The upcoming federal budget for 2023-24 is expected to include a range of tax measures aimed at achieving a tax revenue target of Rs9-9.2 trillion.
Analysts at Topline Securities have compiled a set of tax recommendations that are likely to be considered and incorporated into the Finance Bill for 2023. The government’s focus will be on achieving natural tax growth in line with the nominal GDP growth, along with implementing other measures across various sectors. Let’s take a closer look at some of the expected tax measures:
1. Tax on Undistributed Reserves: It is anticipated that a new advance tax will be imposed on both listed and unlisted companies at rates of 5% and 7.5% respectively. This tax will be adjustable when dividends are distributed. The government has yet to decide whether this imposition will be retrospective, targeting companies that have failed to distribute profits in prior years, or if it will only apply to companies that have not distributed profits recently or are not planning to do so in the coming year. Based on estimates, listed companies at the Pakistan Stock Exchange (PSX) have reserves of approximately Rs6.4 trillion, which could generate around Rs300-350 billion for the Federal Board of Revenue (FBR). Additionally, reports suggest that the reserves of listed companies over the past three years amount to Rs2.8 trillion, potentially generating Rs140 billion in tax revenue for the government. However, it is important to note that this tax on reserves may have legal implications, as the utilization of reserves for growth or distribution purposes is at the discretion of the shareholders and sponsors.
2. Continuation of Super tax: The government is expected to continue imposing the super tax on companies, following the model introduced in the FY23 budget. Previously, a 10% super tax was imposed on 15 specified sectors with earnings exceeding Rs300 million for the tax year 2022 (FY22), along with a slab-wise super tax ranging from 1% to 4% on sectors outside the specified sectors with earnings of Rs150-300 million or above.
3. Shift from Final Tax Regime (FTR) to Minimum Tax Regime (MTR) for Exporters: The taxation system for untaxed sectors and sectors receiving concessions may undergo changes, requiring exporters to pay taxes on their taxable income instead of the current system where tax is paid on proceeds deducted by banks. This shift aims to promote documentation within the export sector.
4. Asset Tax/Wealth Tax: The Revenue Mobilization Commission (RMC) has proposed the imposition of a Minimum Asset Tax (MAT) on the value of movable and immovable assets owned by resident individuals in Pakistan exceeding Rs100 million. The MAT assumes an annual return of 5% from the taxpayer’s assets, based on the assumption of a 20% tax rate on income. Additionally, the government is considering the imposition of a wealth tax, known as the Income Support Levy, on all assets, including agriculture, with rates ranging from 0.25% to 2%. Depending on the chosen rate and asset class for taxation, the government estimates additional annual tax revenue of Rs25 billion to Rs200 billion.
5. Higher Tax on Non-Filers: The government is contemplating the possibility of imposing higher taxes on non-filers of tax returns, particularly on transactions involving the buying and selling of immovable property. This measure aims to promote documentation, similar to the increased taxation introduced by the PML-N government in 2014.
6. Maintenance of GST at 18%: The government plans to maintain the standard rate of General Sales Tax (GST) at 18%, which was increased from 17% in the February 202
7. GST at 18%: The government plans to maintain the standard rate of General Sales Tax (GST) at 18%, which was increased from 17% in the previous mini-budget. Rather than reducing the GST rate, the government intends to focus on increasing withholding taxes where applicable.
8. Tax on Agri Income: There have been continuous demands from various economic circles to impose higher taxes on agricultural income, which contributes 20% to the GDP. However, it is important to note that provincial governments have the authority to levy taxes on such income. So far, provinces have shown reluctance to revise the rates, and the tax collection from the agricultural sector is currently only Rs3 billion.
9. Increase in valuation of immovable properties: Starting from July 01, 2023, the valuation of immovable properties is expected to increase. The Federal Board of Revenue (FBR) has already begun the process of updating the valuation tables in consultation with provincial authorities. This move aligns with the taxation reforms being pursued by the FBR under the Pakistan Raises Revenue Project (PRRP) in collaboration with the World Bank. Higher property valuations will result in increased tax collection.
10. Tax on deemed rental income: The Reforms and Resource Mobilization Commission (RRMC) has recommended a 1% tax on deemed rental income for land held by non-filers. Given the fiscal constraints, such taxes on non-filers cannot be ruled out.
