The International Monetary Fund (IMF) has recommended uniform Federal Excise Duty (FED) rates for locally manufactured cigarettes, regardless of the manufacturer’s origin, and proposed the imposition of Petroleum Development Levy (PDL) on machinery inputs that contribute to environmental pollution.
Furthermore, the IMF has advised the Federal Board of Revenue (FBR) to gradually increase excise duties on domestically produced vehicles and luxury items such as yachts, while also enhancing border control measures to curb the smuggling of oil derivatives, particularly from sensitive areas. The Fund has also suggested taxing e-cigarettes similarly to tobacco products due to their comparable health impacts.
In the medium term, the IMF suggests reconsidering the number of items subjected to federal excise duties, focusing on those with features such as negative externalities, significant revenue potential, inelastic demand, or luxury aspects. These insights were shared with Pakistani authorities in a Technical Assistance Report.
Regarding excise on petroleum products, the Petroleum Development Levy (PDL) constituted 0.7% of GDP in FY2023, while other excises, mainly from FED on cigarettes, accounted for 0.4% of GDP in revenues. The PDL experienced fluctuations but notably increased in FY23, with rates rising from Rs20 to Rs60 per litre for petrol between July 2022 and September 2023.
Another noteworthy policy change highlighted by the IMF is the exemption of petroleum products from Sales Tax since March 2022. While Sales Tax revenues are shared with provinces under the NFC Award, the PDL remains with the federal government. Despite a significant increase in the PDL rate, taxation on petroleum products has declined since 2019, with the total taxation rate on petrol dropping from 29% to 19.6% of the sales price by September 2023.
The IMF report indicates that eliminating Sales Tax exemptions for petroleum products would result in an 18% price increase with the standard rate of General Sales Tax, bringing gasoline prices slightly above the average for neighbouring countries and emerging economies.
Similarly, FED rates on tobacco products have gradually increased, with a notable surge averaging 146% in February 2023. This hike reportedly led to a 20-25% decline in cigarette consumption, according to a survey cited by the IMF.
