Islamabad: The federal government and the International Monetary Fund (IMF) have reached an understanding to introduce a single value-added tax (VAT) regime in the country, a news source reported. Both sides have agreed to this measure as part of the overall medium-term macroeconomic framework which is expected to play host to of PKR 1.25 trillion incremental federal and provincial revenue sums.
Over a period of three years, this IMF programme will produce an additional revenue of about 2.6% of GDP. The federal taxes will increase by 2.3%, beginning at 1.1% of GDP in fiscal year 2019-20 (FY20). 0.9% and 0.3% will follow in FY21 and FY22 respectively.
The provincial taxes will be raised by 0.1% of GDP each year. This is expected to help in achieving the 1.6% tax to GDP ratio – currently 1.3% – during FY22. Other tax measures for meeting the required targets include significant reduction in tax expenditures, executed through removal of exemptions and excessive tax credits from income and sales taxes, and federal excise duty law. Additionally, the country will be moved to a single sales tax (VAT) regime by cutting special procedures and reduced rate taxation.
Under this IMF programme, the government will also reduce the number of withholding taxes. The government has also told IMF that the country will move to a single tax collection agency with single return and single auditing authority in three years’ time. It expects to reduce the compliance costs with this measure.