Macro Analysis /

Pakistan Strategy – IMF Program: Potential removal of sales tax exemptions

  • The government has reportedly committed to the IMF to remove all tax exemptions

  • Affected sectors can include Dairy, Pharma, Autos and Tractors

  • This will be inflationary but can increase taxes and moderate CAD in the interim

Intermarket Securities
25 November 2021

The government has reportedly committed to the IMF to remove almost all sales tax exemptions, worth c.PKR350bn, as a precondition for the resumption of the stalled EFF program. Broadly, this will affect petroleum, pharmaceuticals, food and other agriculture-related items which had hitherto enjoyed 5-10% GST on inputs or final products, compared with the normal rate of 17%. These items are listed in the Sixth, Eighth and Ninth Schedules of the Sales Tax Act 1990.

The major implications of the removal of exemptions will be higher inflation in the coming months, on top of the impact of recent PKR depreciation and higher petrol prices. Note that we already assume the headline CPI to average 10% in the next 12 months, without incorporating the impact of the removal of tax exemptions. Lower demand for non-essential items, as a result of higher prices, could result in moderating the current account deficit on top of raising additional taxes, in our view.   

Click through to our report for a table showing the sectors that could be targets for a rise in GST to 17%. We present potential tax collection by the increase and the impact of industry profitability – in some cases, through lower volumes because of high price elasticity in some products (tractors, for example). Therefore, the measure will be negative for Tractor, Pharmaceutical, Dairy and Auto sectors.

While much of farmers’ input cost will be affected, we highlight that farmer income is presently at the strongest level in many years; hence, it may not be very difficult for the government to push some of these measures, in our view.