The International Monetary Fund has proposed that Pakistan increase the standard General Sales Tax (GST) rate from 18% to 19% as part of discussions for the 2026-27 federal budget. The proposal comes amid ongoing negotiations between both sides over revenue targets and fiscal reforms, although Pakistani authorities have so far resisted the move, warning that it could intensify already high inflationary pressures across the economy.
Officials argue that raising indirect taxation at this stage would directly affect consumers, especially low and middle-income households, who are already struggling with rising prices of essential goods and services.
Estimated Revenue Gains Linked to Proposed Increase
According to preliminary estimates, if the GST increase is implemented, it could generate between Rs250 billion and Rs300 billion in additional revenue for the national exchequer. These projections are based on current consumption patterns and existing tax collection structures, which the IMF believes require strengthening due to recent shortfalls in revenue performance.
The recommendation is closely tied to concerns over Pakistan’s inability to fully meet its revised tax collection targets for the outgoing fiscal year, even though the Federal Board of Revenue is expected to come close to the Rs13 trillion mark.
IMF Concerns Over Weak Tax Performance
The IMF has highlighted weak tax collection performance as a key reason behind its proposal, noting that Pakistan’s fiscal gap continues to widen due to structural inefficiencies in the tax system. Officials associated with the discussions suggest that the Fund believes existing measures have been exhausted, prompting the need for additional revenue tools such as an increase in GST.
However, Pakistani officials maintain that the solution should focus more on broadening the tax base rather than increasing rates, as higher indirect taxes tend to place a heavier burden on ordinary consumers.
Inflation Fears Drive Resistance From Pakistan
Pakistani authorities have strongly opposed the proposed tax increase, arguing that the economy is already facing significant inflationary pressure and that any further rise in GST would directly translate into higher retail prices. They also emphasize that economic recovery remains fragile, and additional taxation could slow down growth and consumption.
As a result, the government has been pushing back during negotiations, seeking alternative revenue solutions that do not further burden the public.
Broader Tax Reforms Under Discussion
Alongside GST discussions, the IMF has also proposed changes in other tax categories, including a recommendation to raise GST on hybrid vehicles from 8.5% to 18% once current exemptions expire in 2026. Talks are also ongoing regarding taxation policies for electric vehicles, although no final decision has been reached yet.
In addition, the IMF has supported the introduction of a simplified tax regime for retailers, under which businesses with turnover up to Rs200 million would pay a fixed annual tax of Rs25,000 and would be exempt from routine audits unless major discrepancies are detected. A QR code-based certification system is also expected to be introduced through the Federal Board of Revenue to streamline compliance.
Relief Discussions for Salaried Class Continue
Negotiations are also underway regarding possible relief for the salaried class, although the IMF has urged Pakistan to identify alternative revenue sources before implementing any tax reductions. This issue remains one of the key sticking points in the ongoing talks, as both sides try to balance fiscal stability with public relief.
Super Tax Adjustment May Be Considered
In a potential compromise, the IMF may consider allowing a reduction in the Super Tax rate by 1.5% to 2% in the upcoming budget. However, this adjustment is still under review and has not been finalized, as broader fiscal targets remain under negotiation.
Ongoing Budget Negotiations and Final Decisions
Officials confirm that discussions between Pakistan and the IMF are still ongoing and are expected to continue even after the federal budget is presented in parliament. Final figures and policy measures may therefore undergo last-minute adjustments depending on the outcome of negotiations and agreed revenue strategies.
FBR Clarification on Reports
The Federal Board of Revenue has denied claims that a GST increase has already been formally agreed upon, stating that no such proposal is currently under active consideration in an official capacity.
