Tax exemption withdrawal may save Rs100 billion

KARACHI: The federal government is considering a significant fiscal policy shift through the withdrawal of tax exemption currently granted to specific sectors, which could potentially result in savings of up to Rs100 billion, according to analysts at Arif Habib Limited on Monday.

This initiative is expected to be formalized in the upcoming Finance Bill, where proposals targeting the withdrawal of select tax exemptions across multiple industries are likely to be included. With the Federal government reportedly approving these recommendations, the amendments will be presented in the National Assembly as part of the Budget 2021-22, specifically to revise the Income Tax Ordinance.

Among the notable changes is the proposal to eliminate the tax credit on enlistment under section 65C. Currently, newly listed companies are eligible for a 30% tax credit in the first year, followed by 10% in the subsequent two years. The withdrawal of this incentive may affect companies considering listing on the stock exchange.

Another major area targeted by the government is the exemption on dividend income received by a holding company under group tax relief provisions. The proposed withdrawal of this exemption could increase the tax burden on group structures.

Additionally, the government is reviewing the 20-year tax exemption previously granted to refineries established between July 2018 and June 2023 with a minimum production capacity of 100,000 barrels per day. Its withdrawal would mark a major policy reversal and could impact future investments in the energy sector.

The sale of property to REITs (Real Estate Investment Trusts) has also been under favorable tax treatment. However, the proposed withdrawal of the exemption by the government on profits from such transactions may affect the real estate investment landscape.

Other sectors affected include power generation companies, where profits were previously exempted if the letter of intent was issued after June 30, 2021. The planned withdrawal would now bring these entities into the tax net.

Similarly, the government is considering Shariah-compliant listed companies, which currently enjoy a 2% tax exemption, may also see this benefit removed. Lastly, the five-year tax exemption on profits earned by RLNG (Re-gasified Liquefied Natural Gas) terminals from the Commercial Operations Date (CoD) is also proposed for withdrawal.

These potential measures reflect the government’s broader strategy to broaden the tax base by reducing sector-specific tax exemptions and enhancing revenue generation.