The Finance Bill 2025 proposes wide-ranging amendments to the Income Tax Ordinance, 2001, aimed at restructuring the tax regime for tax year 2026, starting from July 1, 2025.
These changes, summarized by PwC A.F. Ferguson & Co., reflect the government’s intent to balance revenue generation with relief measures for certain taxpayer segments, particularly salaried individuals and specific sectors of the economy.
Key Highlights and Income Tax Changes:
1. Tax relief has been provided to salaried individuals with annual income up to Rs 3.2 million through reduced tax rates. This is expected to benefit middle-income earners struggling with inflation.
2. A marginal cut in the surcharge has also been offered to salaried persons earning above Rs 10 million annually, with the rate reduced from 10% to 9%, providing slight relief to higher income earners.
3. The super tax applicable on incomes exceeding Rs 150 million but not surpassing Rs 500 million has been reduced by 0.5%, likely to support large-scale business owners and investors.
4. A revised tax credit on profit earned from loans taken for house acquisition or construction has been reintroduced, signaling the government’s focus on encouraging home ownership.
5. Advance tax rates on property purchases have been lowered, especially beneficial for first-time homebuyers, while exemptions for income in the erstwhile tribal areas have been extended until June 30, 2026.
6. The Finance Bill reverts the appeal process to a two-tier mechanism, potentially improving dispute resolution efficiency within the tax system.
7. A retrospective restoration of a 25% tax rebate for full-time teachers and researchers has been allowed until June 30, 2025, to promote academic and research excellence.
8. Stricter measures are proposed, such as disallowing 50% of cash sale expenditures above Rs 200,000 and a 10% disallowance for purchases from suppliers without NTN numbers—moves aimed at promoting documentation.
9. General withholding tax rates on services have been increased from 11% to 15%, and sector-specific rates from 4% to 6% or 8%, depending on classification.
10. Digital economy transactions will now attract final withholding tax, a key development in regulating the e-commerce sector.
11. Income derived from mutual funds via debt instruments will now face an increased tax rate on dividends—from 15% to 25%.
12. A higher withholding tax rate of 20% will be levied on profit from debt instruments, up from 15%, along with a new 15% tax on premature disposals of such instruments.
13. New compliance rules disqualify certain individuals (non-filers or those deemed ‘ineligible’) from buying vehicles, immovable properties, or opening bank accounts.
14. Income tax exemptions for select non-profit organizations (NPOs) are now subject to stricter compliance under Section 100C, while clubs are barred from applying for NPO status.
15. Banking companies will now capitalize leasehold improvements for depreciation, and the treatment of rental expenses versus depreciation for “Right of Use” assets has been clarified retrospectively.
16. Withdrawals from approved pension schemes and annuities exceeding Rs 10 million (for persons under 70 years) have been made taxable, bringing high-value retirement benefits into the income tax net.
17. Lastly, enhanced powers have been granted to the FBR to collect data from banks and to enforce recovery of confirmed tax demands more effectively.
In summary, the Finance Bill 2025 introduces both relief measures and compliance-enforcing mechanisms within the income tax framework, reflecting a broader strategy to expand the tax base, regulate financial behavior, and streamline tax administration.