ISLAMABAD: The government's hopes of reducing electricity tariffs received a setback when the International Monetary Fund (IMF) rejected a proposal to cut sales tax on electricity bills.

The Ministry of Energy had suggested a reduction in sales tax to alleviate the financial burden on consumers, but the global lender turned down the request, citing its loan programme conditions. The IMF's response emphasized that exemptions from new taxes cannot be granted under the terms of the current agreement with Pakistan. The IMF further stated that reducing the sales tax would hinder the country's ability to meet its tax collection targets, which are vital for the implementation of fiscal reforms under the ongoing bailout programme. Currently, consumers are charged Goods and Services Tax (GST) twice on their electricity bills. The first charge is an 18% tax levied on the total bill amount, while the second is a sales tax applied on the fuel cost adjustment (FCA), which varies depending on fluctuations in fuel prices.

The double taxation has been a point of contention for many consumers, especially as energy prices continue to rise. In addition to the sales tax, the government imposes several other levies on electricity bills, contributing to a substantial revenue stream for the federal and provincial governments. The annual tax revenue from electricity bills amounts to Rs954 billion, with Rs391 billion allocated to the federal government and Rs563 billion going to the provinces. These taxes help support the power sector and contribute to the national exchequer, but also increase the financial burden on consumers.

According to a government document released in August 2024, the taxes levied on electricity bills include income tax, advance tax, additional tax, extra sales tax, retailers' sales tax, electricity duty, and the PTV fee. For example, electricity duty is a provincial tax ranging from 1% to 1.5% on variable charges, applicable to all consumers. Commercial consumers are also subject to sales tax rates that vary depending on the size of the bill, with higher taxes for bills exceeding Rs20,000. Moreover, the bills include a financing cost surcharge, a fuel price adjustment charge, and an extra tax imposed on industrial and commercial consumers who are not registered with the Federal Board of Revenue (FBR). These taxes, combined with the regular charges for electricity usage, contribute to the overall high cost of electricity in the country. While the government had hoped for some relief in the form of a reduced sales tax, the IMF's stance underscores the importance of adhering to the conditions of the bailout agreement. This rejection also highlights the challenge Pakistan faces in balancing the need for fiscal discipline with the pressure to ease the financial strain on ordinary consumers.