The International Monetary Fund (IMF) has expressed serious concern that the implementation gaps in the track-and-trace system has undermined the gains from recent increase in the Federal Excise Duty (FED) on cigarettes.
In its Staff Report, IMF said that the implementation gaps in track-and-trace have led to early signs of increased cigarette contraband, partially undermining the gains from recent FED increases and requiring the authorities to quickly correct these gaps.
The revenue efforts to broaden the tax base fell short of expectations during the Extended Fund Facility (EFF) period, and the tax-to-GDP ratio has declined. The report revealed that the budget (2023-24) aims to set in a gradual fiscal improvement and to strengthen tax revenues to 10.3 percent of GDP on the back of measures worth over Rs. 254 billion (almost ¼ percent of GDP) so that Pakistan has space to scale up investment in social and development sectors.
The measures included (i) an increase in the maximum PDL having an impact of Rs. 79 billion. The maximum will be raised to Rs. 60 per liter, with a path to reach an average rate of Rs. 55 per litre over 2023-24;
(ii) an increase of personal income tax (PIT) having a revenue impact of Rs. 30 billion. The Finance Act 2023 increases rates as of July 2023 by 2.5 percentage points for wage earners on their taxable annual income in excess of Rs. 2.4 million and on all income for persons earning income from business activities. In addition, the top two brackets for PIT are merged;
(iii) rationalization of tax exemptions for fertilizer with a revenue impact of Rs. 34 billion. Instead of an exemption, the Finance Act 2023 levies GST at a rate of five percent on diammonium phosphate (DAP) fertilizer. In addition, all fertilizers, including DAP and Urea, are subjected to FED at the rate of five percent;
(iv) an increase of FED on sugary drinks having a revenue impact of Rs. 8 billion. The rate is doubled to 20 percent;
(v) an increase of the advance tax on the purchase and sale of immovable property yielding Rs. 46 billion. The rate is increased from two percent to three percent;
(vi) broadening of the base of the tax on second homes and other high-wealth items for non-filers having a revenue impact of Rs. 19 billion. This tax at an effective rate of one percent was enacted in July 2022, with a threshold of Rs. 25 million and first homes excluded. The Finance Act 2023 abolished the threshold and exclusion of first homes for non-filers, with no changes for those on the active taxpayer list;
(vii) an increase in the advance tax for builders and developers based on the land size of the project under development with a revenue impact of Rs. 15 billion; and (viii) an increase of the additional GST on deliveries to businesses that are not registered for VAT with a revenue impact of Rs. 23 billion. The additional rate is increased from three to four percent, the report added.
