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Pakistan Govt Cancel Plans to Impose Flood Levy, Tax on Deposit

LISLAMABAD: After the International Monetary Fund (IMF) and the main stakeholders opposed them, the government to force to drop the flood tax on imports and the one-time tax on public bank deposits.

In the financial sector, the extreme measures that the finance ministry wanted to take to collect billions of rupees in additional revenue for which the federal government would have exclusive rights to view as extremely regressive.

The government gave in after receiving advice from the IMF, the commerce ministry, and the State Bank to avoid extreme measures due to their negative effects on the economy and banking system.

According to high-ranking sources, “the proposals share with the IMF during the recent talks” (related to the completion of the ninth review of a $6.5 billion loan program).

In addition, Pakistan’s obligations under the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) is breach by the plan to levy a flood tax on imports in the range of one percent to three percent.

In the beginning, the finance ministry had made both of the proposals as part of eight to ten options for raising Rs170 billion in taxes in four months, or more than Rs500 billion annually.

The elimination of both measures has now been confirmed by a senior official from the finance ministry.

Finance Minister Ishaq Dar stated at a news conference on Friday that the government would choose among a list of eight to ten potential areas for taxation.

The list included a 1 percent increase in the General Sales Tax rate to 18% and a 0.6% withholding tax on cash withdrawals by non-filers. In just four months, a 1% increase in GST would bring in Rs70 billion.

The government is likely to proceed with its plan to reintroduce the 0.6% tax, despite the State Bank’s opposition to doing so. It’s possible that this step will once more boost currency circulation.

The measures, like taxes on cash deposits or withdrawals, are regressive and go against the idea of fair and equitable income-based taxation. However, such actions have historically favored by the Pakistan Muslim League-Nawaz government and the Federal Board of Revenue.

It was unusual for the finance ministry to plan to levy a one-time tax on bank deposits. This could have forced people to keep their money outside the banking system. The proposed 0.6% withholding tax on deposits, which is still under consideration, may also result in an increase in currency circulation.

According to the SBP’s statistics, the total amount of deposits in the banking system stood at around Rs22.5 trillion at the end of December 2022. These include salaried individuals, businesspeople, and others’ personal deposits totaling Rs10.5 trillion.

According to the sources, “the government wanted to target only a class of people with higher deposits.” This suggests that the finance ministry’s primary goal is to raise taxes, which would have significant repercussions for various economic sectors.

The IMF has emphasized “permanent” revenue measures in its post-visit statement, which can immediately increase tax collection and withstand court scrutiny.

According to the sources, the government also shared with the IMF its plan to levy a flood tax of one to three percent on imports to raise approximately sixty to seventy billion rupees in additional taxes. However, it was not approved by the IMF.

The initial plan called for an increase in customs duties of one to three percent, which the finance ministry turned into a tax to keep the money out of the provinces’ pockets.

The “import duties” that are  distributing among the provinces and the federal government are a component of the Federal Divisible Pool. However, the term “levy” refers to a federal tax that is not shared by the provinces.

According to the sources, the IMF met in depth with the WTO, Ministry of Commerce, and Ministry of Finance representatives. At that meeting, it is unanimously agreed that the flood tax would go against the commitments made by the World Trade Organization.

The IMF tell by a customs official that the term “levy” did not refer to a duty. It is also impossible to discriminate against imported goods by not imposing a similar tax on domestic goods.

According to the General Agreement on Trade and Tariffs, the products imported into the territory of any other contracting party shall not be subject, directly or indirectly, to any internal taxes or other charges of any kind exceeding those applied, directly or indirectly, to like domestic products.

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