Cigarettes, flight tickets, cold drinks! Pakistan's tax dartboard to please the IMF

Facing a default scare, Pakistan on Wednesday proposed to increase taxes on certain goods to raise 170 billion rupees in extra revenue during the current fiscal year ending July. Shortfalls in revenue collection were among the reasons that held up IMF's 9th review discussions with cash-strapped Pakistan earlier this month. 

Islamabad is in dire need to secure $1.2 billion, part of a $7 billion bailout package it secured in 2019. The latest tranche was originally due in November 2022 but it was delayed as the global lender demanded a clear roadmap from Islamabad on bridging revenue shortage besides ending energy subsidies.

Today, Pakistan's Finance Minister Ishaq Dar introduced the Finance (Supplementary) Bill 2023, in which he proposed a hike in taxes on a number of goods. As per the bill, GST will be increased from 17 per cent to 18 per cent while taxes on luxury items will go up to 25 per cent. 

On first class and business class air tickets, the federal excise duty of 20 per cent of the airfare or Rs 50,000, whichever is higher, will be levied. The bill has also proposed 10 per cent withholding adjustable advance tax on the bills of wedding halls.

Pakistan-based daily Dawn reported that the Federal Board of Revenue (FBR) has issued a notification to enhance a federal excise duty on locally manufactured cigarettes which would generate up to Rs 60 billion in taxes on tobacco products. 

The Finance Division, it said, also issued a notification increasing the general sales tax by one per cent to 18 per cent - these measures are expected to raise Rs 115 billion. However, since the government had agreed to a target of Rs 170 billion in new taxes with the IMF, the remaining amount of Rs 55 billion would be collected through an increase in excise duty on airline tickets, and sugary drinks.

This comes just days after Pakistan's 10-day long intensive talks with an IMF delegation for a bailout package remained inconclusive, forcing the country to move fast as the forex reserves slipped below $3 billion - sufficient for just 16-17 days of imports.  

Speaking in Parliament, FM Ishaq Dar said Pakistan's economy was plagued by fiscal deficit and current account deficit. He said his government was committed to controlling and reducing both these deficits. He also hoped that the FBR would achieve its collection targets promised to the IMF. He said that the Rs170 billion collected under the measures introduced in the finance bill would reduce the country’s fiscal deficit.  

On Tuesday, global ratings agency Fitch downgraded Pakistan's sovereign credit rating by two notches from CCC+ to CCC-, citing critically low reserves and difficult conditions set by the IMF. The agency said that in its view "default or debt restructuring" was now a real possibility. 

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