FBR seeks IMF approval for temporary tax reductions in tobacco, real estate, and beverages

ISLAMABAD: In light of a downward adjustment in the annual tax collection target, the Federal Board of Revenue (FBR) has proposed a reduction in tax rates for key sectors, including tobacco, real estate/construction, and beverages, to the International Monetary Fund (IMF) for a three-month period.

According to the FBR, the current tax rates have led to a significant decline in transaction volumes within these sectors. By implementing these cuts, the FBR anticipates an additional Rs100 billion in tax revenues for the national treasury during the April-June quarter of the current fiscal year.

Pakistani officials have informed the IMF of these proposed adjustments, although it remains unclear whether the tax reductions will take effect within the current fiscal year or be incorporated into the 2025-26 budget.

The IMF has evaluated the situation and estimated that, with full enforcement and recovery efforts, the FBR’s tax collection could reach approximately Rs12,480 billion by June 30. This figure falls short of the established target of Rs12,970 billion by Rs490 billion.

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During discussions, FBR officials provided simulations based on historical revenue collection trends from the past four months and expressed optimism that recovering outstanding revenue cases from the courts could help close the gap in the annual tax collection target.

In light of this analysis, the IMF’s fiscal team considered all available data and input from the Pakistani side. They concluded that, under the current circumstances, the maximum achievable tax revenue would be around Rs12,480 billion.

As part of their proposal, the FBR recommended a 25 percent reduction in the Federal Excise Duty (FED) on cigarettes, indicating that such a change could yield an additional Rs44 billion by targeting the shift towards tax-compliant cigarette sales in the last quarter of the fiscal year.

For the real estate and construction sectors, the FBR suggested rationalising transaction costs and adjusting withholding tax rates for sellers and purchasers under Sections 236C and 236K. This adjustment is anticipated to generate an additional Rs20 billion in tax revenue.

The FBR also pointed out that the substantial increase in tax rates has led to a rise in transactions conducted via informal channels and stamped papers, thereby avoiding the requisite payment of duties and taxes.

A similar decline in volume has been observed in the beverages sector, underscoring the need for reduced FED rates to stimulate growth and compliance within this industry.