Life for ordinary Pakistanis may continue to be challenging not only throughout this fiscal year but for the next two years as well, owing to sustained high levels of taxation and the inclusion of additional services under the tax net to meet the demands of the International Monetary Fund.
The recently negotiated $7 billion IMF loan package, pending final approval by the IMF Executive Board, will be disbursed over 37 months. A critical condition of this loan requires Pakistan’s provinces to transition from a “positive” to a “negative” list system for levying sales tax on services.
According to a report, provinces such as Sindh, Punjab, KP, and Balochistan are already preparing to implement this change in the upcoming fiscal year starting July 2025. Moving to a negative list means that only a few services will be exempt from sales tax, while all other services will be taxed. Currently, sales tax is only imposed on select services, with exemptions for others.
The impact of these changes is expected to exacerbate consumer inflation, already fueled by frequent hikes in petroleum prices due to increased petroleum levy collections by the federal government.
Furthermore, expanding the sales tax to nearly all services could stymie the growth of small businesses, which are already grappling with soaring costs of gas and electricity.
In the previous fiscal year, the government spent an estimated Rs1.3 trillion on capacity charges to independent power producers (IPPs), surpassing the amount allocated to national defense in nine months of FY24.
Rising energy costs stem from the government’s efforts to recoup past losses and ongoing payments to IPPs for idle electricity generation capacity. These capacity charges represent payments made to IPPs for electricity they can produce but aren’t supplying to the national grid due to infrastructure limitations or strategic decisions.
During the fiscal year 2023-24, the government’s borrowing from commercial banks amounted to approximately Rs8.5 trillion, with total spending on servicing both domestic and external debts reaching around Rs5.52 trillion — over 56.4% of the total revenue generated.
The accumulation of domestic debt over the years, exceeding limits set by fiscal responsibility laws, has been sustained by successive governments. This borrowing pattern has enabled the government to service existing debts by incurring new ones, largely from commercial banks, underlining a systemic reliance on debt-driven financing.
As of May 2024, Pakistan’s total domestic debt and liabilities stand at approximately Rs46.75 trillion, marking a substantial increase from Rs37.89 trillion recorded just a year earlier in May 2023, according to data from the State Bank of Pakistan.
The escalation in domestic debt reflects a persistent trend where the government, backed by concessions, continues to accumulate debt to sustain fiscal operations, despite concerns about its long-term sustainability and economic repercussions.
In summary, Pakistan faces daunting economic challenges exacerbated by ongoing fiscal pressures and the imperative to adhere to IMF conditions, necessitating careful navigation of policies to ensure sustainable economic stability and inclusive growth.
