Govt mulls 1.5% tax on imports

Express Tribune

2 days ago

At high tax rates, profit margins for sellers decrease, leaving them with options to pass on the burden to consumers, compromise on the quality of products, evade taxes or find cheaper illicit goods. photo: file
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In what could become the single largest new revenue source in the budget, the government is considering imposing a 1.5% withholding tax on the value of imports. The tax would be collected by banks at the time of making payments to overseas suppliers.
The measure, still under discussion, will be used as an enforcement tool to curb the widespread under-declaration of import values, a senior government functionary told The Express Tribune. He said that the tax would apply to commercial importers only, who would have the right to claim adjustments against their final tax liabilities.
Currently, commercial importers pay withholding tax when filing goods declarations with the Customs Department. Under the new plan, however, the tax would be deducted when the payment is made to the foreign supplier through banking channels.
Sources said the Federal Board of Revenue (FBR) has briefed the International Monetary Fund (IMF) about its proposal to tax imports at three key points: upon arrival, during shipment, and at the stage of payment to exporters. While it remains unclear whether the IMF has endorsed the proposal, the plan appears to be the government's biggest attempt in the budget at hitting the next fiscal year's tax target of over Rs14 trillion.
Finance Secretary Imdad Ullah Bosal on Thursday said there were no plans to delay the budget presentation, reiterating thrice that it would be presented on June 10. Meanwhile, the Annual Plan Coordination Committee will meet on June 3, and the National Economic Council will convene on June 6 to approve macroeconomic and development plans for FY25.
The proposed withholding tax would be deducted at the point of sending money abroad through letters of credit, said the sources. Banks would follow a model similar to how they deduct tax on overseas credit card payments.
FBR spokesperson Dr Najeeb Memon and Chairman Rashid Langrial did not respond to queries on the matter for the purposes of this story.
A recent report by the Policy Research Institute of Market Economy (PRIME), titled 'Combating Illicit Trade in Pakistan', estimates that the country is losing a staggering Rs3.4 trillion annually to black market activities. Of this, nearly 30% stems from misuse of the Afghan Transit Trade facility. These losses amount to 26% of the current fiscal year's total tax target.
The report warns that illicit trade is eroding formal businesses, government revenues, and consumer safety. It highlights outdated border controls, minimal customs automation, a lack of risk-based profiling, and poor scanning technologies as key contributors to rampant smuggling.
If passed by Parliament, the new withholding tax could offer the FBR a relatively easy way to collect revenue, especially since it would be implemented through banks. The tax authority has historically underperformed in areas where it must rely on its own enforcement rather than external withholding agents such as banks, provincial bodies, or employers.
The government has previously relied on indirect taxation, including last year's controversial 20% federal excise duty (FED) on the packaged juice industry. The result was a 45% drop in sales, according to Atikah Mir, a representative of the industry. The Fruit Juice Council is lobbying for the FED to be reduced to 15%, arguing that the move would benefit both the industry and revenues.
Meanwhile, another tool used frequently by the FBR is blocking genuine tax refunds to inflate revenues.
On Thursday, Special Assistant to the Prime Minister Haroon Akhtar Khan met with a delegation from Utopia Industries to address their pending tax refunds. According to a statement from the Ministry of Industries, Utopia Industries — a leading exporter of mattress covers, pillows, comforters, and plastic products — has been unable to recover more than Rs3 billion (approximately $10 million) despite submitting all required documentation.
The company, which began operations in 2020 with a $50 million investment, now ranks among Pakistan's top 12 exporters by revenue and leads in the number of containers shipped abroad. It is also one of the top two sellers on Amazon, with annual revenues of $170 million. All of its products are branded under its own name and carry Pakistani origin labels, distributed widely across households in the United States, Canada, and the UK.
According to company officials, Rs600 million in sales tax refunds are pending from the April-January period, despite refund payment orders having been generated. An additional Rs700 million in refunds has been deferred for the same period, and Rs350 million in income tax refunds have been stuck since 2022.
Utopia's representatives also met the finance minister in Washington, DC, last October and have filed a complaint with the Federal Tax Ombudsman, but the matter remains unresolved.
The company says it has reached out to multiple stakeholders, including the All Pakistan Textile Mills Association, the Pakistan Textile Council, the commerce and planning ministers, and even the Special Investment Facilitation Council and the Pakistani ambassador to the US—yet the issue persists.