Tax Changes for Exporters Threaten Forex Reserves, Warn Experts

Tax Changes for Exporters Threaten Forex Reserves, Warn Experts

Karachi, Pakistan – June 16, 2024 – Leading tax experts at KPMG Taseer Hadi & Co. have raised concerns about the impact of tax changes for exporters proposed in the Finance Bill 2024 on Pakistan’s foreign exchange reserves.

According to a commentary by the firm on the upcoming budget, the proposed changes could significantly hinder export activity, a crucial factor in maintaining foreign exchange reserves.

The experts highlight the critical role foreign exchange reserves play in Pakistan’s economic stability. Historically, the government has offered incentives to exporters to bolster reserves. These incentives included a flat 1% tax on export proceeds, considered a final tax liability for exporters. Additionally, exporters had the option to choose the regular tax regime if it provided a lower tax burden.

However, the Finance Bill 2024 proposes a shift for goods exporters, bringing them under the regular tax regime. This translates to taxation based on net profits subject to standard tax slabs, along with an increase in advance tax from 1% to 2%. While the 2% advance tax is proposed as a minimum tax, it still represents a significant increase.

KPMG Taseer Hadi & Co. warns that these changes could have a dual negative impact. Firstly, they could discourage exports, hindering the growth of foreign reserves. Secondly, they could incentivize exporters to under-invoice their exports or establish intermediary entities outside Pakistan, diverting revenue away from the country.

The commentary concludes by stating, “These proposed changes will not only adversely impact the dire need of the country to increase its foreign reserves but are also likely to discourage the exporters from engaging in the business of exports or bringing the full revenue in Pakistan.”

The concerns raised by KPMG Taseer Hadi & Co. highlight the potential trade-off between increasing tax revenue and promoting export-driven growth. It remains to be seen whether the government will consider revising these proposals to strike a better balance between these competing objectives.