GOVT FACES IMF PRESSURE TO OVERHAUL TAX LAWS, LIMIT TAX INCENTIVES

Fund advocates for the removal of fbr and Cabinet privileges in granting tax incentives

THE IMF has issued a series of recommendations to Pakistan’s Federal Board of Revenue (FBR), calling for sweeping reforms in the country’s tax laws and oversight on tax incentives. These recommendations come amid crucial deliberations between Pakistan and the IMF, as Pakistan seeks a new bailout package ranging from $6 to $8 billion under the Extended Fund Facility (EFF).

One of the key areas of concern highlighted by the IMF is the discretionary power of the FBR and the cabinet to award tax incentives. The IMF emphasizes the need to limit tax incentives to cases where their economic benefits, such as employment generation and value addition to the economy, outweigh the costs to the budget. Furthermore, the IMF suggests that any remaining incentives should be designed based on costs rather than profits.

In terms of specific tax reforms, the IMF recommends taxing pension contributions or benefits, eliminating the deduction of voluntary payments to workers’ participation funds, and removing exemptions on pensions. The IMF proposes either taxing pension contributions or benefits to streamline the taxation system in this regard.

The IMF also addresses the issue of tax incentives, distinguishing between costbased incentives and profit-based incentives. Cost-based incentives, such as accelerated depreciation and special tax deductions for investment expenses, are seen as more effective in promoting new investments and lowering the cost of capital. In contrast, profit-based incentives like tax holidays and preferential tax rates are deemed less effective, particularly with the implementation of the global minimum tax under pillar two.

Furthermore, the IMF calls for the elimination of tax incentives in the Income Tax Ordinance (ITO), except for those mandated by legal obligations or clear policy reasons. The IMF estimates that this move could generate additional revenue equivalent to 0.2% of GDP.

Another area of focus is the reform of minimum tax rules, including the implementation of a half-year rule to limit deductions when an asset is put into use. The IMF suggests gradually phasing out the minimum tax over the medium term as capacity for Corporate Income Tax (CIT) administration strengthens and CIT revenue increases.

Regarding charitable donations and non-profit organizations, the IMF recommends streamlining the rules to ensure consistency and efficiency. This includes subjecting all types of donations and nonprofit organizations to the same rules and considering tax credits instead of exemptions for certain non-profit entities to improve regulatory oversight.

In conclusion, the IMF’S recommendations underscore the need for comprehensive tax reforms and stricter oversight on tax incentives in Pakistan to ensure fiscal sustainability and promote economic growth.