An international advisory firm, Adam Smith International, has recommended that Pakistan expand its income tax framework to encompass pension income.
Under its flagship project REMIT (Revenue Mobilization, Investment, and Trade), the firm has put forward a series of proposals for the upcoming budget of 2023-2024. Among these suggestions, Adam Smith International advises that pensions should be considered taxable income beyond a threshold of Rs1.2 million. Additionally, it proposes that pensions exceeding Rs2.4 million should be subject to taxation at half the scheduled rate.
Advisory Firm Urges Changes to Income Tax Laws for Enhanced Revenue Generation
In conjunction with the proposal regarding pension income, the advisory firm has outlined several other measures aimed at bolstering the country’s revenue streams. Notably, it estimates a potential revenue gain of Rs513 billion from both federal and provincial immovable properties.
To achieve this projected amount, Adam Smith International recommends amending Section 37 of the Income Tax Ordinance, 2001 to eliminate the current concessional regime. The proposal suggests that short-term gains be included in taxable income, while long-term gains be subject to a tax rate of 20%, taking into account cost indexation based on the Consumer Price Index (CPI) or Deflator.
Furthermore, the advisory firm advises the omission of Section 7E of the Ordinance and proposes amendments to sections 15 and 39 of the Income Tax Ordinance, 2001. These amendments would introduce the concept of deemed rental income and deemed ground rent, to be levied at a rate of 5% of the Fair Market Value (FMV). Exceptions to this rule would include self-occupied houses and empty residential plots not exceeding 500 square yards, with specific exemptions for industrial and agricultural purposes.
In addition to these recommendations, Adam Smith International suggests extending the scope of section 236 C and 236 K of the Ordinance to cover rights to acquire immovable property (files) and property acquired on an installment basis. To encourage compliance, the proposal advocates for an increased tax rate of 7% under section 236 C for non-filers.
The advisory firm also proposes the imposition of income tax on gifts from non-relatives, irrespective of whether they are received through a crossed cheque or other means.
To streamline construction-related taxation, Adam Smith International recommends empowering the Federal Board of Revenue (FBR) to establish a minimum Fair Market Value (FMV) for construction purposes. Additionally, it suggests the implementation of a minimum tax on developers and builders, based on a per square foot basis, during the development and construction phases.
Lastly, in an effort to prevent abuse, the advisory firm proposes amending the definition of Non-Profit Organizations (NPOs) to ensure that the welfare of the general public becomes a mandatory precondition for all income documentation and receipts of NPOs.
These recommendations from Adam Smith International provide valuable insights and avenues for Pakistan’s government to explore in its pursuit of an efficient and equitable tax system. As the budget for 2023-2024 takes shape, policymakers will carefully consider these proposals to promote sustainable revenue generation and fiscal stability.