In the run-up to the 2024-25 budget, the Federal Board of Revenue (FBR) has been urged to abolish the Capital Value Tax (CVT) on foreign assets to prevent an exodus of business talent and investment from Pakistan.
Stakeholders, including prominent business leaders, argue that the tax is driving residents to relocate abroad and is counterproductive to the country’s investment climate.
The CVT, currently under scrutiny by the Supreme Court, imposes a tax on the declared foreign assets of Pakistani residents, in addition to the income tax already paid on earnings from these assets. For example, a 1% CVT on a bank deposit of $100, coupled with a 35% income tax on an interest income of $4, leads to a total tax burden of $2.4—effectively 60% of the income generated. This heavy taxation, stakeholders argue, makes the economic environment in Pakistan unattractive for saving and investment.
Further exacerbating the issue, some Pakistanis are renouncing their nationality to escape the stringent tax regime. This drastic step not only deprives Pakistan of skilled professionals and entrepreneurs but also sets a negative precedent for potential local and foreign investors.
Proposals submitted to the FBR suggest several reforms to mitigate these adverse effects. If outright abolition is not feasible, a reduction of the CVT rate to 0.25% of the actual cost of declared foreign assets is recommended, considering any loans taken to fund those assets. Additionally, it has been proposed that a credit be allowed for the total CVT paid against the total income tax liability from both local and foreign sources for that year.
Reform advocates are also calling for a restoration of the tax residency criteria to the pre-Finance Act 2022 standards. This change would encourage Pakistani nationals living abroad to maintain their citizenship and strengthen their ties with Pakistan, with the hope of returning permanently after retirement. The current levy on overseas assets is seen as a significant deterrent to this return.
The discourse surrounding CVT is part of a broader conversation on how Pakistan can best cultivate a favorable economic environment to retain and attract talented individuals and investments. With the budget announcement on the horizon, all eyes are on the FBR to see how it responds to these pressing concerns.
