FBR considers raising tax on interest income as part of IMF-backed relief measures

The Federal Board of Revenue (FBR) is considering increasing tax rates on interest income from deposits in commercial banks and savings schemes by 2% in the upcoming budget for 2025-26, with approval expected from the International Monetary Fund (IMF). 

According to a news report, the proposal would apply to both tax filers and non-filers, increasing the current tax rate of 15% for filers and 35% for non-filers.

This move is part of the government’s efforts to secure tax relief for salaried individuals and other sectors, as agreed with the IMF, while also addressing the growing fiscal challenges. The IMF has raised concerns over the shrinking volume of the formal sector, which has led to reduced tax revenues, especially after the imposition of high tax rates under the 2024-25 budget in line with the IMF programme.

A senior official in the FBR confirmed that the IMF is reviewing various proposals, including the potential tax hike on passive income, which has become a focal point in the ongoing discussions. However, the IMF has not yet granted its final approval for the proposal.

However, tax experts expressed concerns about the potential impact of the proposed tax increase. They warned that a higher tax rate would further burden those reliant on interest income from their savings, particularly in light of already declining returns from banks due to lower policy rates. 

In contrast, industries such as tobacco and beverages have raised concerns over their shrinking volumes, with a shift towards untaxed products. The beverage industry has proposed a reduction in the Federal Excise Duty (FED) from 20% to 15% to encourage tax compliance, while the tobacco sector anticipates a decrease in its contribution to tax revenues. 

As discussions continue, the FBR is under pressure to find solutions that address the revenue gap while balancing the concerns of both the IMF and key sectors of the economy.