Karachi, June 14, 2024: A significant change is on the horizon for Pakistani exporters as the Finance Bill 2024 introduces a new tax regime. Effective July 1, 2024, this bill dismantles the long-standing final tax system for exports, ushering in a new era for how export-related taxes are handled.
According to tax experts at A. F. Ferguson & Co. previously, since the early 1990s, a final tax regime governed the export of goods. Under this system, a 1% withholding tax collected by banks on export proceeds served as the sole tax obligation for exporters, regardless of their actual profit or loss. This applied to entities in Export Processing Zones (EPZs) and indirect exporters as well.
However, the landscape has shifted. While the final tax regime was narrowed for many sectors in 2019, exporters remained exempt. Now, the new proposal treats the 1% withholding tax as a minimum tax. Exporters will be responsible for calculating their regular taxable income under existing tax laws. If this calculated tax liability is higher than the 1% minimum, they must pay the difference.
This change brings additional implications. Exporters will now be subject to super tax, a levy previously exempt under the final tax system. Additionally, a new 1% advance tax will be imposed on direct exporters of goods, separate from the minimum tax. While exporters can adjust this advance tax against any final tax liability, it signifies a higher upfront tax burden.
The government’s aim is a fairer tax system where taxes align more closely with actual profits. However, this new regime presents challenges for exporters. They will need to adapt to a more complex tax calculation process and potentially face increased tax payments.
This overhaul represents a turning point in Pakistan’s approach to export taxation. While the new regulations may pose challenges, they also offer opportunities as the sector adjusts. Ultimately, the move reflects the government’s commitment to transparency and equity in tax collection, aligning with broader economic reform efforts.
