In a letter to Prime Minister Shehbaz Sharif, Khyber Pakhtunkhwa Chief Minister Sohail Afridi has requested the withdrawal of the proposed tax exemptions in the merged districts and the Malakand division, it emerged on Wednesday.

The development comes as the move to withdraw tax exemptions has received much flak from the PTI-led KP government as well as traders in the region. Last week, the provincial government decided to formally communicate its concerns to the Centre through an official letter.

In the letter, dated July 6 and available with Dawn, CM Afridi requested that the existing tax exemptions should continue “until conditions justifying such exemptions have materially improved” in Malakand and the merged districts.

He held that the decision was taken “despite the fact that the people of KP and their elected provincial government stand hand in [glove] at strengthening of Pakistan’s fiscal position through a fair and sustainable taxation system”.

CM Afridi told the premier that the issue was not solely limited to taxation but rather against the commitments the federal government had made at the time of the merger.

“The merger of the erstwhile Fata with KP was founded upon a broad national consensus and accompanied by explicit commitments on the part of the federation to provide sustained financial support and institutional assistance for the successful integration and development of the region.”

CM Afridi contended that despite the province’s commitments to implement the merger, the commitments made by the Centre remained unfulfilled, which had placed “disproportionate financial, administrative and security responsibilities” on the KP government.

He reiterated that commitments made by the Centre on allocations within the National Finance Commission (NFC) had also not been realised.

The KP CM highlighted that KP was Pakistan’s “frontline province” in the fight against terrorism and went on to cite the sacrifices made by KP.

“The province continues to incur significant expenditures on law and order, policing, counter-terrorism operations, rehabilitation of affected communities and reconstruction of damaged infrastructure in the larger national interest.”

He also drew attention to the disruption of cross-border trade with neighbouring Afghanistan, which he said had reduced commercial activity in the border districts, thereby impacting their local economies that depend on such trade.

“These challenges are compounded by persistent locational disadvantages, inadequate infrastructure, limited industrialisation, high transportation costs and energy constraints, all of which continue to impede private investment, employment generation and sustainable economic growth,” the letter read.

He further recalled that the tax exemptions were conceived as “transitional measures” aimed at promoting investment, industrialisation, employment, and economic integration in what he called “historically disadvantaged regions”.

He noted that the socio-economic conditions which had created the need for the tax exemptions persisted, arguing that “withdrawal at this stage — before the intended developmental objectives have been realised and before the federation has fulfilled its commitments — is likely to discourage investment, weaken economic recovery and place an additional burden on local businesses and communities”.

He also recalled a committee constituted by the federal government on Dec 20, 2024 and which was headed by Inter-Provincial Coordination Minister Rana Sanaullah. The committee was tasked with assessing ground realities and engaging with stakeholders from the merged districts and the Malakand division before making any recommendations on taxation measures.

CM Afridi claimed that the committee only held a “limited number of meetings and no recommendations were finalised”.

He further asserted that the withdrawal of tax exemptions was decided without the “completion of the envisaged consultative process or adequate consultation with the provincial government and local stakeholders”.

“Until the federation fulfils its commitments regarding the committed NFC share and the restoration of cross-border trade, such a decision may undermine public confidence and have adverse implications for law and order in these sensitive areas,” the KP chief minister said.

He also highlighted that the KP Assembly had passed a resolution seeking the deferring of the proposed taxation measures until the prior commitments are fulfilled.

Concluding the letter, CM Afridi appealed to PM Shehbaz: “It is requested in the interest of the people of KP that the proposed withdrawal of tax exemptions in the merged districts and Malakand Division may kindly be deferred and that the existing tax exemptions may continue until these commitments have been substantially fulfilled and the conditions justifying such exemptions have materially improved.”

He expressed confidence that the request will get “earnest consideration” in light of the larger national interest.

Last month, amid discussions about the federal budget, Sanaullah had assured the PTI that the government would discuss the issue with the International Monetary Fund (IMF).

“The finance minister has promised [the opposition] that he will seek to extend these exemptions after speaking with the IMF, and God-willing, will make efforts for it,” Sanaullah told reporters after a meeting with opposition lawmakers.