To combat India’s water crisis, the government is planning a tax.

As a response to Indian water aggression, Pakistan has asked the International Monetary Fund (IMF) for permission to levy a special 1% tax on all taxable products made in the nation, with the exception of electrical energy and medications, in order to finance two massive water storage dams.

According to Ministry of Water Resources and Ministry of Finance sources, the decision to impose a new cess was made because most provincial governments were unwilling to fund the early completion of the Diamer-Bhasha Dam and the Mohmand Dam.

But according to the sources, the government was also encountering resistance from the IMF, which has encouraged the federal government to look for a place inside the authorized Rs1 trillion federal Public Sector Development program.

Although the Diamer-Bhasha Dam, valued at Rs480 billion, and the Mohmand Dam, initially projected to cost Rs310 billion, were sanctioned in 2018, a minimum of Rs540 billion was still required to complete them.

After violating the terms of the Indus Waters Treaty (IWT) and breaking international law by holding the treaty in abeyance, India has threatened to shut off water supply. India has been explicitly informed by Islamabad that any such action would be seen as an act of war.

According to the sources, Pakistan has chosen to expedite the building of the two dams as a backup plan. However, the government has cut the water sector development budget by 28% to Rs133 billion for the upcoming fiscal year due to its political objectives and the urgent needs of its coalition partners. It now seeks to counteract this by enacting a new tax.

According to the sources, in order to raise the extra money, the administration has chosen to impose a 1% cess on the gross value of all local taxable supply, pending approval from parliament and the IMF. They stated that a new cess rate of 1% would be applied to all items manufactured in Pakistan that are subject to tax.

The cess would not apply to goods that are currently exempt from sales tax under the Sixth Schedule or that are taxed at zero rate under the Fifth Schedule of the sales tax law. Similarly, it is suggested that pharmaceutical and electrical energy products be exempt from the new cess.

Like the Gas Infrastructure Development Cess (GIDC), which was imposed to finance the Iran-Pakistan Gas Pipeline, cess is distinct from a regular tax and can only be imposed for a specific purpose. According to the sources, a 1% new special tax would be applied to all goods manufactured in Pakistan and consumed by all families.

The request for comments was not answered by Syed Ali Murtaza, the secretary of the Water Resources Ministry, or Qumar Abbasi, the spokesman for the Ministry of Finance. They have been requested to verify the development and the stance taken by the IMF.

The proposal was being considered, but the talks with the IMF were still ongoing, according to a senior Finance Ministry official. He stated that, subject to IMF approval, a new, independent measure will be tabled in parliament in place of the Finance Act 2025, which would have imposed the cess.

The Supreme Court ruled in the GIDC case that the cess can only be imposed for a defined purpose and that it necessitates independent legislation. The administration is unable to implement the cess through the Finance Act, which is presently being discussed in parliament, because of this.

Another illustration of the government’s indifference is the GIDC case. Despite collecting this from customers, the textile and fertilizer companies have yet to pay more than Rs400 billion into the kitty. The ministries of petroleum and finance are unable to come up with a workable plan.

One alternative is for the government to change the GIDC statute and redirect the funds previously collected toward dam construction rather than imposing a new 1% cess.

The government has once again established a committee to reclaim the GIDC, with Finance Minister Muhammad Aurangzeb serving as its head, in response to Petroleum Minister Ali Pervaiz’s intervention. However, this committee is also proceeding slowly.

According to the sources, the IMF believed that rather than adding to the burden on the populace, the government should use the PSDP to finance the dam projects.

However, the Ministry of Water Resources has advised the government that, at the current rate of budgetary allocations, it would take 15 years to construct the Mohmand Dam and more than 20 years to complete the Diamer-Bhasha Dam.

Ahsan Iqbal, the federal minister for planning and development, stated that the PSDP is already overburdened and that there is no room to finance these projects above the amounts allotted in the new budget. Effectively, he added, Rs640 billion of the Rs1 trillion allotted might be used to fund the PSDP.

The remaining Rs360 billion, according to Iqbal, has been set aside for provincial programs, special regions allocations, and the N-25 Karachi-Quetta expressway.

According to the sources, Prime Minister Shehbaz Sharif held a special conference with the provinces to persuade them to finance these two dams in response to Indian aggression, following the National Economic Council (NEC) meeting earlier this month.

According to the sources, the provinces—aside from Khyber-Pakhtunkhwa—showed reluctance to fund federal projects at a follow-up meeting with Deputy Prime Minister Ishaq Dar.

Seven years ago, the Diamer-Bhasha Dam was anticipated to cost Rs480 billion. To finish the project, an additional Rs365 billion is required, and the cost is expected to rise even further. Just Rs25 billion, even less than this fiscal year, has been set out for the project for the upcoming one.

Similar to this, the Mohmand Dam still needs at least Rs173 billion more at the previous price, which was Rs310 billion when it was sanctioned seven years ago. The new fiscal year has only been allotted Rs35.7 billion.

The government has accelerated the completion of both projects by two years, and both dams would be finished by 2030, according to Ahsan Iqbal’s statement earlier this week. According to him, when it is finished, Pakistan will have an extra 7 million acre feet of water storage space.

Sedimentation and other technical problems are causing storage-related problems at Pakistan’s two reservoirs, the Tarbela and Mangla dams.

In addition to displaying zero-balance for the previous fiscal year, the Sindh government has presented a deficit budget for the upcoming one. This has shocked many because, according to the Ministry of Finance’s fiscal operations brief, the provincial government enjoyed a cash surplus of Rs395 billion through March of this year.

The IMF’s primary goal of obtaining Rs1.4 trillion in cash surpluses from all four provinces is defeated by Sindh’s proposed Rs38.5 billion deficit budget for the upcoming fiscal year.