New tax measures likely in budget 2022-2023

New tax measures likely in budget 2022-2023

Pakistan is presenting the federal budget 2022-2023 on June 10, 2022. A bulk of new taxation measures likely to be announced in the budget to generate additional revenue.

According to Topline Securities the tax target for the next fiscal year is likely at Rs7.25 trillion. The analysts expect new taxation measures across various sectors in the upcoming budget.

READ MORE: Pakistan Budget 2022-2023 – estimates

Supertax: The Federal Board of Revenue (FBR) is mulling to increase the incidence of tax on companies earnings windfall profits by imposing targeted tax in FY23 for a specific time period. FBR is also likely to increase super tax on banking sector which is currently at 4 per cent. A 4 per cent additional super tax on banking sector is likely to impact profitability of banks by around 7 per cent. To recall, government had imposed super tax of 4 per cent on banks and 3 per cent on companies earning profits of Rs500mn and above in 2015. We believe that the re-imposition of 3 per cent super tax on non banking companies and an additional super tax of 4 per cent on bank could fetch an additional Rs50-100 billion for the government.

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Tax on Salaries: The International Monetary Fund (IMF) has demanded Pakistan to increase the number of slabs and taxation rates on salaried class. There is a demand to generate additional Rs80 billion from the salaried class. Miftah Ismail, Pakistan’s Finance Minister, has shown his resentment over imposition of increased taxation on salaried class however any measures on individuals earnings high salaries (Rs0.2 million and above per month) cannot be ruled out. Pakistan collected income tax of Rs152 billion against salaries in the fiscal year 2020-2021.

Concessionary tax rates may be withdrawn: Taxation on untaxed sectors and sectors getting concessions may be subject to increased taxation. As per study of UNDP on Pakistan National Human Development Report on inequality, total benefits and privileges enjoyed by different vested interests in Pakistan amounts to Rs2.66 trillion in FY18 (7 per cent of GDP). As per the report, concessions for different segments include; Corporate Sector Rs724 billion, Feudal Class Rs370 billion, High Net worth individuals Rs368 billion, Large Traders Rs348 billion, State Owned Enterprise Rs345 billion, Military Establishment Rs257 billion, and Exporters Rs248 billion. These needs to be gradually reduced as IMF has also demanded government to reduce such concessions.

READ MORE: FBR suggested reduction in tax rates for equity funds

Subsidy allocations to reduce: Government had budgeted subsidies of Rs682 billion (1 per cent of GDP) for FY22 and thus far government has already disbursed subsidies of Rs575 billion for FY23. Out of these budgeted subsidies for FY22, Rs596 billion or 87 per cent worth of subsidies were for power sector whereas Rs30 billion of subsidies were allocated for Naya Pakistan Housing Scheme. The government has also spent over Rs160 billion worth of subsidies on Petroleum Prices in 4QFY22, which was initially not budgeted. The analysts believe, allocation and spending on subsidies especially on power sector and petroleum products will be reduced in FY23.

Tax loss/exemptions: According to industry estimates, national exchequer has suffered losses of Rs50 billion from the exemptions given to FATA/PATA alongside distortions created in the markets. The government gave tax exemption to FATA/PATA region industries after its merger to Khyber Pakhtunkhwa (KP). IPSOS, a global leader in market research, in its recent study stated that tax evasion in five sectors including illicit trade in Tea, Tobacco, Tyres & Lubricants, Medicines, and real estate amounts to Rs310 billion annually. This is another area where government should focus to improve tax collection.

READ MORE: PSX proposes tax exemption on property transactions

Import Duties: Government recently took measures to ban import of luxury items to curtail outflow of foreign exchange reserves of the country. The analysts believe that given our rising Balance of Payment (BOP) concerns, measures like increased regulatory and custom duty on select imported items is likely to be increased.

Taxes on Non-Filer: Government could also consider to increase taxation on non-filers to increase documentation in the economy. To recall, PML-N government had introduced increased taxation in 2014 on non-filers to promote documentation. The analysts expect government may consider increased tax rates on non-filers.

Rising burden of Pension Expense: Rising pension expense is becoming a big burden for fiscal account. In FY21, federal government pension expense stood at Rs440 billion which is 0.7 per cent of GDP and 7 per cent of government’s total current expenditure. In 9MFY22, federal pension expense has risen by 20 per cent to Rs395 billion. In addition to this, provinces also incur huge expenses on pension expense which is on a rise. Key reform measures on rising pension expense will be key for controlling fiscal deficit going forward.

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Luxury Tax: Government is contemplating possibility of imposition of luxury tax on certain high-value immovable properties and luxury vehicles in the coming budget. Tax on rental income and increase in DC rates of properties is also under consideration. These new taxation measures will assist government to achieve FY23 tax revenue target of Rs7.25 trillion.

Withdrawal of CNIC condition of unregistered buyers: Miftah Ismail has agreed, in principle, to introduce a fixed tax scheme for small traders and resolve all taxation-related issues of business and trade including the condition of providing Computerized National Identity Card (CNIC) numbers of the unregistered buyers. FBR is already charging an additional 3 per cent sales tax for unregistered buyer.

Relief Package against petroleum consumption: Prime Minister Shahbaz Sharif, recently announced relief package of Rs28 billion per month for the poor segment of the society to cushion against rising fuel prices. It is also expected that government may set aside some amount for FY23 budget against this relief package.

READ MORE: FBR urged to eliminate minimum tax for listed companies

It is also anticipated that allocations under Benazir Income Support Program (BISP) is increased owing to soaring fuel & food inflation and expected measures that is going to hit the poor segment of the society. To recall, Rs260 billion was set aside for BISP and Ehsaas Program for FY22 budget.