The International Monetary Fund has demanded Pakistan impose Rs1.3 trillion worth of fresh taxes in the next budget as the South Asian country seeks a new bailout package to support its economic reforms, The Express Tribune reported while quoting government sources.

If accepted, it would take the Federal Board of Revenue’s (FBR) annual target to a whopping Rs12.3 trillion. The tax authority collected Rs5.150 trillion from July 1, 2023 to mid-February compared to Rs3.973tr in the corresponding period of FY23, recording a 30 per cent increase in levy collection during the first seven and half months of 2023-24.

The Rs1.3 trillion additional taxes are equal to 1% of the size of the next year’s economy.

The English daily added that the IMF was demanding Pakistan recover half of the additional taxes from salaried and business individuals.

The IMF has shared its Tax Diagnostic report with the government, which includes a recommendation to reduce the number of income tax slabs for salaried individuals to four. If implemented, this would significantly increase the tax burden on salaried individuals and businesses.

Discussions on the IMF’s demand for additional taxes would take place during the upcoming mission-level talks for the next bailout package. The government plans to negotiate with the IMF, particularly regarding the burden on the salaried class.

An IMF mission is expected to visit Pakistan this month to discuss a programme ahead of Islamabad beginning its annual budget-making process for the next financial year. The IMF did not specify the dates of the visit, nor the size or duration of the programme.

Earlier, in an interview with Reuters, Finance Minister Muhammad Aurangzeb hoped to agree the outlines of a new IMF loan in May. Pakistan is expected to seek at least $6 billion and request additional financing from the Fund under the Resilience and Sustainability Trust.

The imposition of excessive taxes on the salaried class has led to financial strain, with the middle-class segment of society being forced to ration expenses.

But the report added that such a demand was not final and the government has initiated internal discussions on the budget for the fiscal year 2024-25 in light of the IMF visit. Additionally, it has been informed that the current fiscal year’s tax collection target of Rs9.415 trillion was no longer achievable.

On Monday, the authorities concerned began internal discussions on the budget for fiscal year 2024-25 in the light of the IMF visit. The government had also been informed that the current fiscal year’s Rs9.415 trillion tax collection target was no longer achievable.

Tax authorities have indicated that the collection may fall short of the target by around Rs175 billion to Rs200 billion due to amounts stuck in courts due to legal challenges against super tax, tax on real estate, and windfall gains made by commercial banks.

Nearly half of the Rs415 billion additional tax measures implemented in the previous budget are currently held up in courts, reflecting negatively on the budget-making process.

The FBR has informed finance czar Aurangzeb that it can achieve a 19% increase in tax collection without implementing additional revenue measures. The projected collection for this fiscal year is expected to be around Rs9.2 trillion, and without additional measures, the FBR can collect nearly Rs11 trillion in the next fiscal year.

However, in order to increase the FBR’s tax-to-GDP ratio to 10% in the next fiscal year, the target needs to be approximately Rs12.3 trillion.

The government has identified potential areas for taxation in the next fiscal year, including higher taxes on retailers, withdrawal of sales tax exemptions on agriculture inputs and machinery, and ending reduced sales tax rates for businesses registered with the FBR through the point of sale (POS) system.

Currently, garments-related businesses registered with the FBR through POS are subject to a 15% sales tax rate, which the government plans to increase to the standard 18%. The lower tax rate was initially implemented to encourage businesses to register with the FBR but was increased to 18% in the previous budget.

The government aims to withdraw tax exemptions and increase the tax burden at a time when the FBR is facing challenges in meeting its monthly collection targets, and citizens are grappling with 25% inflation.

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Meanwhile, Geo News reported that Pakistan has initiated negotiations with the World Bank for a new four-year program and was expected to receive $8 billion from the IMF through a Country Partnership Framework. The framework will prioritize certain key areas.

This programme, known as the Country Partnership Strategy (CPS) 2025-2029, can provide significant support. However, the policy framework and the real terms of the CPS have not been finalized in the ongoing negotiations.

The CPS for the financial years 2022-2026 could not be finalised due to the time consumed by elections and the formation of a new government.

An official told The News that Pakistan aims to secure maximum funding during the next four to five years to fulfil its external financing requirements.