IMF Wants Pakistan to Scrap Tax Exemptions and Apply 18% GST on Most Goods

The International Monetary Fund (IMF) has proposed a major overhaul of Pakistan’s General Sales Tax (GST) system, which could generate an additional Rs1,300 billion in revenue for the cash-strapped country.

The IMF has suggested that Pakistan should bring several dozen items, including unprocessed food, stationery, medicines, petroleum products and others, under the standard GST rate of 18%, which is currently applied to only a few goods and services.

The IMF has also recommended that Pakistan should eliminate all zero ratings, exemptions and reduced rates of GST, except for exports and a small number of essentials such as food staples and vital education and health items, which should be taxed at a single reduced rate of 10%.

The IMF’s proposal is part of its ongoing dialogue with the Pakistani authorities on policies to strengthen macroeconomic stability and enhance revenue collection in the coming year. The IMF has been providing financial assistance to Pakistan under a 9-month Stand-By Arrangement (SBA) since July 2023, which is subject to periodic reviews and performance criteria.

The IMF has argued that the rationalisation of GST rates would simplify the tax system, broaden the tax base, improve compliance and reduce evasion. The IMF has estimated that the reform could yield revenues of 1.3% of the Gross Domestic Product (GDP), equivalent to Rs1,300 billion, which could help reduce the fiscal deficit and debt burden of Pakistan.

However, the IMF has not assessed the impact of the proposed GST hike on inflation, which is already high in Pakistan due to rising food and energy prices. The GST is an indirect tax that is passed on to the consumers, and thus affects the purchasing power and welfare of the people, especially the poor and vulnerable segments of the society.

The IMF’s proposal has also met with resistance from various stakeholders, including the business community, the provincial governments and the opposition parties, who have expressed concerns over the potential adverse effects of the GST hike on the economy and the people.

The business community has warned that the GST hike would increase the cost of production and reduce the competitiveness of the Pakistani products in the domestic and international markets. The provincial governments have claimed that the GST hike would encroach upon their constitutional right to levy sales tax on services, which is a major source of their revenue. The opposition parties have accused the government of being subservient to the IMF and imposing harsh taxes on the people at its behest.

The government, on the other hand, has defended the IMF’s proposal as a necessary step to improve the tax system and increase the tax-to-GDP ratio, which is one of the lowest in the world. The government has also assured that it would protect the interests of the common people and provide relief to the low-income groups through targeted subsidies and social safety nets.

The government and the IMF are expected to continue their discussions on the GST reform and other fiscal measures in the coming weeks, as they prepare for the second review of the SBA, which is due in April 2024. The outcome of the review will determine the release of the next tranche of the IMF loan, which amounts to $500 million.

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