ISLAMABAD:  The International Monetary Fund has formally demanded that Pakistan remove all exemptions and zero-ratings under the sales tax regime as part of final negotiations for the upcoming fiscal budget.

Negotiations between the IMF mission and the Federal Board of Revenue entered decisive stages on Monday, with three key meetings scheduled to finalise tax targets and revenue strategy for fiscal year 2026-27.

Sources familiar with the talks said the IMF has insisted on a federal tax collection target of Rs15,264 billion. The FBR is seeking some downward adjustment to this ambitious goal while committing to enforcement-led gains.

The Fund has specifically called for the complete withdrawal of sales tax exemptions across sectors. In parallel, it proposed reducing the standard sales tax rate from the current effective 22.8 percent to 18 percent, provided the base is broadened through removal of concessions.

**Official Positions**

FBR officials are briefing the IMF mission on proposed new tax measures worth Rs430 billion. These include adjustments in rates, withdrawal of concessions, and improved compliance frameworks.

The IMF has also pushed for additional revenue of Rs778 billion through stricter enforcement actions, including better audit mechanisms, monitoring of high-risk sectors, and recovery of outstanding dues.

Both sides have reached an understanding to set the overall tax-to-GDP ratio at 11.2 percent for the next fiscal year. This represents a measurable increase from recent levels, where the ratio hovered around 10.3 percent in the outgoing year.

**Key Figures and Targets**

The Rs15,264 billion target marks a significant jump from revised collections expected in the current fiscal year. Provincial governments are also expected to contribute through higher General Sales Tax on Services and agricultural income tax, targeting a combined provincial revenue of around Rs1.95 trillion.

New measures under discussion include broadening the base in retail, real estate, and certain export-oriented sectors that currently enjoy concessions. Enforcement is expected to generate substantial yields from sectors such as sugar, cement, tobacco, and fertiliser through better tracking and audit.

Sales tax currently suffers from low efficiency. The IMF has highlighted that improving GST C-efficiency could unlock significant additional revenue without sharp rate increases.

**Background Context**

Pakistan’s tax system has long been characterised by a narrow base, widespread exemptions, and reliance on indirect taxes. Successive governments have extended concessions to various sectors for industrial promotion, export competitiveness, and political considerations. These have, however, limited revenue mobilisation and created distortions.

The current Extended Fund Facility programme with the IMF emphasises structural fiscal reforms. Revenue mobilisation remains central to achieving primary surplus targets and reducing public debt pressure. Pakistan’s tax-to-GDP ratio, though improved in recent years, still lags behind regional peers.

The upcoming budget, expected to be presented in early June, will serve as a critical test of the government’s commitment to these reforms as the EFF programme moves towards its later stages.

**Reactions and Market Implications**

Business chambers have expressed concern over the potential impact of broad exemption withdrawal on production costs and competitiveness. Representatives of export-oriented industries, particularly textiles, have sought phased implementation and targeted support measures.

Finance Ministry officials maintain that broadening the base while rationalising rates will ultimately support macroeconomic stability, lower borrowing needs, and create space for targeted relief in other areas such as salaried class taxation.

Analysts note that successful implementation could strengthen Pakistan’s fiscal position and improve prospects for future IMF reviews and market confidence. Failure to meet revenue targets has historically led to expenditure cuts or additional borrowing.

**Strategic Outlook**

The negotiations reflect the ongoing tension between short-term economic pressures and long-term structural reform. Removing exemptions will broaden the tax net but requires careful sequencing to avoid disruption in key sectors.

Observers expect the final agreement to include a mix of immediate measures and medium-term commitments on digital enforcement, taxpayer registration, and provincial revenue harmonisation. The outcome will shape not only the 2026-27 budget but also the trajectory of Pakistan’s fiscal consolidation over the next few years.

Further meetings between FBR and the IMF mission are expected in coming days as both sides work towards a staff-level agreement on the budget parameters. The government aims to balance revenue goals with measures to protect vulnerable segments and maintain growth momentum.

The final shape of the budget will indicate the extent of reforms Pakistan is ready to undertake to secure continued international financial support and domestic economic stability.