The Pakistani government plans to introduce a withholding tax on imports Pakistan will enforce through banks. The tax rate will be 1.5%. Banks will deduct it when processing payments to foreign suppliers. Officials say this move targets under-invoiced imports and boosts tax revenue.
How the New Import Tax Will Work
Currently, commercial importers pay withholding tax during customs declarations. Under the proposed plan, the tax will be deducted at the point of payment to foreign suppliers via banking channels, specifically when funds are transferred abroad. This shift is designed to improve enforcement and tax collection efficiency by leveraging the banking system as a withholding agent.
Banks will deduct the tax while processing payments abroad through letters of credit, adopting a model similar to how they handle overseas credit card transaction taxes. Importers will be able to claim adjustments against their final tax liabilities, ensuring the tax acts as a prepayment rather than a new tax burden.
IMF Briefed on Multiple Taxation Points
The Federal Board of Revenue (FBR) has informed the International Monetary Fund (IMF) about its proposal to impose taxes at three critical stages of imports: upon arrival of goods, during shipment, and when payments are made to exporters. While the IMF’s stance remains unclear, this proposal represents the government’s strongest effort to meet its ambitious tax revenue target of over Rs14 trillion in the next fiscal year.
Key Upcoming Dates for Budget and Economic Planning
Finance Secretary Imdad Ullah Bosal confirmed that the budget will be presented on June 10, with no plans for delay. Prior to the budget announcement, the Annual Plan Coordination Committee will meet on June 3, and the National Economic Council will convene on June 6. These meetings will finalize macroeconomic and development plans for the fiscal year 2025.
Tackling Illicit Trade to Protect Revenues
A recent report by the Policy Research Institute of Market Economy (PRIME) reveals Pakistan loses an estimated Rs3.4 trillion annually due to illicit trade, with nearly 30% related to misuse of the Afghan Transit Trade facility. These losses amount to 26% of the current fiscal year’s tax target, severely impacting government revenues.
The report highlights several factors enabling illicit trade, including outdated border controls, minimal customs automation, weak risk profiling, and ineffective scanning technology. If passed, the new withholding tax would give the FBR a straightforward tool to increase revenue collection, particularly because banks would enforce the tax deduction. Historically, the FBR has struggled to enforce taxes without the support of external withholding agents like banks and employers.
Indirect Taxation and Industry Impact
The government has previously relied on indirect taxes, such as last year’s controversial 20% federal excise duty (FED) on packaged juices. According to Atikah Mir, representing the fruit juice industry, the FED caused a 45% drop in sales. The Fruit Juice Council is lobbying to reduce the FED to 15%, arguing this adjustment would benefit both industry growth and government revenue.
Challenges with Tax Refunds: Utopia Industries Case
Another tactic the FBR uses to manage revenue is withholding genuine tax refunds. Recently, Special Assistant to the Prime Minister Haroon Akhtar Khan met with Utopia Industries to address their pending tax refunds.
Utopia Industries, a major exporter of mattress covers, pillows, comforters, and plastic goods, has struggled to recover over Rs3 billion in refunds despite submitting all required documentation. Founded in 2020 with a $50 million investment, Utopia now ranks among Pakistan’s top 12 exporters by revenue and leads in container shipments abroad. Its products, branded under its own name, enjoy a strong presence in households across the US, Canada, and the UK.
The company has Rs600 million in sales tax refunds pending for April to January, along with Rs700 million in deferred refunds for the same period. Additionally, Rs350 million in income tax refunds have been stuck since 2022. Despite meeting with the finance minister in Washington, DC, and filing a complaint with the Federal Tax Ombudsman, Utopia’s issues remain unresolved.
Utopia has sought assistance from various stakeholders, including the All Pakistan Textile Mills Association, Pakistan Textile Council, commerce and planning ministers, the Special Investment Facilitation Council, and even the Pakistani ambassador to the US, but the refund delays continue to hamper their operations.
Conclusion: Balancing Revenue Growth and Industry Support
The government’s plan to introduce a 1.5% withholding tax on imports represents a significant step toward meeting ambitious revenue goals. By shifting tax collection to banks at the payment stage, the FBR aims to curb import value under-declaration and streamline enforcement. However, challenges such as tax refund delays and the impact of indirect taxes on industries highlight the need for a balanced approach that supports both revenue generation and business growth.
