss.
• FBR hopeful pending cases will boost tax collection.

ISLAMABAD: The International Monetary Fund (IMF) has projected a Rs490 billion shortfall in the Federal Board of Revenue’s (FBR) annual tax collection target, estimating revenues to reach Rs12,480 billion instead of the planned Rs12,970 billion.

This assessment puts the government in a tough spot, requiring either spending cuts or fresh tax measures to bridge the fiscal gap, The News reported on Thursday.

Now the finance ministry would be given two options by the IMF — either to cut down the expenditures proportionally to match the fiscal requirement for avoiding escalation in the budget deficit after projecting revenue shortfall or take additional revenue measures in the shape of a mini-budget on an immediate basis.

It will be the choice of the government to make an appropriate decision during the upcoming policy-level talks, which will commence between the two sides next week.

Tobacco industry demands 25% cut in FED

Meanwhile, representatives from Pakistan’s tobacco industry briefed the IMF review mission on Wednesday, recommending a 25% reduction in the Federal Excise Duty (FED) and the introduction of a third tax tier due to declining volumes and revenues.

In their presentation, industry representatives highlighted that the FED had increased by 254% in recent years, leading to a drop in both tax-paying cigarette volumes and revenues.

The industry noted that the FBR’s tax collection from tobacco stood at Rs148 billion in the fiscal year 2021-22, but after several rounds of FED hikes, the collection surged to Rs277 billion in 2023-24.

Despite this temporary increase, industry representatives projected a significant downturn, forecasting that revenue would fall to Rs243 billion by June 2025 and further decline to Rs235 billion by fiscal year 2025-26 and Rs223 billion by 2026-27.

On the volume side, the tobacco industry’s share, which was 55 billion sticks out of a total 80 billion in 2021-22, has also been impacted by the FED hikes.

The volume of tax-paying cigarettes has been persistently on a decline and now touched the lowest ebb at 33 billion sticks in 2024-25.

This decline in volume has been shifted towards illicit cigarettes, causing a revenue loss of Rs300 billion or $1.1 billion to the national exchequer.

FBR's apprehensions

The FBR high-ups expressed their apprehensions that if the proposal were granted assent of the IMF and the government, the FBR might face a revenue hit of Rs50 billion, arguing that the tax-evading manufacturers made investments in new machinery and secondly smuggled cigarettes possessed a substantial share in the market.

The FBR had set an ambitious annual tax collection target of Rs12,970 billion, but in the first eight months of the fiscal year, the board is already facing a revenue shortfall of Rs604 billion.

During discussions with the IMF, the FBR officials insisted they would meet the target, citing the settlement of pending revenue cases in the higher judiciary as a key factor in closing the gap.

After extensive deliberations, however, the IMF revised its projections, estimating that the FBR’s revenue collection could not exceed Rs12,480 billion, with challenges anticipated in the final quarter (April to June 2025).

The finance ministry now faces a critical decision, either cut government expenditures by Rs500 billion or implement additional revenue measures to mitigate the shortfall.