It is anticipated that a variety of tax measures to achieve the tax revenue objective would be included in the upcoming federal budget for fiscal year 2023-24 (FY24).
Topline Securities‘ analysts have developed a list of tax suggestions that would likely be taken into account and put into the Finance Bill for 2023. The government’s priority will be on implementing measures across all economic sectors to achieve natural tax growth in line with nominal GDP growth.
Unused Funds Reserve Tax
It is expected that both publicly traded and private enterprises will be subject to a new advance tax at rates of 5% and 7.5 %, respectively.
When dividends are paid out, this tax might be adjusted in the budget. Whether this requirement will be retroactive, affecting corporations that failed to disperse profits in former years, or prospective, affecting only those that have not released profits recently or do not expect to do so in the coming year, is something the government has not decided.
The estimated Rs. 6.4 trillion in reserves held by corporations trading on the Pakistan Stock Exchange (PSX) might yield Rs. 300–350 billion in tax revenue for the country’s tax authority, the Federal Board of Revenue (FBR).
Furthermore, it has been estimated that the government might collect an additional 140 billion rupees from taxes on the reserves of listed corporations over the past three years. It’s up to shareholders and sponsors to decide whether reserves are used for expansion or distribution, but it’s crucial to recognize that this tax on reserves could have legal ramifications either way.
The Super Tax Will Go On
Companies would likely continue to be subject to the government’s “super tax,” as proposed in the FY23 budget. For the fiscal year 2022 (FY22), a super tax of 10% was levied on 15 selected sectors with earnings above Rs. 300 million, while a super tax of 1%-4% was levied on sectors outside the defined sectors with earnings of Rs. 150-300 million or higher.
Change for Exporters from the Final Tax Regime to the Minimum Tax Regime
It is possible that the current system, in which exporters pay tax on proceeds deducted by banks, will be replaced by one in which exporters pay tax on their taxable income. The export sector hopes that this change will encourage more formalised paperwork as anticipated with the new budget.
Wealth/Asset Tax
The Revenue Mobilisation Commission (RMC) has suggested a Minimum Asset Tax (MAT) on the value of personal property owned by Pakistani citizens and permanent residents that exceeds Rs. 100 million.
The MAT is calculated based on a 20% marginal tax rate and an annual return of 5% on the taxpayer’s assets. The government is also debating whether or not to levy a 0.25 percent to 2 percent wealth tax, known as the Income Support Levy, on all assets, including farmland.
The government anticipates increased annual tax collection of Rs. 25–200 billion in the next budget depending on the selected rate and asset class for taxation.
Non-filers face a higher tax rate.
Higher taxes, especially on the purchase and sale of real estate, are being considered for those who choose not to file tax returns by the government. Similar to the increased taxation enacted by the PML-N government in 2014 budget, the goal of this measure is to encourage documentation.
GST at 18%
After increasing it from 17 to 18 percent in the last mini-budget, the government now intends to keep the regular rate of General Sales Tax (GST) at 18 percent. The administration has no plans to lower the GST rate and instead will prioritise raising withholding taxes where they apply.
Agricultural Income Tax
Higher taxes on agricultural revenue, which accounts for 20% of GDP, have been repeatedly called for by various economic circles. It’s worth noting, though, that individual provinces can legally impose their own taxes on such earnings. Provinces have been hesitant to change the rates, and as a result, the agriculture sector is only bringing in Rs. 3 billion in tax revenue.
Immovable Assets Appreciation in Value
There will likely be a rise in the market value of real estate beginning on July 1, 2023. The Federal Board of Revenue (FBR) has started working with the provinces to revise the valuation tables. This action is in line with the Pakistan Raises Revenue Project (PRRP) that the FBR is working on with the World Bank to modernise the country’s tax system. With a rise in property values comes a rise in tax revenue as expected in this budget.
Income Tax on Hypothesised Rentals
A 1% tax on deemed rental income for land held by non-filers has been proposed by the Reforms and Resource Mobilisation Commission (RRMC). It is not possible to avoid such taxes on non-filers in light of the budgetary restrictions.
