Islamabad, June 10, 2025 – As part of the ongoing fiscal reforms, the Federal Board of Revenue (FBR) has unveiled major amendments to the Income Tax Ordinance, 2001 through the Finance Bill 2025.
These changes are aimed at broadening the tax base, improving compliance, enhancing documentation, and generating higher revenues to meet Pakistan’s growing fiscal needs.
The salient features of the proposed amendments in the Income Tax Ordinance under the Finance Bill 2025 are categorized into revenue, relief, streamlining, and procedural measures:
1. Revenue Measures – Broadening the Net
To enhance government revenues, the Finance Bill introduces the following measures:
• A new Digital Transactions Proceeds Levy has been introduced to cover income generated from the sale of digitally ordered goods and services. The income of domestic vendors operating in e-commerce will be more closely monitored, with banks and courier services acting as designated withholding agents. This step ensures that the entire digital payment chain is brought within the income tax net.
• The withholding tax rate on specified services has been proposed to increase from 4% to 6%, excluding IT and IT-enabled services. Non-specified services will face a flat 15% withholding tax, while sportspersons will be subject to an increased rate of 15% (up from 10%).
• Banking companies will be subject to stricter disclosure requirements, allowing tax authorities to determine a fair and accurate estimate of their income and applicable tax liability.
• The tax on profit earned from debt instruments is set to rise from 15% to 20%. Meanwhile, the dividend income tax rate will increase to 25%, with dividends from mutual funds taxed at 15%.
• Pension income exceeding Rs. 10 million received by individuals under 70 years of age will be taxed at a flat rate of 5%. Pension income up to Rs. 10 million will remain tax-free, recognizing the need to protect retirees with modest income levels.
• The withholding tax on cash withdrawals for non-filers is proposed to increase from 0.6% to 0.8%, aimed at discouraging undocumented cash-based transactions.
• A new provision mandates custodians of debt securities—excluding Sukuk bonds—to act as withholding agents. This is designed to prevent tax leakage arising from the coupon washing scheme.
• The final tax regime upper limit of Rs. 5 million on profit from debt income for individuals and associations of persons (AOPs) will be removed. However, corporate entities will still be able to adjust taxes withheld on such income.
2. Relief Measures – Targeted Support
The Finance Bill 2025 also includes important relief provisions to assist specific segments of the population and encourage economic activity:
• The super tax applicable under Section 4C will be reduced by 0.5% for income slabs between Rs. 200 million and Rs. 500 million, offering some breathing space for large enterprises.
• Salaried individuals earning up to Rs. 3.2 million annually will see a reduction in tax rates, aimed at providing relief to the lower and middle-income classes. Additionally, a slight reduction in surcharge from 10% to 9% is proposed exclusively for salaried individuals.
• The Finance Bill extends the income tax and withholding tax exemptions for the erstwhile FATA and PATA regions for one more year, until the tax year 2026, continuing fiscal support to underdeveloped regions.
• A 25% tax rebate for full-time teachers and researchers is being reinstated, effective retroactively from tax year 2023 through 2025, acknowledging their contributions to education and research.
• Taxpayers obtaining housing loans will now be eligible for proportionate tax credit on profit on debt if the residential property is up to 250 sq. yards or 2,000 sq. ft., encouraging investment in low-cost housing.
3. Streamlining and Structural Reforms
To promote efficiency and curb abuse, the Finance Bill 2025 proposes the following:
• The authority of tax officers to determine the fair market rental value will now be limited to commercial properties only. A flat 4% of the Fair Market Value (FMV) as notified by the Board or Deputy Collector will be deemed the annual rental income unless the declared amount is substantiated with proper evidence.
• Purchases from unregistered persons will now attract disallowance of 10% of the related expense, making buyers responsible for engaging with documented suppliers.
• Where cash payments are received against a single sale invoice exceeding Rs. 200,000, 50% of related expenses will be disallowed, discouraging large-scale undocumented transactions.
• Proportionate depreciation will be disallowed where tax was not withheld on asset purchases, and such disallowed amounts will not be added back to the asset’s written down value.
• Transitioning from the Final Tax Regime to the Normal Tax Regime will disallow adjustment of accumulated business losses.
• The amortization period for intangible assets with indefinite useful life has been reduced from 25 years to 15 years.
• Businesses engaged in coal mining in Sindh can now supply coal to any sector and still enjoy 100% tax credit for supplies to power generation units.
• The period to carry forward minimum tax on turnover for adjustment has been reduced from three to two years.
• The limitation of 180 days to conclude amended assessments has been removed to offer more flexibility in complex cases.
• Appellate procedures have largely reverted to those in place before the 2024 Tax Laws Amendment, including stricter conditions for recovery proceedings only after adverse judgments from both ATIR and the High Court.
• The FBR’s power to grant condonation of time limits will now be capped at two years, with possible extension in high-revenue impact cases via a committee.
• For group tax relief, all member entities must now generate income under the Normal Tax Regime.
• Entities previously exempt under various tables of the Second Schedule will now be merged under Section 100C. Approval from the Commissioner is mandatory to qualify as a non-profit organization and avail income tax exemption.
• Tax exemptions for entities in Special Economic Zones (SEZs) and Special Technology Zones (STZs) will now be time-bound, valid until tax year 2035 or for a 10-year period, whichever comes first.
4. Procedural Reforms – Enhancing Data and Compliance
To improve compliance and digital transparency:
• Online marketplaces, couriers, and payment gateways are now required to submit seller data to the Commissioner for those involved in digitally ordered goods and services.
• E-commerce platforms will also be responsible for ensuring registration of all sellers operating via their portals, increasing accountability.
• The Finance Bill allows for anonymized taxpayer data to be shared with international donors and reputable academic institutions, and relevant data can also be accessed by the Tax Policy Office for research and analysis purposes.
In summary, the Finance Bill 2025 brings a comprehensive set of reforms aimed at improving tax administration, enhancing transparency, and widening the income tax base. By balancing revenue generation with targeted relief and streamlined procedures, these amendments to the Income Tax Ordinance reflect a decisive step toward building a more equitable and efficient taxation system in Pakistan.