IMF Presses Pakistan to End Tax Incentives by 2035 Under New Fiscal Reforms

ISLAMABAD – June 5, 2025:
The International Monetary Fund (IMF) has called on the Government of Pakistan to phase out all tax incentives currently offered to Special Technology Zones and Industrial Zones by 2035, as part of broader fiscal reform efforts.

During ongoing negotiations, IMF officials emphasized that Pakistan must submit a comprehensive phase-out plan before the end of this year. This requirement is part of the government’s commitments under the current agreement with the global lender.

According to IMF representatives, the move aims to promote fiscal discipline, eliminate revenue leakages, and enhance transparency in tax collection. The gradual elimination of sector-specific tax exemptions is expected to broaden Pakistan’s tax base and reduce its dependency on external financing.

Officials from Pakistan’s Ministry of Finance confirmed that the upcoming national budget is being prepared for the first time under a formal staff-level agreement with the IMF. This has added new layers of scrutiny and discipline to the budget-making process.

“The IMF has laid out clear conditions, and the government is committed to meeting all financial targets without exception,” a senior finance official told the press.

Sources within the ministry also indicated that the forthcoming federal budget will likely exclude any large-scale development projects due to strict fiscal limitations. Instead, the government is expected to implement comprehensive austerity measures to control the budget deficit and ensure compliance with IMF benchmarks.

The transition away from tax incentives—especially in emerging sectors like technology and industry—is expected to stir debate among stakeholders. However, officials argue that long-term economic stability requires difficult but necessary reforms.

As Pakistan prepares to unveil its federal budget later this month, all eyes are on how the government balances IMF demands with domestic economic and political realities.

LAHORE: Punjab agriculture authorities are hopeful that taxes on local cotton will be withdrawn in the next budget to provide it a level playing field.

Punjab Agriculture Minister Syed Ashiq Kirmani told a delegation of the Pakistan Cotton Ginners Association on Wednesday that Chief Minister Maryam Nawaz has carried the demand of abolishing taxes on local cotton to the pre-budget meeting of all chief ministers headed by Prime Minister Shehbaz Sharif in Islamabad on Wednesday.

The minister asked the ginners to be ready to start their units early this season to process the cotton sown earlier on at least one million acres in the province.

He did not agree with the proposition put forward by MPA Rana Saleem, who is also a ginner, that, like in the past, the import of cotton should be banned till local cotton is not fully sold out, Chaudhry Waheed Arshad, a spokesperson for the PCGA, told Dawn by phone.

FBR Proposes Doubling Withholding Tax on Non-Filers’ Cash Withdrawals

The Federal Board of Revenue (FBR) has proposed a significant increase in the withholding tax rate on cash withdrawals from banks by non-filers, aiming to boost revenue for the fiscal year 2025-26. Under the new proposal, the tax on cash withdrawals exceeding Rs 50,000 in a single day will jump from 0.6% to 1.2% for non-filers. This new rate will apply to all cash withdrawals, including those made via credit cards or ATMs.

These changes are part of the government’s broader strategy to penalize individuals who do not file their income tax returns. Starting July 1, 2025, the government plans to impose tighter financial restrictions on non-filers. The new proposal, which is part of the Tax Laws (Amendment) Bill, 2024, categorizes non-filers as “ineligible persons” and will bar them from engaging in various financial transactions. This bill has already been approved by the National Assembly Standing Committee on Finance and Revenue.

The government is considering a phased approach to implementing these measures, taking into account the potential revenue impact of immediately removing all withholding tax exemptions for non-filers. This isn’t the first time such a measure has been in place; the Finance Act 2023 had previously reintroduced a 0.6% tax on cash withdrawals over Rs 50,000 by non-filers.

ISLAMABAD: Industry sources have rejected claims by certain NGOs that the government will collect PKR 285 billion in revenue from the cigarette sector in fiscal year 2024–25, calling the figure unrealistic and not based on factual analysis.

According to officials and financial analysts, the actual revenue is more likely to hover around PKR 250 billion. This projection includes anticipated adjustments in June related to advance tax payments—a factor often overlooked in inflated estimates.

A key driver of the anticipated shortfall is the excessive Federal Excise Duty (FED) imposed on acetate tow, a crucial raw material used in cigarette manufacturing. While the industry had proposed an adjustable FED of PKR 4,000 per kilogram to curb illicit trade and enhance documentation, the government instead imposed a rate of PKR 44,000 per kilogram—an elevenfold increase.

This sharp hike has backfired, making smuggling significantly more profitable and pushing more players into the illegal trade. The scale of the problem is evident in the record seizures by law enforcement, which have already confiscated 447 metric tons of smuggled acetate tow in 2025—enough to produce nearly seven billion illicit cigarettes. This represents a major blow to the documented industry and a substantial loss to the national exchequer.

In a bid to crack down on illicit trade, the government recently introduced an ordinance authorizing provincial law enforcement agencies to take enforcement action against illegal cigarette operations. However, a formal notification required to implement this measure has yet to be issued, leaving enforcement efforts stalled.

