Plans to impose 15 pct flood surcharge on tax

Flood surcharge to be imposed on income tax to tackle the country's widening budget deficit.

KARACHI: Pakistan will impose a flood surcharge of 15 percent on income tax in order to tackle the country's widening budget deficit, a government source involved in talks with the IMF said on Wednesday.

"Yes, we plan to impose the flood surcharge," the source told Reuters, declining to give details of when the surcharge might be levied.

Pakistan, whose tax-to-GDP ratio is around 10 percent, one of the world's lowest, is trying to show the IMF and other donors that it is working on ways to boost revenue.

The country is dependent on foreign aid, and riven with political instability and violence.

The struggling government, still contending with damage from disastrous floods last year, is desperate to raise money.

According to news reports, as well as the flood surcharge, it plans to increase a special excise duty by 150 percent soon after a National Assembly recess.

"The proposal to increase the special excise duty on nine luxury items has been with the National Assembly since last year," said another government source.

The two measures, according to media reports, would raise Rs46 billion during the fiscal year 2010/11 (July-June) and increase the revenue target to Rs1,630 billion.

The measures will be presented to an International Monetary Fund (IMF) team that arrived in Pakistan on Tuesday to conduct the fifth review and evaluate the country's performance for the possible release of a sixth loan tranche, delayed since August last year. The team is expected to stay until March 8.

The two measures could be an alternative to a key condition for the release of the sixth tranche: the implementation of a reformed general sales tax (RGST). The IMF and international donors are demanding Pakistan tax more of its economy.

Neither government nor IMF sources would comment on the RGST, which has stalled in parliament.

In December, the IMF approved a nine-month extension of Pakistan's $11 billion loan, which was due to end last year, to give authorities time to complete the implementation of key fiscal reforms. The extension runs to Sept. 30, 2011.

Pakistan's widening budget deficit was 2.9 percent of GDP in the six months ending December 31. In November 2010, Pakistan agreed with the IMF that it would keep its deficit at 4.7 percent for the 2010/11 fiscal year.

Analysts say Pakistan is likely to overshoot this figure. Some forecast the deficit will be around eight percent, higher than the central bank's prediction of between 6.0 and 6.5 percent, if fiscal reforms are not implemented, but the implementation of a RGST could deepen public frustrations with the unpopular government.

In May, Pakistan received $1.13 billion in the fifth tranche.