IMF Contingency Plan: Govt to Increase Fuel Taxes If Revenue Data Underperforms

The Government of Pakistan will initially impose a 10.5 percent General Sales Tax (GST) on petroleum products and increase it to 17 percent in accordance with contingency revenue measures negotiated with the International Monetary Fund (IMF).

Well-informed sources told ProPakistani that the government will revise GST upwards to 17 percent if monthly revenue data exhibits underperformance during the fiscal year (FY) 2022-23.

Persons familiar with the matter explained that if monthly revenue data showed signs of underperformance against the Q1 FYy23 and corresponding benchmarks, the government will take immediate steps to raise revenue. These steps include:

• Setting the GST on fuel to 10.5 percent before increasing it to the standard 17 percent rate.
• Removing agricultural GST exemptions on pesticides, fertilizers, and tractors that cost more than Rs. 150 billion, sugary drinks worth Rs. 60 billion, and other exemptions benefitting exporters.
• Increasing Federal Excise Duty (FED) on Tier I and Tier II cigarettes by at least Rs. 2 per stick.

Moreover, the government has fully and unequivocally recommitted to not launching any future tax amnesties or granting any further tax exemptions/concessions through Statutory Regulatory Orders (SROs) without the prior approval of the National Assembly. Additionally, it will continue to work towards the harmonization of the service sales tax across provincial jurisdictions with the support of the World Bank.

The government also plans to bolster revenue through an assortment of 17 measures that will add Rs. 608 billion in additional revenue, with the most notable being:

1. FED increase of Rs. 1 per stick on Tier-I and Tier-II cigarettes (Rs. 50 billion).
2. Customs Duty increases on various products (Rs. 59 billion), including an increase from 2.5 to 5 percent for crude oil.
3. Direct taxes on high incomes (Rs. 256 billion), including most notably a super tax of between one and four percent for individuals earning over Rs. 150 million, Rs. 120 billion, and of 10 percent on high earnings from certain sectors (Rs. 80 billion), as well as an increase in the taxation of banks from 39 to 42 percent (Rs. 45 billion).
4. Five different direct taxes on immovable property targeting deemed income and capital gains (Rs. 118 billion).

As per miscellaneous details, the Petroleum Development Levy (PDL) on diesel was already planned to be increased by Rs. 5 per liter per month from 1 July 2022, and the IMF was assured it will continue to do so until it reaches Rs. 50 per liter on 1 April 2023.

The PDL will remain at Rs. 50 per liter for both products until the end of FY23, resulting in average PDL rates for petrol and diesel of Rs. 40 per liter and Rs. 32 per liter for petrol and diesel respectively, over FY23, and an increase in Customs duty on crude from the current 2.5 percent to five percent with a commitment not to reduce this rate below five percent during FY23.