Pakistan Proposes New 1% Special Cess to Support Dam Projects, Seeks IMF Approval
ISLAMABAD – June 17, 2025: The Government of Pakistan has proposed a new 1% special cess on taxable goods — excluding electricity and medicines — to generate funds for two major dam projects aimed at enhancing the country’s water storage capacity.
According to sources within the Ministry of Finance and the Ministry of Water Resources, the new funding mechanism is being considered in response to limited financial support from provincial governments for the timely completion of the Diamer-Bhasha and Mohmand dams. The proposal has been shared with the International Monetary Fund (IMF) for review and approval.
The two projects, with estimated combined costs exceeding Rs790 billion, remain underfunded despite being approved in 2018. Officials say that over Rs540 billion is still required for their completion.
Balancing Development and Fiscal Responsibility
The IMF has reportedly suggested that Pakistan reallocate resources within its existing Public Sector Development Programme (PSDP), which stands at Rs1 trillion for the upcoming fiscal year, rather than introducing new levies.
The federal government, however, notes that budgetary constraints and reduced allocations for the water sector — down by 28% to Rs133 billion — limit available options. As a result, the proposed 1% cess is intended to help bridge the funding gap specifically for these critical infrastructure projects.
This cess would be applied to all locally produced taxable goods, excluding those already exempt under the existing sales tax laws, as well as electrical energy and pharmaceutical products. It would not affect zero-rated or exempt items under the Fifth and Sixth Schedules of the Sales Tax Act.
A Purpose-Driven Levy
Unlike regular taxation, a cess is typically imposed for a specific objective. In this case, the funds would be directed exclusively towards water infrastructure development, mirroring previous levies like the Gas Infrastructure Development Cess (GIDC), originally intended to support energy projects.
Finance Ministry officials indicated that the cess, if approved, would be introduced through a separate legislative bill — not through the Finance Act 2025 — in accordance with legal precedent and in line with Supreme Court guidelines.
Exploring Alternate Options
Discussions are ongoing between government stakeholders and the IMF. One alternate proposal under consideration involves redirecting unutilized funds collected under existing levies, such as the GIDC, towards the dam projects. However, recovery efforts on this front have been slow, with over Rs400 billion reportedly yet to be deposited by certain sectors.
A committee led by Finance Minister Muhammad Aurangzeb has been formed to address this issue, but progress has remained limited so far.
Urgency Behind the Projects
Officials warn that without a significant boost in funding, the timeline for completion of the Diamer-Bhasha and Mohmand dams could stretch to 15–20 years. The Ministry of Water Resources has emphasized the importance of accelerating construction to enhance national water security.
Planning Minister Ahsan Iqbal confirmed that despite financial constraints, the government has advanced the completion targets of both projects to 2030. Once completed, the two dams are expected to add approximately 7 million acre-feet of water storage capacity to the national grid.
Federal–Provincial Cooperation in Focus
In recent high-level meetings chaired by Prime Minister Shehbaz Sharif and Deputy Prime Minister Ishaq Dar, provinces were urged to contribute financially to the projects. While Khyber-Pakhtunkhwa expressed interest, other provinces have shown hesitancy due to their own budgetary pressures.
For instance, the Sindh government has presented a deficit budget for the upcoming fiscal year, despite holding a significant cash surplus earlier this year. This move has raised concerns in the context of Pakistan’s agreement with the IMF to maintain a combined provincial surplus of Rs1.4 trillion.
Next Steps
The federal government is expected to continue consultations with the IMF and other stakeholders before finalizing the introduction of the proposed cess. Officials emphasize that any new measure will follow legal procedures and be dedicated to national infrastructure development.
