Govt plans tax to counter India's water threat

Pakistan has sought the International Monetary Fund's (IMF) permission to impose a special 1% tax on every taxable product produced in the country, except electrical energy and medicines, to fund two mega water storage dams as a solution to deal with Indian water aggression.
The decision to impose a new cess has been taken after majority of the provincial governments showed reluctance to finance the early completion of the Diamer-Bhasha Dam and the Mohmand Dam, according to the sources in the Ministry of Water Resource and the Ministry of Finance.
However, the government was also meeting opposition from the IMF, which has urged the federal government to try to find a space within the approved Rs1 trillion federal Public Sector Development programme, the sources revealed.
The Diamer-Bhasha Dam worth Rs480 billion and Mohmand Dam – originally estimated to cost Rs310 billion – had been approved in 2018 but still a minimum Rs540 billion was needed for their completion.
India has threatened to cut water supplies after it held the Indus Waters Treaty (IWT) in abeyance in violation of the treaty provisions and in the breach of the international law. Islamabad has plainly told India that any such act would be considered as an act of war.
The sources said that as an alternate strategy, Pakistan has decided to fast track the construction of the two dams. However, due to its political priorities and pressing demands by the coalition partners, the government has reduced the water sector development budget by 28% to Rs133 billion for the next fiscal year. Now it wants to offset this by introducing a new tax.
The sources said that the government has decided to levy a 1% cess on the gross value of all local taxable supplies to raise the additional funds, subject to the approval by the IMF and by parliament. They said that all the goods produced in Pakistan and subjected to tax are proposed to be charged at a new cess rate of 1%.
The goods that are currently exempted from the sales tax under the Sixth Schedule, or are charged at a zero rate under the Fifth Schedule of the sales tax law would be immune to the cess. Likewise, the electrical energy goods and pharmaceutical goods are proposed to be exempted from the new cess.
Cess is different from a normal tax and it can only be levied for a specific purpose, like the Gas Infrastructure Development Cess (GIDC) that had been imposed to fund Iran-Pakistan Gas Pipeline. Effectively, every good produced in Pakistan and consumed by all households would be subject to 1% new special tax, said the sources.
The Ministry of Finance spokesman Qumar Abbasi and the Secretary Water Resources Ministry Syed Ali Murtaza did not respond to the request for comments. They have been asked to confirm the development and also the IMF's position.
A senior Finance Ministry official said that the proposal was under consideration but the discussions with the IMF were still going on. He said that the cess would not be imposed through the Finance Act 2025, and instead a new separate bill will be introduced in parliament, subject to the IMF clearance.
In the case of GIDC, the Supreme Court has decided that the cess can only be levied for a specific purpose and it requires separate legislation. This binds the government's hands from introducing the cess through the Finance Act, which is currently under discussion in parliament.
The GIDC case is also an example of how the government is indifferent. The textile and fertiliser companies have not yet deposited over Rs400 billion in the kitty despite collecting those from the consumers. The finance and petroleum ministries are not able to make an effective strategy.
One of the options is that instead of levy a new 1% cess, the government should amend the GIDC law and divert the already collected money towards building dams.
On the intervention of the Petroleum Minister Ali Pervaiz, the government has again constituted a committee under the chairmanship of Finance Minister Muhammad Aurangzeb to recover the GIDC. But this committee too is moving at a snail's pace.
The sources said that the IMF's view was that the government should fund the dam projects from the PSDP instead of imposing more burden on the people.
However, the Ministry of Water Resources has informed the government that it would take 15 years to complete the Mohmand Dam and over 20 years to finish work on the Diamer-Bhasha Dam at the current pace of the budget allocations.
The PSDP is already overstretched and there is no space to fund these projects beyond the allocations made in the new budget, said Ahsan Iqbal, the federal minister for Planning and Development. He said that out of the Rs1 trillion allocations, effectively, Rs640 billion was available for funding the PSDP.
Iqbal said that the remaining Rs360 billion had been allocated for spending on N-25 Karachi-Quetta road, provincial schemes and special areas' allocations.
The sources said that after the National Economic Council (NEC) meeting earlier this month, Prime Minister Shehbaz Sharif had also chaired a special meeting with the provinces to convince them to fund these two dams to deal with Indian aggression.
In a follow-up meeting with Deputy Prime Minister Ishaq Dar, the provinces except Khyber-Pakhtunkhwa showed reluctance to fund federal projects, said the sources.
The cost of the Diamer-Bhasha Dam had been estimated at Rs480 billion seven years ago and it still needs Rs365 billion more to complete the work against a price that is likely to increase further. For the next fiscal year, only Rs25 billion has been allocated for project, which is even less than this fiscal year.
Likewise, the Mohmand Dam was approved at a cost of Rs310 billion seven years ago and it still requires a minimum of Rs173 billion more at the old price. Only Rs35.7 billion has been allocated in the new fiscal year.
Earlier this week, Ahsan Iqbal said that the government has advanced the completion of both the projects by two years and these dams will be completed by 2030. He said that on completion, Pakistan will have 7 million acre feet of additional water storage capacity.
Pakistan's two reservoirs Tarbela and Mangla dams are facing storage related issues due to sedimentation and other technical issues.
The Sindh government has given a deficit budget for the next fiscal year and also showed zero-balance for the outgoing fiscal year. This has surprised many, as the provincial government had a cash surplus of Rs395 billion till March this year, according to the Ministry of Finance's fiscal operations summary.
For the next fiscal year, Sindh has shown a Rs38.5 billion deficit budget, which defeats the IMF's core objective of getting Rs1.4 trillion cash surpluses from all the four provinces.

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