The Government of Pakistan is pursuing approval from the International Monetary Fund (IMF) to implement a special 1% tax on all taxable domestically produced goods—excluding electricity and medicines—in a bid to secure funds for completing two major water storage projects: the Diamer-Bhasha and Mohmand dams.
This initiative stems from the reluctance of most provincial governments to finance the swift completion of these strategically important dams. However, the IMF has reportedly urged the federal government to reallocate resources from the existing Rs1 trillion Public Sector Development Programme (PSDP) instead of introducing a new levy.
The two dams, approved in 2018, require an estimated Rs540 billion to complete. The Diamer-Bhasha Dam is projected to cost Rs480 billion, while the Mohmand Dam was initially valued at Rs310 billion. Rising tensions with India, which has suspended its commitment to the Indus Waters Treaty and hinted at reducing water flow to Pakistan, have further accelerated the urgency of these infrastructure projects.
To expedite dam construction without adequate provincial support, the federal government is proposing a 1% cess on the gross value of taxable supplies. This surcharge would apply to all taxed goods, excluding those exempted under the Fifth and Sixth Schedules of the Sales Tax Act. Electricity and pharmaceutical products are also exempted.
Cess, unlike regular taxation, is imposed for a specific, predefined purpose—similar to the previously implemented Gas Infrastructure Development Cess (GIDC), which was intended to fund the Iran-Pakistan gas pipeline.
The proposed cess will not be part of the 2025 Finance Act but introduced through separate legislation, pending IMF approval. The Supreme Court’s decision in the GIDC case mandates that any such levy must be backed by dedicated legislation.
Some experts suggest that instead of introducing a new tax, the government could consider amending the GIDC law and redirect the over Rs400 billion in uncollected or withheld funds toward the dam projects. A special committee led by Finance Minister Muhammad Aurangzeb has been formed to address this, but progress has been slow.
The IMF remains unconvinced, reportedly advising that the government utilize existing PSDP allocations rather than increase the financial burden on citizens. However, officials argue that without additional funds, completion of the dams could stretch up to 15–20 years.
Planning Minister Ahsan Iqbal confirmed the PSDP’s limited fiscal space, noting that only Rs640 billion of the Rs1 trillion allocation is effectively available, with Rs360 billion earmarked for roadworks, provincial schemes, and special area projects.
A special meeting chaired by Prime Minister Shehbaz Sharif earlier this month aimed to encourage provinces to contribute, but only Khyber Pakhtunkhwa expressed interest in co-financing. The remaining provinces declined to support federal initiatives.
Budget allocations for the coming fiscal year reflect the funding challenges: Rs25 billion for Diamer-Bhasha and Rs35.7 billion for Mohmand—both lower than previous years. Despite these constraints, the government claims it will advance the completion timeline for both dams to 2030, adding seven million acre-feet to Pakistan’s water storage capacity upon completion.
Existing dams like Tarbela and Mangla face reduced storage due to sediment buildup and technical issues, increasing the need for new infrastructure.
Meanwhile, the Sindh government surprised federal officials by presenting a deficit budget, despite having a cash surplus earlier in the year. Its projected Rs38.5 billion deficit undermines the IMF’s condition that provinces contribute a combined Rs1.4 trillion in budget surpluses to support national fiscal consolidation.