Observers warn that this delay risks allowing illegal trade to expand further, eroding government revenues and undermining legitimate businesses. With the fiscal year nearing its end, policymakers are under increasing pressure to address regulatory inefficiencies and enforcement delays to protect vital revenue streams and ensure a fair competitive environment within the cigarette industry.

BUDGET 2025-26: Experts Urge to Ensure Transparency and Avoid Shocks

KARACHI: As the government prepares to unveil the federal budget for FY 2025-26, Pakistan’s top business and industry leaders have called for a transparent, stable, and pro-growth fiscal policy. They have urged the government to avoid any surprise measures and instead focus on broad-based tax reforms, relief for the salaried class, and meaningful support for exports and industrial growth.

The Pakistan Business Council (PBC), Overseas Investors Chamber of Commerce and Industry (OICCI), Federation of Pakistan Chambers of Commerce and Industry (FPCCI), Karachi Chamber of Commerce and Industry (KCCI), and Site Association of Industry (SAI) have all presented detailed budget recommendations focused on long-term economic stability.

PBC Calls for Export Growth and Tax Rationalisation

Pakistan Business Council CEO Ehsan Malik emphasized the need to improve the external account and fiscal balance while also strengthening national defence through enhanced export revenues. The PBC has proposed fiscal incentives to accelerate exports and encourage local sourcing of inputs.

Malik called for the gradual withdrawal of the super tax, reduction in corporate tax rates, and elimination of multiple taxation on inter-corporate dividends. He also recommended a cut in the 18% general sales tax (GST), arguing that it promotes tax evasion and hampers business growth. According to him, an improved tax-to-GDP ratio should stem from expanding economic activity, not increased tax pressure on compliant taxpayers.

OICCI Urges Expansion of the Tax Net and Policy Consistency

M. Abdul Aleem, CEO and Secretary General of OICCI, advocated for bold reforms to widen the tax base by ensuring effective tax collection from the trade, services, and agriculture sectors. He echoed calls for tax relief for salaried individuals and a phased reduction in corporate and sales taxes over the next few years.

He urged the government to ensure transparency in policymaking, avoid abrupt changes, and engage all stakeholders in designing tax reforms that are consistent and sustainable.

FPCCI Focuses on Export-Oriented Growth

Saquib Fayyaz Magoon, Senior Vice-President of FPCCI, stressed the importance of strengthening Pakistan’s export sector, especially as the country looks to reduce its reliance on IMF support in the future. He cautioned against imposing new taxes on export-driven industries, warning that such moves would raise production costs and reduce global competitiveness.

KCCI Demands Fair and Transparent Tax Regime

Jawed Bilwani, President of KCCI, highlighted the need for a transparent and predictable tax system that broadens the tax base, removes distortions, and distributes the tax burden more fairly. He underscored the importance of simplifying procedures and eliminating inefficiencies to promote sustained industrial growth.

Bilwani also pointed to the challenges faced by the SME sector, including limited access to finance and a complex regulatory environment. He called for focused policy support to unlock the sector’s potential in employment and innovation.

SAI Advocates Pro-Industry Reforms and GST Harmonisation

Ahmed Azeem Alvi, President of the Site Association of Industry, urged the government to prioritize industrialization and export competitiveness. He recommended capping business income tax at 25%, abolishing the super tax, and rolling back recent controversial amendments to the Income Tax Ordinance.

Alvi also called for harmonisation of GST across provinces, reduction of the standard sales tax rate to 15%, abolition of the additional sales tax, and faster refunds to reduce informality and improve liquidity.

He further urged the government to eliminate tax exemptions in FATA/PATA, reform welfare programs, adopt digital governance systems, and implement a one-window operational framework. Additionally, he demanded the restoration of zero-rated status for export sectors and essential goods to ease the burden on manufacturers and exporters.

The Federal Board of Revenue (FBR) has made significant legal victories, including a major win against Bahria Town (Private) Limited, unlocking revenue to the tune of Rs36.14 billion previously stuck in litigation.

The development comes amid special interest and firm instructions from Prime Minister Shehbaz Sharif to improve FBR’s legal strategy and push for results in court, the Ministry of Finance said in a statement on Monday.

“FBR has significantly improved its legal framework and achieved major success in resolving long-pending cases.

“Acting on the PM’s directives, FBR vigorously pursued pending cases in the Islamabad High Court. As a result, last week the court ruled in favor of FBR in cases collectively valued at Rs36.14 billion,” read the statement.

Malik Riaz has occupied govt, private lands: NAB

Among last week’s major wins for the federal tax collecting authority were three high-value tax cases, with the most significant being the case against Bahria Town (Private) Limited.

“In this case, the IHC upheld a recovery decision in favour of FBR amounting to Rs26.446 billion.”

The case had been pending at various appellate forums for the past two and a half years.

Moreover, in two other corporate cases involving a total of Rs9.7 billion, the IHC also ruled in FBR’s favour.

“These victories are clear evidence of the government’s commitment to economic reforms,” read the statement.

According to the Ministry of Finance, revenue to the tune of trillions of rupees remains stuck in various legal disputes, hindering national revenue collection.

Thus, a coordinated legal strategy was developed for representation and litigation, which has now started yielding notable results for FBR, it added.