Tax Measures Unveiled
Pakistan’s Finance Minister, Ishaq Dar, announced a range of tax measures on Friday to boost revenue. These measures include taxes on cash withdrawals and bonus shares, as well as an amnesty scheme to legalize undisclosed income. The government aims to achieve a tax target of Rs9.2 trillion, with an additional Rs223 billion from these measures. Asim Ahmad, Chairman of the Federal Board of Revenue (FBR), emphasized that the total revenue impact would amount to Rs223 billion.
Amnesty Scheme
One of the key measures is the amnesty scheme, which allows individuals to declare up to $100,000 of offshore money without facing any taxes. This threshold, equivalent to Rs29 million, represents a significant increase compared to the current limit for legalizing undisclosed income. However, concerns have been raised about the potential abuse of this scheme by linking it to foreign currency.
50% Additional Tax on Company Income
The Finance Bill 2023 introduces a 50% additional tax on certain income, profits, and gains of companies starting from 2018. The FBR has not shared the exact revenue impact of this measure, but it aims to target income generated from unexpected gains due to economic factors.
Proposed Tax Measures
Afaque Qureshi, the FBR’s member policy, proposed gross income tax measures of Rs185 billion, along with Rs10 billion in income tax relief. Additionally, the government has suggested Rs22 billion in sales tax measures and Rs4 billion in federal excise duty measures.
Challenges and Projections
The proposed tax target of Rs9.2 trillion represents a 28% increase compared to the expected collection of Rs7.2 trillion in the current fiscal year. However, sources indicate that the FBR has informed the finance minister that it may not be able to collect more than Rs8.6 trillion in the next fiscal year.
Officials from the Ministry of Finance believe that achieving a 27% growth should not be challenging, considering the projected nominal economic growth of 25% in the next fiscal year.
Pakistan’s Tax Target and IMF Endorsement
If Pakistan seeks endorsement from the International Monetary Fund (IMF), it may be required to increase the tax target, which currently stands at 8.7% of the GDP. However, the FBR may face difficulties in meeting the new target due to strict import restrictions, as its performance has been heavily reliant on imports.
The FBR chairman has set a goal of adding at least one million new taxpayers in the next fiscal year to expand the tax base.
According to an interim report by the Reform and Revenue Mobilisation Commission, only 28,027 taxpayers accounted for 80% (Rs1.274 trillion) of the income tax paid in tax year 2022. The report reveals that a small number of taxpayers contribute significantly to the overall income tax collection.
Tax Measures Targeting Cash Withdrawals and Overseas Transactions
The government has proposed a major measure of introducing a 0.6% income tax on daily cash withdrawals above Rs50,000 by non-filers. However, this tax measure is opposed by the IMF and the World Bank.
Another measure is the increase in the income tax rate for filers conducting overseas credit card transactions from 1% to 5%, and for non-filers, the rate is set at 10%. This increase aims to curb the outflow of dollars, which is estimated at $1.5 billion annually.
Taxation on Bonus Shares and Foreign Workers in Pakistan
Additionally, the government has proposed a 10% tax on bonus shares for filers and 20% for non-filers. A tax of Rs200,000 has been imposed on each foreign worker employed in Pakistan.
Progressive Super Tax Rates Based on Income Levels
The scope of the super tax has been significantly expanded, with a proposed 10% rate for individuals and companies earning over Rs500 million annually. For those earning between Rs400 million and Rs500 million, an 8% rate is proposed, while those earning between Rs350 million and Rs400 million would face a 6% rate.
The government has also increased the rate for commercial importers from 5.5% to 6%.
Government Plans to Adjust Withholding Tax Rates
To account for increasing inflation, the government plans to raise the withholding tax rates by 1% for suppliers, contractors, and service providers in all categories. These rates have not been adjusted since 2015.
Higher Sales Tax on Luxury Textiles
The sales tax rates on branded textiles and leather chains have been increased from 12% to 15%. Finance Minister Ishaq Dar stated that this measure specifically targets wealthy individuals.
Furthermore, the government has introduced a Rs2,000 tax on fans to promote energy conservation.
Reduced Income Tax Rate to Strengthen Stock Market
In terms of relief measures, the government has reduced the minimum income tax rate for listed companies by 0.25%, bringing it down to 1%, in an effort to support the stock market.
Tax Incentives Extended for IT Services and SME Lending
The concessionary income tax rate of 0.25% for IT services has been extended for three years. Additionally, the concessionary income tax rate of 20% for banks lending to SMEs has been extended.
Tax Reforms for Overseas Pakistanis and Young Entrepreneurs
The government has abolished the 2% income tax on the purchase of immovable property by overseas Pakistanis.
For young entrepreneurs up to 30 years of age starting a business, their tax liability has been reduced by 50%. Similarly, influential builders will benefit from a 10% reduction in their tax liability, up to Rs5 million, or the lower of the two amounts.
Published in PakWeb, June 10th, 2023.
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