The government is looking at a potential game-changer for its budget: a 1.5% withholding tax on imports. This tax would be collected by banks when payments are made to overseas suppliers.
Still in the discussion phase, this measure aims to tackle the common issue of under-declaring import values, according to a senior government official who spoke to The Express Tribune. The tax would specifically target commercial importers, who would be able to adjust it against their final tax liabilities.
Right now, commercial importers pay withholding tax when they file goods declarations with the Customs Department. But with this new plan, the tax would be deducted at the time of payment to foreign suppliers through banking channels.
Sources indicate that the Federal Board of Revenue (FBR) has informed the International Monetary Fund (IMF) about its proposal to tax imports at three critical stages: upon arrival, during shipment, and when payments are made to exporters. While it’s still uncertain if the IMF has given the green light, this plan seems to be the government’s most significant effort to meet the ambitious tax target of over Rs14 trillion for the next fiscal year.
Finance Secretary Imdad Ullah Bosal confirmed on Thursday that there are no plans to postpone the budget presentation, emphasizing three times that it will take place on June 10. In the meantime, the Annual Plan Coordination Committee is set to meet on June 3, followed by the National Economic Council on June 6 to approve macroeconomic and development plans for FY25.
According to sources, the proposed withholding tax would be deducted when sending money abroad via letters of credit, with banks using a model similar to how they handle tax deductions on overseas credit card payments.
FBR spokesperson Dr. Najeeb Memon and Chairman Rashid Langrial did not respond to inquiries regarding this issue for this story.
A recent report from the Policy Research Institute of Market Economy (PRIME), titled ‘Combating Illicit Trade in Pakistan’, reveals that the country is losing an eye-watering Rs3.4 trillion each year due to black market activities. Shockingly, about 30% of this loss is linked to the misuse of the Afghan Transit Trade facility. These losses represent a hefty 26% of the total tax target for the current fiscal year.
The report raises alarms about how illicit trade is undermining legitimate businesses, government revenue, and consumer safety. It points to outdated border controls, minimal automation in customs, a lack of risk-based profiling, and inadequate scanning technologies as major factors fueling rampant smuggling.
If Parliament approves it, the new withholding tax could provide the FBR with a relatively straightforward way to boost revenue, especially since it would be collected through banks. Historically, the tax authority has struggled in areas where it has to depend on its own enforcement rather than relying on external withholding agents like banks, provincial bodies, or employers.
In the past, the government has leaned on indirect taxation, including last year’s contentious 20% federal excise duty (FED) on the packaged juice industry. This move led to a staggering 45% drop in sales, as noted by Atikah Mir, an industry representative. The Fruit Juice Council is now pushing for the FED to be lowered to 15%, arguing that this change would benefit both the industry and overall revenues.
Meanwhile, another tactic often employed by the FBR is to block legitimate tax refunds to artificially inflate revenues.
On Thursday, Special Assistant to the Prime Minister Haroon Akhtar Khan met with a delegation from Utopia Industries to discuss their outstanding tax refunds. According to a statement from the Ministry of Industries, Utopia Industries — a prominent exporter of mattress covers, pillows, comforters, and plastic products — has been unable to recover over Rs3 billion (around $10 million) despite having submitted all necessary documentation.
The company kicked off its journey in 2020 with a hefty $50 million investment and has quickly climbed the ranks to become one of Pakistan’s top 12 exporters by revenue. It also stands out as one of the leading sellers on Amazon, raking in an impressive $170 million annually. All of its products proudly bear its own brand name and feature labels indicating their Pakistani origin, reaching households across the United States, Canada, and the UK.
Company officials report that they are currently waiting on Rs600 million in sales tax refunds from the April-January period, even though refund payment orders have already been issued. Additionally, Rs700 million in refunds for the same timeframe has been put on hold, and Rs350 million in income tax refunds have been stuck since 2022.
Last October, Utopia’s representatives met with the finance minister in Washington, DC, and have since lodged a complaint with the Federal Tax Ombudsman, but unfortunately, the issue remains unresolved.
The company claims to have reached out to a variety of stakeholders, including the All Pakistan Textile Mills Association, the Pakistan Textile Council, the commerce and planning ministers, and even the Special Investment Facilitation Council, along with the Pakistani ambassador to the US—yet the problem continues to linger.
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Q1. What is the proposed 1.5% withholding tax on imports?
It is a tax the government is considering, where 1.5% of the payment to foreign suppliers will be withheld by banks at the time of making the payment for imported goods. This amount will go to the Federal Board of Revenue (FBR).
Q2. Who will be affected by this tax?
The tax will only apply to commercial importers, not individual consumers or personal imports. It targets companies importing goods for business purposes.
Q3. How is this different from the current system?
Currently, importers pay withholding tax when they file goods declarations with Customs. Under the new system, the tax would be deducted earlier — at the point of bank payment to the overseas supplier.
Q4. Is this tax in addition to existing import taxes?
No. The 1.5% is meant to be adjustable against the importer’s final tax liability. It is not an extra or final tax — it functions as an advance tax credit.
Q5. Why is the government proposing this change?
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Reduce under-invoicing and tax evasion,
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Improve compliance by leveraging banks as tax agents,
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Increase revenue to meet the Rs14 trillion tax target,
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Address the Rs3.4 trillion annual loss due to illicit trade.
Q6. How will the tax be collected?
Banks will deduct the 1.5% tax automatically when import payments are made through:
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Letters of credit (LCs)
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Telegraphic transfers (TTs)
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Other official banking channels
