IMF asks for petroleum development levy on polluting machinery

The International Monetary Fund (IMF) has advised Pakistan to impose federal excise duty (FED) on locally manufactured cars and luxury items like yachts and impose a petroleum development levy (PDL) on machinery that pollutes the climate. 

The global lender also asked to enhance border control to curb petroleum smuggling, and tax e-cigarettes and other tobacco products regardless of the manufacturer’s origin. 

In its Technical Assistance Report to Pakistan, the IMF highlighted the necessity of reducing the number of items subject to federal excise duties once revenue increases, targeting goods with negative externalities, significant revenue potential, inelastic demand, or luxury characteristics. 

The IMF also recommended bringing several dozen items under the standard rate of 18% GST, including unprocessed food, stationery, medicine, POL products, and others.

Current excises affect tobacco, aerated drinks, motor vehicles, cement, telecommunication, and petroleum and natural gas products.

The report notes that the PDL represented 0.7% of GDP in FY2023, with other excises contributing 0.4%, primarily from cigarette taxes. 

The PDL rate increased significantly in FY23, reaching Rs60 per liter for petrol by September 2023. 

Additionally, petroleum products were exempted from Sales Tax since March 2022, affecting revenue distribution between federal and provincial governments.

The IMF observed a decrease in petroleum product taxation since 2019, with taxes constituting 19.6 percent of petrol’s sale price in September 2023. 

It compared Pakistan’s petrol pricing to that in neighboring countries and emerging markets, suggesting that removing the sales tax exemption for petroleum products could align prices with regional averages.

The report also mentioned a significant rise in FED rates on tobacco products in February 2023, leading to a 20-25% reduction in cigarette consumption.