Pakistan scrambles to plug tax gap as IMF demands tough reforms

ISLAMABAD: Pakistan has presented a wide-ranging fiscal plan to the International Monetary Fund (IMF), committing to additional tax measures and spending cuts if revenue collection falls short by the end of the current month, according to the latest IMF country report.

Officials have drawn up a package of additional taxes to plug an expected shortfall in Federal Board of Revenue (FBR) collections. The proposed measures include a 5 per cent increase in federal excise duty on fertilizers and pesticides, as well as the introduction of a tax on high-value sugar products. The government has also assured the IMF that it will apply an 18 per cent sales tax to selected goods currently benefiting from exemptions.

The IMF report notes that Pakistan may need to impose a standard sales tax rate on high-value surgical items by abolishing their Schedule-8 exemption. New conditions tied to the Memorandum of Economic and Financial Policies (MEFP) for the next loan tranche also require fresh revenue-raising steps, including commitments to fully deregulate the sugar sector.

The IMF warns that FBR tax collection is likely to decline and stresses the government’s obligation to respond with stronger tax enforcement and possible expenditure reductions. Pakistan has pledged to increase its tax-to-GDP ratio to 15 per cent, and the Fund has set August 2026 as the deadline for key reforms to state-owned enterprise laws.

FINANCING NEEDS AND EXPECTED INFLOWS

Pakistan faces a $4 billion financing gap in the current fiscal year. The IMF expects the country to receive $2 billion in program installments, alongside additional support that may include:

• $1 billion under the Saudi Oil Facility
• $504 million in budget support from the Asian Development Bank
• $500 million from the World Bank Group
• $250 million from international bond issuance

ENERGY SECTOR AND DEBT REFORMS

Reforms in the energy sector will continue, with tariff adjustments and cost-reduction measures planned. Circular debt in the power sector has fallen to Rs 1.614 trillion, while a Rs 1.2 trillion settlement with commercial banks is expected to conclude by January. The report also highlights a planned waiver of Rs 128 billion in interest owed to Independent Power Producers (IPPs) to further reduce revolving debt.

Tariff rebasing has been brought forward to January, a shift from the previous July timeline.

CLIMATE IMPACT AND INFLATION OUTLOOK

The IMF Country Report notes the severe toll of recent floods, which affected 7 million people and caused nearly 1,000 deaths, damaging infrastructure, homes, and livestock nationwide. The central bank expects inflation to average around 7 per cent this fiscal year.

TAX ADMINISTRATION AND TRANSPARENCY REFORMS

Pakistan plans to install Point-of-Sale systems at 40,000 retailers over the next two years to strengthen monitoring. Income tax filings rose to 5.2 million in FY2024 and are projected at 7 million for FY2025.

Transparency in public procurement is expected to improve with the rollout of E-PADs, with the Auditor General required to submit an evaluation report to the President by March.

SOCIAL PROTECTION MEASURES

Under the Kafalat program, quarterly stipends will rise to Rs 14,500 starting January, and the number of eligible beneficiaries will be increased to 12 million. New biometric systems, including an e-wallet, will support withdrawals under the Benazir Support Programme by June.

DEVELOPMENT SPENDING

Only 10 per cent of the Public Sector Development Programme (PSDP) will go toward new projects by 2027, with greater emphasis shifting to climate-resilient initiatives from the next fiscal year. Harmonization of provincial sales tax frameworks will also be incorporated into the MEFP.

The IMF says it will continue working with Pakistan to support stable growth as the government navigates fiscal tightening, structural reforms, and climate-related challenges.