Pakistan likely to levy ‘flood tax’

Pakistan’s government is considering a “flood tax” to help pay the billions of dollars it faces in reconstruction costs, a senior finance ministry official has told the Financial Times.

The tax would probably “increase an individual’s income tax bill by up to 10 per cent”, said the official, adding: “It will apply to those in the high-income bracket, prob­ably with annual incomes of over Rps300,000 [$3,500] a year.”

A second finance ministry official confirmed the plan, saying: “A flood tax is actively under consider­ation and is likely to be imposed.”

However, the proposal is likely to be controversial, given that it aims to tap the country’s relatively small community of taxpayers, while there has been no attempt to clamp down on widespread tax evasion.

Less than 1 per cent of Pakistan’s population of 180m pays income tax.

A range of powerful figures, from landowners to business people, remains outside the tax-collection net.

Shaukat Tarin, the former finance minister, whose resignation in February was widely believed to have been prompted by policy differences with Pakistan’s rulers, warned that a flood tax on taxpayers could backfire.

“Why should only a small segment of society be forced to pay the bill? The annual loss in public sector companies is Rps300bn. Why should this loss not be curtailed first through reforms to save money for flood relief?” said Mr Tarin in a Financial Times interview.

He added: “The government must first tighten its belt.”

Abdul Hafeez Shaikh, Pakistan’s finance minister, is in Washington negotiating with the International Monetary Fund either to ease restrictions on an existing $10bn loan or to agree a loan with easier conditions.

Stabilising the economy has become a more urgent challenge for the Pakistani government as economists predict a rise in inflation during the financial year to June 2011, while overall economic growth is expected to drop sharply and the government’s fiscal deficit to rise.

“The economic picture is becoming increasingly difficult,” said Muhammad Suhail of Karachi’s Topline securities, an equity investment brokerage house.

Politicians from the ruling Pakistan People’s party have given warning that measures considered essential by some economists, such as clamping down on tax evaders, were unlikely to be introduced by the government.