Pakistan Considers Ending Tax Exemptions on Imports

Tax Budget

Pakistan is contemplating significant changes to its tax policies, with plans to withdraw tax exemptions on imports in the upcoming budget for the fiscal year 2024-25.

The government is considering amendments that would abolish the tax exemptions currently enjoyed by importers and introduce a reduced withholding rate ranging from 1 to 4 percent on supplies made by importers.

Under the current tax regime, there is a uniform tax withholding rate of 5.5 percent applicable to all types of supplies, with imports being exempted due to the advance tax already paid on imported goods. However, the proposed changes would eliminate this exemption and implement a new withholding rate of one percent on supplies made by importers. This revised tax withholding scheme would be applicable to all purchases from commercial importers.

The Federal Board of Revenue (FBR) has drafted a proposal to introduce income tax withholding on purchases from commercial importers, aiming to streamline tax collection processes and enhance revenue generation. If the government proceeds with the plan to impose a one percent withholding tax, it is estimated that this measure could contribute approximately Rs 20 billion in tax revenue during the next fiscal year.

The decision to withdraw tax exemptions on imports reflects the government’s efforts to broaden the tax base and ensure fairness in the taxation system. By subjecting imports to withholding taxes, the government aims to enhance tax compliance and increase revenue streams while promoting transparency and equity in taxation.

While the proposed changes may lead to increased tax revenues for the government, they could also impact businesses and consumers. Importers may face higher tax burdens, which could potentially affect the cost of imported goods and services, ultimately impacting consumer prices and inflation rates.

The introduction of a reduced withholding rate for supplies made by importers is intended to strike a balance between tax collection objectives and the facilitation of trade activities. By implementing a lower withholding rate, the government aims to incentivize compliance while minimizing the burden on importers and promoting a favorable business environment.

As Pakistan prepares to unveil its budget for the fiscal year 2024-25, stakeholders across various sectors will be closely monitoring the proposed tax reforms and their potential implications. The government’s decision regarding tax exemptions on imports and the introduction of new withholding rates will undoubtedly shape the country’s economic landscape and fiscal policies in the coming years.