ISLAMABAD: The International Monitoring Fund (IMF)’s precondition for the new bailout package to impose an 18 percent sales tax on almost all goods sold in Pakistan, including medicines, has put the government in dire straits.
According to sources, Prime Minister Shehbaz Sharif did not allow the immediate implementation of the budget on tax-related conditions, but instead directed the finance ministry to prepare again. According to these conditions, the tax collection target of the Federal Board of Revenue (FBR) will have to be set at around 12,900 billion rupees, which is 40% more than the expected 9.23 trillion rupees for this financial year.
A target of Rs 12.9 trillion means the FBR will have to collect an additional Rs 3700 billion a year in just one year, which is almost impossible due to the poor economy. Earlier, the Ministry of Finance had told the Prime Minister that the tax targets for the next fiscal year is 12.4 trillion rupees, which has been increased to 12.9 trillion rupees.
Hours after the IMF mission returned, the finance ministry gave its first comprehensive briefing on Friday. Last week, the Prime Minister was briefed by the IMF on the overall size of the budget and conditions related to spending.
Sources said other pre-conditions for the next bailout package include increasing electricity prices from July, adjusting gas prices and getting approval for a new budget as per IMF guidelines. According to sources, the prime minister was told if Pakistan Implements the condition of withdrawal of sales tax exemption, then 18 percent sales tax will be levied on all goods sold in Pakistan, except essential foodstuffs and those protected under sovereign treaties.
An agreement with the IMF is not possible without withdrawing all sales tax exemptions, the Prime Minister was told. The prime minister did not take an immediate decision after knowing the terms of the IMF but asked the finance ministry to review these measures. Another meeting with the IMF is expected next week.
The estimated annual cost of sales tax exemption is Rs 2.9 trillion, of which Rs 1.4 trillion is the cost of sales tax exemption on petroleum products. A 5% sales tax is proposed on all petroleum products as the rest of the sales tax impact is being collected through the petroleum levy. In the next budget, at least Rs 1.5 trillion in sales tax exemption will have to be withdrawn.
The IMF said on Friday that significant progress had been made, but its mission to reach a staff-level agreement on an expansion fund returned to Washington without a new bailout package. The IFF’s estimated two-week mission ended without an agreement as Islamabad grapples with political instability and economic problems.
Pakistani sources say that the implementation of all the conditions will put an extraordinary burden on the people and some of the conditions will affect bilateral relations. The IMF has linked the agreement to the prior approval of the Executive Board. The IMF said in its statement that the IMF delegation, led by its mission chief Nathan Porter, spent two weeks in Pakistan and met with key stakeholders. .
The IMF team also had a breakfast meeting with US Ambassador Donald Bloom at the residence of IMF Resident Representative Esther Peres last Wednesday.
A key government official told The Express Tribune that the purpose of the IMF visit was to assess Pakistan’s budget preparations and see if its economic framework for the next fiscal year is in line with the overall objectives of ensuring fiscal and external sector sustainability. It was appropriate.
The PML-N-led coalition government is struggling to maintain economic stability amid rising political temperatures. It had hoped to finalize the Extended Fund Facility program soon, but the IMF has tied any agreement to approval of the next budget, according to its framework.
Porter said the authorities’ reform program aims to move Pakistan from economic stability to strong, inclusive and resilient growth. Pakistan is planning to consolidate public finances for inclusive growth to reduce vulnerabilities by improving the economy.
Porter said that Pakistan should continue to move towards low and stable inflation through appropriate monetary and exchange rate policies.
