Exporters in Scramble to Avoid Tax Regime Shakeup

Exporters in Scramble to Avoid Tax Regime Shakeup

Islamabad, June 21, 2024 – Pakistan’s export sector is in a state of flux as exporters scramble to negotiate a way out of the proposed changes to their tax regime outlined in the Finance Bill 2024.

The bill proposes a shift from the current final tax regime to a more complex normal tax regime, a move that exporters fear will cripple their competitiveness in the global marketplace.

Exporters Speak Up: Protecting Their Competitive Edge

Several exporters interviewed by PkRevenue.com expressed their deep concern about the potential ramifications of the proposed tax changes. They are actively lobbying the government to reconsider the provisions in the Finance Bill, emphasizing that the current final tax regime is essential for maintaining a level playing field in international trade.

A Compromise on the Table: More Tax, Less Complexity

To avoid the disruptions associated with a complete overhaul, exporters have proposed a compromise solution. They suggest keeping the final tax regime in place but with an increase in the current one percent tax rate. This would provide the government with additional revenue while shielding exporters from the complexities and potential financial burdens of a normal tax regime.

Understanding the Current System: Final Tax vs. Normal Tax

Pakistan’s current export tax framework operates under a final tax regime. Established in the early 1990s, it treats the one percent withholding tax collected on export proceeds as the final tax liability, regardless of a company’s actual profits or losses. This system also applies to entities within Export Processing Zones (EPZs) and indirect exporters.

The Finance Bill 2024 proposes to dismantle this system entirely. Under the new normal tax regime, the one percent withholding tax would become a minimum tax, and exporters would be required to calculate their taxable income and pay additional tax if it exceeds the amount withheld.

Beyond Withholding Tax: Super Tax and Advance Tax Concerns

Exporters are particularly worried about the additional tax burdens they would face under the normal tax regime. Currently exempt from super tax due to the final tax regime, they would now be subject to this levy. Additionally, a new one percent advance income tax would be imposed on direct exports of goods, further squeezing profit margins.

Balancing Revenue Needs with Export Growth

The government’s desire to broaden the tax base and increase revenue is understandable. However, exporters warn that the proposed changes could achieve the opposite effect. A more complex and burdensome tax regime could discourage exports, ultimately leading to a decrease in tax revenue.

The compromise solution offered by the exporters presents a potential path forward. By raising the final tax rate, the government could secure additional income without derailing export growth.

Negotiations Continue: A Decision with Far-Reaching Consequences

The coming weeks will be crucial as the government weighs the concerns of exporters and determines the final shape of the tax regime. The outcome of these negotiations will have a significant impact on Pakistan’s export competitiveness and its overall economic health. Both exporters and policymakers understand that the decisions made today will influence the country’s trade position and economic trajectory for years to come.