Finance Institutions Tax
It is not possible to rule out the possibility of new taxes being imposed on the financial sector, or the continuation of the Super Tax in the next budget. The banking industry’s bottom line has benefited greatly from the increase in interest rates. There was an 80% increase in tax costs to Rs. 336 billion for listed banks in the calendar year 2022.
Tobacco tax
Government tax collection from the tobacco sector continues to be substantial. In the mini-budget released in February 2023, the Federal Excise Duty (FED) on cigarettes was increased, resulting in a drop in sales of legally purchased cigarettes. The rise of the black market for cigarettes, which offers cheaper alternatives, has coincided with this reduction. This means that tax revenues from the cigarette industry may fall short of projections.
As a result, more levies on the tobacco industry are highly improbable. As a result of the decline in formal sector sales following the price rise, the federal government is projected to fall short of its FY23 tax collection goal of Rs. 200 billion, which was set based on FY22 collections of Rs. 150 billion.
Freeing up Dollars
Amnesty to declare and deposit cash into the budget or soon after is something the government may consider to fill the gap in foreign finance for FY24.
Beverage Tax
Health experts and members of the public have advocated for a 50 percent excise tax on sugary drinks to be included in the Finance Bill for Fiscal Year 2024.
But beverage industry officials and their supporters are advocating for a reduction in levies on sugary beverages from 20% to 16%. The mini-budget passed in February 2023 boosted the sales tax from 13% to 20%; this rate is likely to be kept.
Distribution of Subsidies
For FY23, the government set up Rs. 664 billion for subsidies, and so far, Rs. 524 billion has been distributed. In FY24, cuts to subsidies are planned.
Encouragement of Card Payments at Petrol Stations
The use of cash at petrol stations should be discouraged, with cashless transactions promoted and paperwork required.
Tax Increase on Business Imports
In the fiscal year 2023-2024, it is proposed to raise the tax rate for commercial imports from 5.5 percent to 8 percent, and the tax rate for commercial importers from 3.5 percent to 5.5 percent. The hope is that more money will be made from commercial imports with this hike.
Small-Business Tax Rate Stabilisation
Small businesses in Pakistan might benefit from a uniform tax rate, as advocated by the Pakistan Institute of Chartered Accountants (ICAP). ICAP advises grouping local shops into several categories according on their physical location. In an effort to involve major merchants, the Federal Board of Revenue (FBR) has already begun making moves. The use of a streamlined tax return form and the engagement of provincial and development authorities are also possibilities for carrying out this tax collection. However, there could be complications in enforcing these levies.
Input Tax Deductions Not Allowed
In order to file accurate sales tax returns and withholding statements, producers, commercial importers, wholesalers, distributors, and retailers must supply full information about their customers. If you don’t, you won’t be able to deduct your fair share of income tax or input tax. The goals of this strategy are to increase openness and reduce tax avoidance.
Tax Rate Increase for Partnerships and Corporations
The Reforms & Revenue Mobilisation Commission suggests raising taxes by 10% for unincorporated enterprises like sole proprietorships and AOPs in order to promote incorporation. This action is meant to encourage company formation and formalisation.
Changes to Real Estate Appreciation Taxes
Gains from investments held for less than a year would be taxed at ordinary income rates, long-term gains would be taxed at 20% (indexed for inflation), and rental and ground rent would be treated as considered income. Options to purchase real estate would also be subject to this type of tax in advance. The purpose of these amendments in the budget is to modify the way capital gains from the sale of real estate are taxed.
Exemption on Real Estate and Stocks Extended
Gains from the sale of property or shares to a Real Estate Investment Trust (REIT) may be free from taxation until June 30, 2026. The goal of this extension is to maintain tax breaks for REIT investments.
Customs Duties
In an effort to stop the drain on the country’s foreign currency reserves, the government has lately banned the import of luxury goods. Increases in regulatory and customs charges on some imported goods are likely as a result of growing worries about the Balance of Payments (BOP).
Promotional Aid Programme (BISP)
Due to rising gasoline and food prices and anticipated measures that could significantly effect the underprivileged section of society, the government may grant more money under the Benazir Income Support Programme (BISP). Providing aid to individuals in need may require an increase or maintenance of the Rs. 360 billion allocated for BISP in the FY23 budget.
Note that these estimates are based on the information currently available and are therefore subject to change until the actual budget is announced.
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