ISLAMABAD: Finance Minister Muhammad Aurangzeb announced on Wednesday that Pakistan will not be signing an energy debt restructuring agreement with China next week. He also confirmed that provinces would implement new agricultural income tax rates starting from the next fiscal year.
Speaking to reporters after a Senate Standing Committee on Finance meeting, Aurangzeb dismissed any immediate plans to reschedule Chinese energy debt. Recent media reports suggested that the government was ready to sign a memorandum of understanding (MoU) for energy debt re-profiling during the upcoming visit of the Chinese Prime Minister.
Sources familiar with the negotiations indicated that while Pakistan’s government may hope for an agreement, no substantial progress has been made to finalize the terms. They noted that the Chinese authorities are open to continuing discussions on debt re-profiling.
The finance minister emphasized that an agreement cannot be signed at this stage, as it is a lengthy process requiring the approval of lenders and project sponsors. According to the government’s economic plan, it could take three to four years to complete negotiations for restructuring the Chinese energy debt.
Pakistan currently owes approximately $16 billion to Chinese financial institutions. It hopes the Chinese Prime Minister will sign an MoU to facilitate discussions on various options for debt re-profiling, aiming for a mutually beneficial outcome. However, this does not imply immediate relief.
During his recent visit to Beijing, Aurangzeb requested China to consider converting the foreign currency’s base currency and interest rate, extend the loan term by an additional five years, and introduce a three-year moratorium on principal payments.
Aurangzeb also mentioned that Chinese negotiators faced violence in Karachi, resulting in the deaths of two individuals. However, the Finance Division clarified that the government has been negotiating with independent power producers (IPPs), including those involved with the power plant where the deceased worked, emphasizing that they were not part of the IPP discussions. Any implication to the contrary in media reports is misleading.
Agricultural Income Tax Updates
The finance minister announced that provinces will begin collecting agricultural income tax at new rates from the fiscal year 2025-26. Provinces must amend their agricultural income tax laws by January 1, 2025, with new rates taking effect on July 1.
Aurangzeb’s statement reflects the resistance from Sindh and Punjab, where local governments are reluctant to upset their landlord legislators amidst increasing political instability. Confusion exists, as the National Fiscal Pact signed by the four provinces mandates the alignment of agricultural income tax laws with federal personal income tax and corporate tax by the end of October.
The pact states that provinces will initiate agricultural income taxation under the new regime starting January 1, 2025, with collections for the second half of FY 2024-25 in July 2025.
The finance minister’s remarks suggest that the new income tax rates for farmers and landowners will be implemented in the upcoming fiscal year. Federal personal income tax rates can reach up to 50%, while corporate rates are 29%, excluding the super income tax.
The government appears to be retreating on two other major initiatives—taxing retailers and increasing property valuation rates, which were intended to generate an additional Rs90 billion this fiscal year collectively. Progress on these initiatives has stalled, with the salaried class bearing the brunt of increased taxation.
Chartered accountant Haroon Khawaja presented before the Senate Standing Committee on proposals to expand Pakistan’s limited tax base. In collaboration with tax expert Dr. Ikramul Haq, he recommended establishing a National Tax Authority comprised of qualified professionals with market-based compensation.
Khawaja advocated for the authority to operate autonomously, like the State Bank of Pakistan (SBP), and to be financially independent. He argued that this would streamline the tax system by eliminating redundant agencies involved in various taxes and levies.
According to Khawaja and Haq, Pakistan could potentially add 18.9 million new taxpayers to its tax net, compared to the current six million return filers. Capturing this potential could boost income tax collection from this year’s projected Rs5.4 trillion to Rs13 trillion within two years.
As a result, they suggested that individual tax rates could be reduced to 10% from 39%, and the corporate rate could be set at a flat 20% within five years, increasing the tax-to-GDP ratio from a low of 9% to 15%. They criticized the Federal Board of Revenue (FBR) for its inefficiency and alleged corruption, which forced compliant taxpayers to pay under the table.