ISLAMABAD: The International Monetary Fund (IMF) has strongly reiterated its demand for strict adherence to loan program requirements for Pakistan, including the timely implementation and effective collection of agriculture income tax in provincial budgets. The Fund insists that this crucial tax reform should commence no later than September 2025, according to a report by Dawn.
The IMF has also expressed significant concerns over the federal government’s proposed plan to incentivize increased power consumption as a strategy to absorb surplus generation capacity. The Fund argues that such measures could further distort the country’s economy, emphasizing a need for cautious fiscal management.
Provincial expenditure & development plans under scrutiny
Sources indicate that the IMF is pressing for a firm commitment from the provinces to control their expenditures. This demand comes despite the expansionary development plans presented by the provinces, which were recently approved by the National Economic Council (NEC). These provincial development budgets have notably exceeded the IMF’s initial estimates by nearly Rs850 billion for the upcoming fiscal year.
While provinces are keen to secure their financial entitlements under the National Finance Commission (NFC) Award, they may face considerable challenges in generating a committed budget surplus this year.
This difficulty stems partly from the Centre’s ongoing revenue shortfall. To safeguard their financial rights ahead of the next NFC meeting, the provinces appear to be maximizing their development allocations.
Agriculture Income Tax: A critical reform
According to Dawn’s report, the IMF is intensely pushing for the full implementation of the agriculture income tax. This remains a contentious issue yet to be fully settled between the federal government and the provinces. While the Centre believes that corporate agriculture falls under its jurisdiction for taxation, the IMF views robust enforcement of this tax as a critical reform necessary for improving Pakistan’s overall fiscal stability.
The IMF has also shown reluctance toward the government’s proposal to sell surplus power at marginal cost, even though the government believes this would involve no subsidy and could boost economic activity by offering cheaper electricity to new consumer and industrial sectors. The IMF argues that such an approach could be unfair to existing consumers who already bear high electricity costs and risks further distorting the energy market.
Additionally, the Fund has explicitly opposed provincial subsidies on electricity and gas, particularly those planned by Punjab for the next fiscal year. The IMF has underscored the urgent need for joint strategies between federal and provincial governments to combat rampant electricity and gas theft, as well as smuggling. Such measures are crucial to reduce significant financial leakage and mitigate tax losses within the energy sector. Provinces are also expected to streamline their respective departments in alignment with federal efforts to tackle similar issues.
FBR’s tax target & budget themes
The Federal Board of Revenue’s (FBR) tax collection target for the coming year remains around Rs 14.2 trillion, a figure consistent with the extended fund program review conducted earlier this year.
While there might be slight relaxations in tax rates for the salaried class, the budget will place a stronger focus on recovering taxes from the retail sector.
A major overarching theme of next year’s budget will be digitization, with proposals for differential tax and transaction rates favoring digital payments over cash transactions.
