IMF Recommends Taxation on Civilian and Military Pensions in Pakistan

The International Monetary Fund (IMF) has placed new recommendations before Pakistan, which include the taxation of civilian and military pensions and the withdrawal of income tax exemptions on various pension schemes. As reported by The Express Tribune on May 10th, 2024, these recommendations come as the IMF mission quietly arrives in Islamabad to commence discussions for two pivotal bailout packages.

The global financial institution is pushing for Pakistan to implement these measures in the next fiscal budget to enhance the country’s revenue by an additional 0.5% of its Gross Domestic Product (GDP), which translates to roughly Rs600 billion. The taxation on pensions could potentially yield between Rs22 billion to Rs25 billion annually once all exemptions are eliminated. This move is expected to impact various pension funds, including those enjoyed by retired government servants and military personnel, which are currently estimated to cost over Rs12 billion in tax exemptions.

Negotiations, which Finance Minister

Negotiations, which Finance Minister Muhammad Aurangzeb initially indicated would start within a week to ten days, have surprisingly kicked off within three days following his announcement. The finance minister has yet to comment on whether the IMF accelerated the discussion timeline in response to his statement.

Pakistan’s quest for financial stability

Pakistan’s quest for financial stability continues as it seeks the 24th bailout package from the IMF, which includes the Extended Fund Facility (EFF) for comprehensive structural reforms and the Resilience and Sustainability Facility (RSF) aimed at combatting climate change adversities. Despite the frequency of these bailouts, sustainable economic objectives have remained elusive for both Pakistan and the IMF.

The finance ministry hints that the current negotiations might encompass both the EFF and RSF facilities, yet the specifics of the programme’s size and duration remain under deliberation. The IMF’s Mission Chief Nathan Porter and other members are expected to join the discussions next week.

Reforms

These suggested reforms are part of the IMF’s broader strategy to amplify the Federal Board of Revenue’s (FBR) tax base, with proposed new taxes amounting to Rs1.3 trillion. Half of this figure is projected to burden salaried individuals. The IMF has also proposed a review of the income tax and pension regimes for sole proprietors benefitting from social security and pension contributions.

This 24th programme might be the most stringent Pakistan has had to agree

Government sources intimate that this 24th programme might be the most stringent Pakistan has had to agree to, reflecting the gravity of the nation’s annual financing needs, which oscillate between $25 billion to $30 billion. The proposed taxation on pensions is a step towards this fiscal consolidation, but it may also place additional strain on Pakistan’s marginalized fixed-income population, already struggling with double-digit inflation and diminishing purchasing power.

the IMF suggests ending income tax credits for voluntary payments to workers

Moreover, the IMF suggests ending income tax credits for voluntary payments to workers’ participation funds and taxing any pension received by Pakistani citizens from former employers, which could generate an estimated Rs2 billion. The tax credit for contributions to approved Pension Funds may also be withdrawn, further boosting revenues.

Economic landscape of Pakistan remains under intense scrutiny

As the government and the IMF continue their negotiations, the economic landscape of Pakistan remains under intense scrutiny. The potential repercussions of these tax reforms on the fixed-income population pose a significant challenge for policymakers balancing fiscal responsibility with social equity.

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