As part of its strategy to revamp tax collection and support environmental initiatives, the Pakistani government is contemplating the introduction of a carbon tax on petroleum products. This move aligns with the International Monetary Fund’s (IMF) broader goal of implementing a uniform value-added tax (VAT) system across the economy, aimed at enhancing documentation and digitization of financial transactions.
Aligning with IMF’s Goals
The proposal for a carbon tax emerges alongside discussions about potentially increasing the petroleum levy to as high as Rs100 per liter in the upcoming budget. According to a report by Dawn, officials privy to the matter suggest that these measures could significantly boost federal revenue, as these taxes are retained entirely by the central government, unlike GST revenues, which are largely distributed among provinces.
Financial and Environmental Benefits
Implementing both a carbon tax and an increased petroleum levy could attract international financial support, offering access to green bonds, e-bonds, and favorable loans and grants from global institutions. The move is part of a broader effort to align the country’s future development programs with global benchmarks for climate-focused public investment management.
IMF’s Advocacy for Tax Reforms
The IMF has been vocal in advocating for the reinstatement of standard GST on petroleum products, complemented by a petroleum levy, as part of a comprehensive overhaul of the current GST framework. This transformation is aimed at fostering a more inclusive and non-preferential VAT system across all sectors of the economy.
National Strategies for Revenue Enhancement
National authorities are considering reintroducing a carbon tax or raising the petroleum levy to Rs100 per liter in the next budget to enhance federal revenue. This approach is favored because these revenues remain entirely with the federal government, unlike GST, which is mainly distributed to the provinces.
Enhancing Social Welfare Programs
The upcoming financial measures, as discussed by government officials and the IMF, also include enhancements to social welfare programs such as the Benazir Income Support Programme (BISP). Plans are underway to link monthly stipends more closely with inflation rates to mitigate the effects of the current economic situation, focusing on improving the targeting of aid and gradually transitioning beneficiaries to income-generating activities.
Expanding the Tax Base
On the revenue side, the focus will be on expanding the tax base through a series of digitization and documentation initiatives. The government plans to encourage voluntary registration under the Tajir Dost Scheme for retailers, with penalties set to be introduced for non-compliance. Furthermore, non-filers may face increased withholding tax rates on bank transactions in efforts to encourage compliance.
Revisiting Taxation Measures
Other reforms include the reconsideration of several taxation measures previously withdrawn due to parliamentary intervention. These measures are aimed at bolstering the tax-to-GDP ratio, which is expected to rise by an average of 1% annually, ultimately achieving a significant fiscal adjustment necessary for economic stabilization.
Pension System Reforms and Energy Tariffs
Additionally, the finance minister has outlined plans to reform pension systems as part of key expenditure rationalization measures, alongside commitments to adjust energy tariffs and promote private sector involvement to mitigate the circular debt issue.
Anticipating Challenges
As Pakistan gears up for its next IMF review, the government remains cautious of the potential political and geopolitical challenges that could impact the progress of these reforms. Despite these challenges, the commitment to a tight monetary policy and a market-based exchange rate system signifies a continued effort to stabilize the economy and strengthen social security frameworks.
The introduction of a carbon tax on petroleum products represents a significant step in Pakistan’s efforts to enhance revenue collection, support environmental initiatives, and align with international financial standards. As the country navigates these reforms, the focus on expanding the tax base, improving social welfare programs, and ensuring fiscal stability remains paramount.
