Govt mulls options for hiking GST by one percentage point

ISLAMABAD: The government is mulling over options to raise the GST rate by 1 percent in the upcoming budget 2024-25 in a bid to comply with the IMF conditions, The News has learnt.

This single step, if conceded by the government, can yield Rs180 billion revenue in the next budget.

Another proposal under consideration is to remove different rates in the GST and bring all sectors under the standard rate of GST.

On Personal Income Tax (PIT), the IMF has prescribed raise in the tax rate for higher income bracket earners and enhancing the maximum rate from 30 percent to 40 percent. However, the proposal for bringing pensioners drawing over Rs100,000 into the tax net has been dropped for the time being.

The IMF has shared its draft report with the Pakistani high-ups and asked for stringent measures in the coming budget, including options to raise the GST rate by 1 percent and jacking up rates for higher income brackets of the salaried class.

A top official said the draft report and Memorandum of Economic and Financial Policies (MEFP) were under discussion and the government would implement the agreed conditions in the coming budget in order to pave the way for signing the Staff Level Agreement (SLA) after the budget approval. The IMF wants the FBR’s tax collection target in the range of Rs12.9 trillion for the budget 2024-25 but the FBR is still insisting on Rs12.5 trillion at the maximum.

The IMF wants to discuss with the provinces the possibility of harmonizing the tax rate and base (e.g., deductions and rate of depreciation) of the agricultural income tax with that which would apply at the federal level.

The IMF wants to repeal the existing SME tax framework under the Fourteenth Schedule for the manufacturing sector, tax all manufacturers and phase out as quickly as practicably possible the special tax regime for the construction sector and subject the sector to the standard income-tax regimes. The IMF has proposed a front-loaded program whereby the government will have to make very tough decisions on taxation fronts such as raising the GST rate by at least 1 percent going up from the standard rate of 18 percent to 19 percent.

For the salaried class, it is proposed that higher bracket income earner tax should be further enhanced from 30 percent to 40 percent in the next budget.

There are seven slabs in PIT for the salaried class and the IMF is asking to bring it down to four slabs. For the highest income bracket earners where the taxable income exceeds Rs6,000,000, the FBR will charge Rs880,000+ 30% of the amount exceeding Rs6,000,000. Now the IMF is proposing that the maximum rate should be enhanced from 30 to 40 percent.

On rationalization of GST, the IMF has recommended eliminating all zero-rating (Fifth Schedule) except for exports and bringing all other goods to the standard rate.

The Fund has asked for restricting the exemptions (Sixth Schedule) to only the supply of residential property (except the first sale) and bringing all other goods to the standard rate. This will also raise the taxation of fuel in line with the average of comparators in the region and emerging economies.

The IMF seeks removal of reduced rates under the Eighth Schedule and bring goods thereunder to the standard rate, except a small number of essentials such as food staples and vital education and health items to be taxed at a single reduced rate of 10 percent. The bank wants to remove all compliance-related distortionary tax policy changes. This includes eliminating the minimum taxes and removing the Ninth and Tenth Schedules under GST Act.

On the income tax side, the IMF wants to repeal the FBR’s discretionary power to award tax incentives for industrial undertakings, and the discretionary power of the cabinet to award tax incentives. It calls for complementing the Tax Expenditure Report with a chapter that assesses the cost and benefits of tax incentives.

In case the tax incentives are granted in future, they should be time-bound and subject to regular assessment of costs and benefits. If the costs are higher than expected initially and/or benefits lower, incentives should be immediately withdrawn.

The IMF recommends transforming the remaining incentives into cost-based incentives, where possible, and reforming the minimum tax allowing the effect of accelerated deductions. It wants to implement a half-year rule to limit deductions the year an asset is put in use and repeal the minimum tax over the medium term, as the capacity for corporate income tax (CIT) administration strengthens and CIT revenue increases.