Petroleum Products
ISLAMABAD: The International Monetary Fund (IMF) has issued recommendations aimed at restructuring Pakistan’s taxation policies to enhance revenue generation and address environmental concerns.
One key proposal involves imposing a uniform rate of Federal Excise Duty (FED) on locally manufactured cigarettes, regardless of the manufacturer’s origin. Additionally, the IMF suggests implementing a Petroleum Development Levy (PDL) on machinery inputs known for polluting the environment.
Furthermore, the IMF advises the Federal Board of Revenue (FBR) to incrementally raise excise duties on domestically produced cars and luxury items such as yachts.
To combat smuggling of oil derivatives, particularly from sensitive areas, the IMF recommends strengthening border controls. The Fund also urges the taxation of e-cigarettes in a manner similar to tobacco products, citing equivalent health risks.
In the medium term, the IMF advocates for a reduction in the number of taxed items, particularly those lacking negative externalities, substantial revenue potential, inelastic demand, or luxury attributes. This recommendation aims to streamline the tax system while maximizing revenue generation.
Regarding excise duties on petroleum products, the PDL constituted 0.7% of GDP in FY2023, with additional revenues from FED on cigarettes. While the PDL experienced fluctuations, it notably increased in FY23.
The IMF highlights a significant policy change where petroleum products were exempted from Sales Tax since March 2022.
Despite the substantial increase in PDL rates, overall taxation of petroleum products has declined since 2019, reflecting a shift in the tax burden.
The IMF report underscores the potential impact of eliminating Sales Tax exemptions on petroleum products, estimating an 18% increase in prices with the standard General Sales Tax rate.
This adjustment would bring gasoline prices in Pakistan closer to the average observed in neighboring countries and emerging economies.
Moreover, the IMF notes a gradual increase in FED rates on tobacco products, resulting in a significant decline in cigarette consumption.
This shift aligns with efforts to deter tobacco consumption and improve public health outcomes.
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