PAKISTANI SEASONAL TAXES HINDERING AFGHANISTAN'S

UNCLAS KABUL 002682 SENSITIVE SIPDIS DEPT FOR D-LEW, S/SRAP, SCA/A, AND EEB/BTA DEPT PASS USTR E.O. 12958 N/A TAGS: ETRD PREL EFIN AF SUBJECT: PAKISTANI SEASONAL TAXES HINDERING AFGHANISTAN'S AGRICULTURAL EXPORTS REF: Kabul 2659 ¶1. (SBU) SUMMARY: Pakistan has imposed seasonal taxes on Afghan fruits and vegetables, raising the taxes from seven to twenty-five percent in order to protect its domestic production. Afghan farmers are feeling the tax pinch, and the tax increases reportedly have been passed on to the Pakistani consumer, resulting in reduced sales. Embassy Kabul believes it would be useful for Deputy Secretary Lew to raise this issue with the Pakistani Minister of Finance during his upcoming visit to Islamabad. END SUMMARY. ¶2. (SBU) Afghan Minister of Commerce and Industry (MOCI) told Coordinating Director for Development and Economic Assistance, Amb. Wayne in a September 3 phone conversation that the Pakistani government in recent weeks had increased tariffs dramatically on Afghan fruits and vegetables entering Pakistan. He noted he had received a letter from the Pakistan Chamber of Commerce in Peshawar noting an eleven-fold increase in the tariffs/taxes over the last two weeks. The Minister said he had briefed President Karzai twice on this issue in the past week and was attempting to make contact with Pakistani counterparts to seek redress, and was trying to arrange a visit to Islamabad for face to face talks. He said he would very much appreciate any efforts the USG could make to flag concern to the Pakistanis. (Note: The Econ section obtained a copy of the letter, which cites an income tax increase from two to four percent plus an additional eighteen percent sales tax on the produce. The author of the letter expressed concern, too, that Afghanistan might retaliate against Pakistani exports in the coming months. End note.) ¶3. (SBU) Deputy Minister of Commerce and Industry Farhadi reports that under Pakistan's tax law, the GOP can impose a seasonal tax on imported fruit and vegetables varying from seven to twenty-five percent. In this case, Pakistan exercised its right to increase the tax to the maximum amount in order to protect its domestic production. Farhadi opined Pakistan's tax hike was directed principally against imports from Kashmir, India and that Afghanistan had been caught in the middle. He said GIRoA would write a formal letter to Islamabad requesting that a waiver be granted for Afghan produce. ¶4. (SBU) Post previously passed to S/SRAP Economic Advisors recent reports that Afghan trucks of potatoes and onions were being charged 2700 Pak Rupees per 1000 kilos (approximately $32) at the border vice the previous rate 112 Pak Rupees ($1.35) per 1000 kilos. Deputy Minister Farhadi clarified that this action was just another measure of the effect of raising the sales tax from seven to twenty-five percent. He noted some fruits, principally pomegranates and grapes, were also affected. ¶5. (SBU) Farhadi said Afghan producers had met with Commerce Minister Shahrani regarding the increases, complaining that Pakistani wholesalers were passing the taxes onto the consumers, making goods too expensive and cutting into their sales. Farhadi noted that Afghanistan would not/not raise this issue during the next round of Af-Pak Transit Trade Agreement talks as he feared it would derail both sides' ability to tackle outstanding issues in the agreement. ¶6. (SBU) Comment: Embassy Kabul believes it would be beneficial for Deputy Secretary Lew to raise this issue during his upcoming meetings in Pakistan. Pakistan's decision to dramatically raise taxes on Afghanistan's produce jeopardizes the good will between the two countries and restricts Afghanistan's agricultural trade potential. However, this issue does not appear to have shaken the resolve of the GIRoA to realize an APTTA by the end of 2009. End comment. EIKENBERRY