Pakistan is set to present its budget for the fiscal year 2023-2024, and experts have highlighted key taxation measures that may be included in the Finance Bill 2023. Here are the anticipated taxation measures as outlined by Insight Securities:
Tax on Reserves/Bonus Shares: The Federal Board of Revenue (FBR) has reportedly recommended a 5% tax on bonus shares. If implemented, this proposal could incentivize corporations to issue bonus shares in the current fiscal year to avoid taxation. An earlier proposal to tax undistributed profits of companies is not currently under consideration.
Continuation of Super Tax: In order to achieve the ambitious tax collection target, the government may choose to maintain a 10% super tax on profits for the fiscal year 2023-2024.
Taxation of Wholesalers, Dealers, Distributors, and Retailers: The Revenue Reforms and Modernization Committee (RRMC) has proposed a taxation regime for wholesalers, distributors, and retailers. This move aims to enhance documentation within the economy and positively impact revenue generation.
Introduction of Wealth Tax: The government is considering the imposition of a wealth tax or income support levy on all assets, including agriculture. This measure could potentially yield a revenue of PKR 25 billion to PKR 200 billion, according to government officials.
Reinstatement of GST on Petroleum Products: To boost revenue collection, the government may restore the Goods and Services Tax (GST) on petroleum products.
Rationalization of Tax Regime for Commercial Importers and Contractors: It is recommended to increase the tax rate for commercial imports from 5.5% to 8% under section 148, and from 3.5% to 5.5% for commercial importers.
Shift of Exporters from FTR to MTR: The proposal suggests converting the Fixed Tax Regime (FTR) of exporters into the Minimum Tax Regime (MTR). The tax credit regime may be reduced to lower the tax burden, but the elimination of FTR is necessary to improve documentation.
Higher Taxes on Non-Filers: In an effort to broaden the tax base, the government may consider increasing tax rates for non-filers.
Sector-Wise Proposals:
Banks:
• Alignment of Corporate Tax Rate: The Pakistan Banks’ Association (PBA) has proposed reducing the corporate tax rate to 29% to match other sectors. However, this proposal is unlikely to be approved due to banks’ healthy profits from higher returns on federal government securities.
Construction:
• Increase in Public Sector Development Program (PSDP): The government is expected to set a target of PKR 1.1 trillion for the PSDP in FY24, including PKR 150 billion under Public-Private Partnership. However, the actual allocation may be lower due to fiscal constraints.
• Continuation of Federal Excise Duty (FED): The FED on cement is expected to remain unchanged, as the government faces tight fiscal space.
• Reduction of Minimum Tax Rate: A proposal suggests abolishing or reducing the minimum tax rate from 1.25% to 0.25% for steel manufacturers to alleviate economic challenges.
E&Ps and Oil Marketing Companies:
• Reduction in Minimum Tax: The Oil Companies Advisory Council (OCAC) has proposed reducing the minimum tax rate applicable to oil marketing companies and refineries from 0.5% to 0.25% to support their profitability.
• Subsidy to Gas Sector: The government has allocated PKR 76 billion for gas sector subsidies, which falls short of the Ministry of Energy’s demand of PKR 230 billion. This indicates a potential increase in gas prices.
• Tariff Differential Subsidy: E&P companies have sought a
E&P and Oil Marketing Companies:
• Reduction in minimum tax: The Oil Companies Advisory Council (OCAC) has proposed a reduction in the minimum tax rate applicable to oil marketing companies (OMCs) and refineries from 0.5% to 0.25%. This would help OMCs maintain their profitability under a fixed margins regime. However, it is uncertain whether this proposal will be accepted in the budget.
• Subsidy to the gas sector: The government has allocated PKR 76 billion for gas sector subsidies, which falls short of the Ministry of Energy’s demand of PKR 230 billion. This suggests that the government may consider increasing gas prices as they have not allocated sufficient subsidies to meet the demand.
• Tariff differential subsidy: The Pakistan Petroleum Exploration and Production Companies Association (PPEPCA) has proposed a grant of PKR 500 billion for a tariff differential subsidy. This subsidy would help alleviate the accumulated revenue shortfall faced by Sui gas companies and improve the cash position of Oil and Gas Development Company (OGDC) and Pakistan Petroleum Limited (PPL). However, the chances of this proposal being approved are slim.
