Government Eyes 1.5% Withholding Tax on Imports via Banking Channels
In a significant move to strengthen revenue collection and reduce widespread under-invoicing, the Government of Pakistan is considering a 1.5% withholding tax on the value of all commercial imports, to be collected by banks at the point of payment to foreign suppliers.
The proposal is currently under discussion and, if approved, could become the single largest new source of revenue in the upcoming federal budget, helping to achieve the Federal Board of Revenue’s (FBR) ambitious Rs14 trillion tax target for FY25.
Collection Mechanism Through Banks
Unlike the existing framework—where withholding tax is paid at the time of goods declaration with Customs—this new tax would be deducted when import payments are processed via banks, specifically through letters of credit (LCs) and similar payment modes. The model mirrors the mechanism used to tax overseas credit card transactions.
According to government sources, this measure is aimed at curbing under-declaration and illicit trade, both of which have severely eroded Pakistan’s tax base. The tax would be adjustable against the final tax liability of commercial importers, ensuring that compliant businesses are not overburdened.
IMF Briefed, Regulatory Pathway Unclear
The FBR has already briefed the International Monetary Fund (IMF) on its multi-point strategy to tax imports—proposing levies at arrival, during shipment, and upon payment. However, it remains unclear whether the IMF has formally endorsed the plan.
If passed, this would represent one of the most aggressive enforcement steps taken by Pakistan to target revenue leakages in the import sector, especially as it seeks to meet stringent fiscal and structural reform targets under its IMF program.
Combating a Rs3.4 Trillion Black Market
A recent report by the Policy Research Institute of Market Economy (PRIME) revealed that Pakistan loses Rs3.4 trillion annually to black market activities, with 30% attributed to the misuse of the Afghan Transit Trade facility. This accounts for more than one-quarter of the entire tax target for the current fiscal year.
The report further identifies outdated border management, lack of automation, weak risk profiling, and poor cargo scanning as major contributors to systemic tax evasion and smuggling.
Challenges in Refunds Undermine Credibility
While the government looks to broaden its revenue base through new measures, ongoing issues with refund delays continue to frustrate exporters. A case in point is Utopia Industries, a high-growth Pakistani manufacturer and exporter with annual revenues of $170 million.
Despite having submitted all required documentation, Utopia has over Rs3 billion in unpaid tax refunds, including:
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Rs600 million in pending sales tax refunds (April–January period)
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Rs700 million in deferred sales tax refunds
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Rs350 million in income tax refunds pending since 2022
The company, which exports high-value home textile products and ranks among Pakistan’s top 12 exporters, has escalated the issue to nearly every relevant authority—including the Federal Tax Ombudsman, Finance Ministry, and the Pakistani ambassador to the US—but has yet to receive relief.
This ongoing backlog raises concerns about the credibility of Pakistan’s tax administration, especially at a time when new taxes are being proposed. Without resolving such bottlenecks, efforts to improve tax compliance could face pushback from the business community.
Budget Timeline and Broader Economic Context
Despite speculation, Finance Secretary Imdad Ullah Bosal confirmed that the FY25 budget will be presented on June 10. Prior to that, the Annual Plan Coordination Committee is scheduled to meet on June 3, and the National Economic Council will convene on June 6 to finalize macroeconomic and development targets.
With pressures mounting from the IMF and domestic economic realities, broadening the tax base without disrupting legitimate business operations remains a delicate balancing act.
