Pakistan abandons flood levy, bank deposit tax plans

February 13, 2023 (MLN): The federal government has dropped its plans to implement a flood levy on imports and a one-time tax on bank deposits after facing opposition from the International Monetary Fund (IMF), the commerce ministry, and the State Bank, according to media reports.

 These proposals, which were part of an effort to raise additional revenue, were deemed regressive by the financial sector and in violation of Pakistan's commitments under the World Trade Organization (WTO) and the General Agreement on Trade and Tariffs (GATT).

The finance ministry had initially considered the measures as part of a list of 8 to 10 items aimed at raising Rs170 billion in taxes over four months.

However, the finance ministry has confirmed that both proposals have been dropped. The government is still considering the reintroduction of a 0.6% withholding tax on cash withdrawals by non-filers, as well as a 1% increase in the General Sales Tax rate to 18%.

Although the State Bank is against taxing cash withdrawals, the government is likely to move forward with this plan, which may result in an increase in currency circulation.

The IMF has emphasized the need for "permanent" revenue measures that can increase tax collection and withstand court scrutiny. The government had also discussed the plan to impose a 1% to 3% flood levy on imports with the IMF, but this proposal was not endorsed.

The IMF had a meeting with representatives of the WTO, the commerce ministry, and the finance ministry, and it was determined that the flood levy would violate WTO commitments. A customs official informed the IMF that the term "levy" was not a duty and that imported goods could not be discriminated against.

“The proposals were shared with the IMF during the recent talks related to the completion of the ninth review of a $6.5 billion loan program,” highly placed sources told The Express Tribune.

As of December 2022, the total deposits in the banking system amounted to around Rs22.5 trillion, including Rs10.5tr in personal deposits. The government's primary focus was to raise taxes from individuals with higher deposits, but this could have led to significant implications for various sectors of the economy.

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