Fertilizer:
• Accumulated sales tax refunds and subsidy receivables: The fertilizer industry has been facing challenges in retrieving pending subsidy and sales tax receivables from the government. Currently, the industry’s subsidy receivables stand at approximately PKR 18.5 billion, and sales tax refunds worth PKR 58 billion remain unsettled. The fertilizer industry has proposed releasing these amounts to improve their cash flows.
• Anomaly in sales tax: The removal of sales tax on fertilizers in the previous federal budget resulted in a cost escalation for fertilizer companies. While urea prices increased, the prices of imported DAP remained unchanged due to import parity-based pricing. This created an anomaly for Fauji Fertilizer Bin Qasim Limited (FFBL), a local producer, and importers. FFBL has proposed achieving a level playing field in the upcoming budget by either exempting FFBL from input sales tax or imposing sales tax on imported DAP.
• Steps to support farmers: The government is likely to allocate resources for quality seeds, latest machinery, agriculture research, and the complete conversion of agriculture tube wells to solar energy. Additionally, the government may maintain lucrative support prices on key commodities and reduce the cost burden by providing direct subsidies on fertilizers, seeds, and necessary equipment.
Textile:
• Tax on exchange gain: The Regional Tax Office for Manufacturers and Exporters (RRMC) has proposed levying taxes on exchange gains for exporters who fail to repatriate proceeds within a specified period. This proposal could increase the burden on export players, considering the existing rulings on delayed payments.
• Reduction in financing rate to tackle liquidity issues: The All Pakistan Textile Mills Association (APTMA) has suggested measures to address the liquidity crunch faced by the textile sector. These measures include restoring the zero-rating status for the textile sector, refunding deferred sales tax, enhancing Long-Term Financing Facility (LTFF) and Export Finance Scheme (EFS) credit limits, and lowering markup rates.
• Rationalization of energy tariffs: APTMA has proposed the revival of regional competitive energy tariffs to ensure the competitiveness of the textile sector, particularly in Punjab. They also aim to address the existing disparity in gas prices and availability between export players in the north and south regions.
Automobile Assemblers:
• Increase in advance income tax on non-filers: The Pakistan Business Council (PBC) has proposed an increase in the existing advance income tax on the purchase of cars by non-filers based on different engine capacities. The specific details of the proposed tax rates are not mentioned in the information provided.
• Imposition of tax based on value: There are proposals to implement advance tax and withholding tax based on the value of vehicles, rather than the current system based on engine capacity. This change aims to align the taxation with the actual value of the vehicle.
• Reduction in FED: The Overseas Investors Chamber of Commerce and Industry (OICCI) has proposed a reduction in the Federal Excise Duty (FED) on locally manufactured vehicles. However, the likelihood of this proposal being accepted is considered low.
• Additional tax on selling before registration: The PBC has proposed raising the advance income tax to PKR 2.4 million (previously PKR 1.2 million) for non-filers when selling vehicles with an engine capacity above 2,000cc before registration. The objective is to discourage the prevalent practice of selling vehicles at inflated prices without proper registration, commonly known as the “Own-money” culture, by imposing a higher tax burden.
Information and Technology:
• TELCO sector burdened with WHT: The OICCI has proposed the government to abolish withholding tax on mobile services in the country. They have also suggested abolishing advance tax on auction/renewal of licenses for telecommunication spectrums. Additionally, TELCO operators have demanded the implementation of a 5G policy in the country, including free spectrum for the first five years, zero taxes on the import of equipment and 5G handsets/devices, and policy intervention to ban the production and import of 2G/3G phones.
• Easing duties on mobile phones: The Mobile Phones Traders Association has recommended reducing the duties on mobile phones, which currently range between 100% to 150% for small and large mobiles. The initial aim of these high duties was to generate PKR 85 billion in revenue, but only PKR 5-10 billion were generated. The reduction in duties is expected to increase affordability for users and improve revenue generation for the government.
• Reward IT sector to improve export potential: The Pakistan Software Houses Association (PASHA) has requested the government to eliminate the 0.25% tax on export earnings in the upcoming budget to enhance foreign exchange inflows in Pakistan. PASHA has also proposed a 5% cash reward on IT exports to encourage reaching the $5 billion export target by 2025. Additionally, they have appealed to the government to revive the Export Refinance Facility (ERF) for the IT sector at a 50% discount, establish special IT zones in the country, and allow 100% forex retention permission in banks.
READ MORE: Pakistan Budget Preview For Fiscal Year 2023-2024