11. Tax on Banks: The continuation of the Super Tax and the potential imposition of new taxes on the banking sector are possibilities that cannot be ruled out. The profitability of the banking sector has significantly increased due to the hike in interest rates. In the calendar year 2022, listed banks’ tax expenses rose to Rs336 billion, an increase of 80%.
12. Tax on Tobacco: The tobacco industry remains a significant source of tax revenue for the government. However, the recent increase in the Federal Excise Duty (FED) on cigarettes in the February 2023 mini-budget has led to a decline in sales of legally sold cigarettes. This decline has been accompanied by a surge in the illicit cigarettes market, offering lower-priced alternatives. As a result, the government’s revenue targets from the tobacco sector may not be met. Therefore, it is unlikely that further taxes will be imposed on the tobacco sector. In FY22, the federal government collected Rs150 billion in taxes, and the target for FY23 was set at Rs200 billion, but it is likely to be missed due to the decrease in formal sector sales after the price increase.
13. Dollar Amnesty: To address the gap in external financing for FY24, the government may consider granting amnesty to declare and deposit dollars in the budget or soon after.
14. Tax on Beverages: Civil society representatives and health professionals have proposed increasing the excise tax on Sugar-Sweetened Beverages (SSB) to 50% in the Finance Bill FY24. However, representatives of the beverage industry and their supporters are lobbying for a decrease in taxes on sugary beverages from 20% to 16%. The current tax rate of 20% of retail prices, which was increased in the February 2023 mini-budget from 13%, is likely to be maintained.
15. Subsidy allocations to reduce: The government had allocated subsidies of Rs664 billion for FY23, and thus far, Rs524 billion has already been disbursed. It is expected that subsidies will be reduced in FY24.
16. Promotion of cashless transactions at petrol pumps: Steps may be taken to discourage cash transactions at petrol stations, promoting cashless transactions, and encouraging documentation.
17. Increase in tax rate for commercial importers: The tax rate for commercial imports is proposed to increase from 5.5% to 8%, and for commercial importers, it is proposed to increase from 3.5% to 5.5% in the fiscal year 2023-2024. This increase aims to generate more revenue from commercial imports.
18. Fixed tax regime for small retailers: The Institute of Chartered Accountants of Pakistan (ICAP) has proposed a fixed tax regime for small retailers. ICAP suggests categorizing small retailers based on their location and area. The Federal Board of Revenue (FBR) has already initiated efforts to engage tier 1 retailers. To implement this tax collection, the involvement of Provincial and Development Authorities and the introduction of a simplified tax return form may be considered. However, implementing these taxes may present some challenges.
19. Disallowance of input taxes: Manufacturers, commercial importers, wholesalers, distributors, and dealers will be required to provide complete details of buyers in their sales tax returns and withholding statements. Failure to do so will result in the disallowance of proportionate income tax and input tax. This measure aims to improve transparency and discourage tax evasion.
20. Increase in tax rates for sole proprietors and Association of Persons (AOPs): The Reforms & Revenue Mobilization Commission recommends a 10% increase in tax rates for non-corporate businesses, such as sole proprietors and AOPs, to encourage corporatization. This move aims to incentivize businesses to register as corporations and promote formalization.
21. Revamping of capital gains on immovable property: Proposed changes include taxing short-term gains as normal income, introducing a 20% tax on long-term gains with cost indexation, and implementing deemed rental income and deemed ground rent. Additionally, advance tax would apply to rights to acquire immovable property. These changes aim to reform the taxation of capital gains from immovable property transactions.
22. Extension of exemption on property and shares: The current exemption on gains from property or shares sold to a Real Estate Investment Trust (REIT) scheme may be extended until June 30, 2026. This extension seeks to provide continued tax incentives for investment in REITs.
23. Import Duties: The government recently implemented measures to ban the import of luxury items to curb the outflow of foreign exchange reserves. Given rising Balance of Payment (BOP) concerns, it is likely that additional measures, such as increased regulatory and custom duties on select imported items, will be implemented to address the issue.
24. Relief Package under BISP: The government may allocate a higher amount under the Benazir Income Support Program (BISP) due to soaring fuel and food inflation and expected measures that could negatively impact the poor segment of society. In the FY23 budget, Rs360 billion was allocated for BISP, and a similar or increased amount may be set aside in the upcoming budget to provide support to those in need.
It’s important to note that these points are based on the provided information and are subject to change until the official budget is released.