The government on Wednesday proposed imposing a record Rs1.5 trillion in additional taxes to achieve an ambitious Rs13 trillion target for the new fiscal year, which is expected to unleash an inflationary storm in Pakistan due to heavy indirect taxation and further reductions in individual incomes.
In an unprecedented move, despite heavy taxation, there remains an Rs800 billion gap between the measures taken in the budget and the new Rs12.970 trillion tax target. The government has banned foreign travel for non-filers of income tax returns, except for Hajj. Additionally, a 75% higher tax on mobile phone calls has been imposed on those who have not filed returns despite receiving notices.
It has also proposed to seal the shops of traders who do not file income tax returns, including imprisonment for six months. For tax evasion over Rs500 million, a five-year jail term is proposed, and in cases of fraud over Rs1 billion, the jail term will be ten years.
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In another drastic measure, non-filers’ banking payments would fall under the category of transactions exceeding Rs50,000, liable to a 0.6% tax, including utility bill payments. Chairman Federal Board of Revenue (FBR), Malik Amjad Zubair Tiwana, revealed that in case the FBR misses the target, a mini-budget has been agreed upon in advance, which includes increasing the standard General Sales Tax (GST) rate from 18% to 19% as a “contingency measure.”
The government aims to extract Rs3.8 trillion in additional taxes from the struggling economy: over Rs1.5 trillion in additional taxes, another Rs1.5 trillion through automatic increases in collection due to inflation, and Rs800 billion through administrative measures and court recoveries, said the FBR chairman. The government’s challenge was to impose taxes on the incomes of exporters, real estate, and retailers while protecting salaried individuals from additional burdens.
However, the salaried class has been hit the hardest due to increased effective income tax rates.
The maximum rate of 35% will now be charged on monthly incomes over Rs333,000, compared to the current level of over Rs500,000. Similarly, tax brackets for other income levels have also been revised.
Chairman FBR said that out of Rs1.5 trillion in additional revenue measures, Rs667 billion worth of income tax measures have been taken. Salaried and non-salaried business individuals will pay Rs224 billion more in the next fiscal year.
An additional Rs484 billion worth of sales tax measures have been taken, including taxing packaged milk and infant milk. The government has imposed Rs289 billion in additional federal excise duty measures, including increasing cement prices, and Rs70 billion worth of custom duty measures.
The FBR chief said that Rs250 billion would be recovered through enforcement measures. The proposed budget measures suggest that there will be an inflationary storm in Pakistan, and people will have less money to spend due to higher taxes on their personal incomes.
Income Tax Measures
In a positive move, the government has ended the fixed income tax regime for exporters, who will now be subject to normal tax, expected to generate an additional Rs125 billion in income tax next year.
The property sector will pay an additional Rs100 billion in income tax in the next fiscal year. Similarly, traders will pay Rs100 billion due to a 2.5% withholding tax on sales made to them by manufacturers.
The salaried class has been hit the hardest again. Currently, the maximum rate of 35% applies to monthly incomes over Rs500,000. Now, the government has imposed a 35% tax on monthly incomes over Rs333,000.
A 5% tax rate on monthly incomes of Rs100,000 has been imposed, double the existing rate. On monthly incomes of Rs183,000, the government has imposed a 15% income tax, and on monthly incomes over Rs267,000, a 25% income tax. For monthly incomes up to Rs333,000, the tax rate is 30%. The FBR chairman said that the salaried class would pay an additional Rs75 billion in taxes.
Rates for non-salaried individuals have also been significantly revised. A 15% income tax rate has been imposed on monthly incomes of Rs100,000. For the next slab, if the monthly income is up to Rs133,000, the new tax rate is 20%. For monthly incomes up to Rs267,000, the tax rate is 30%.
For monthly incomes up to Rs466,000, the income tax rate is 40%. The highest income tax rate of 45% has been imposed on monthly incomes above Rs467,000. Non-salaried individuals will pay an additional Rs150 billion in income tax next year, said the chairman.
Chairman FBR said that on the sale of immovable property, the new tax rate for filers is 3% to 4% of the value, but for non-filers, the rates are from 12% to 20% of the property value. This will generate Rs40 billion for the government, he added. Tiwana said that property valuations have also been revised, generating an additional Rs30 billion.
In another punitive measure, the government has imposed a 45% tax on capital gains from properties owned by non-filers and 15% for filers, said Tiwana.
Chairman FBR said that a 2.5% tax has been imposed on supplies made to traders, generating an additional Rs100 billion. The government has also increased the capital gains tax on mutual funds from 10% to 15%.
The government has ended engine capacity-related withholding taxes on cars and proposed 0.5% to 12% of the car’s value as withholding tax, aiming to collect Rs5 billion more next year. Buyers of 1000 CC cars will now pay 1% income tax, and for 1600 CC cars, it is 2% of the value. The government has increased the withholding tax on bank depositors for non-filers to 35%, which will generate Rs25 billion next year.
The income tax exemption for beneficiaries of government subsidies has also been abolished. The government has also imposed income tax on teachers and researchers. The FBR chairman said the government has imposed a default surcharge at Karachi Interbank Offered Rate (KIBOR) plus 3% on late payments of all taxes.
Sales Tax
The government has made massive changes to the sales tax regime to raise an additional Rs484 billion, which will stoke inflation in Pakistan. It has withdrawn sales tax exemptions, enhanced reduced tax rates, and ended zero-rating, affecting milk and infant milk.
The government has imposed an 18% tax on milk, infant milk, and fat-filled milk, generating Rs95 billion in revenue, chairman FBR informed the media. The government will collect Rs20 billion by taxing infant milk. All stationary items have been taxed at a rate of 10%.
The government has imposed an 18% sales tax on vegetables and fruits imported from Afghanistan, he said. It has not even spared buns and rusks, imposing a 10% GST. Matchboxes will also become expensive as an 18% GST has been imposed, generating Rs21 billion.
Chairman FBR said that an 18% GST has been imposed on diagnostic kits imported by hospitals and on supplies of electricity and gas to hospitals, generating Rs30 billion.
Tiwana said that a 10% GST is proposed on oil cake, poultry feed, tractors, cattle feed, sunflower seed meal, and canola meal, increasing prices of cooking oil, milk, and chicken in Pakistan. The government will collect Rs47 billion in tax from this measure.
A 10% sales tax has been imposed on the sale of stationery and newspapers. In a controversial move, the government has imposed an 18% sales tax on cardiology, cardiac surgery, and other medical treatments. An 18% sales tax has been imposed on medicaments and sales made by retail outlets.
The sales tax exemption for the erstwhile FATA has been withdrawn, but the income tax exemption will continue. The government has also increased the sales tax from 8.5% to 18% on hybrid and electric vehicles.
Chairman FBR said that a 10% tax has been imposed on computers. An 18% sales tax has been imposed on mobile phones, generating Rs33 billion in revenue.
Federal Excise Duty
The government has imposed heavy excise duties on items like sugar, homes, plots, and cement to raise a total of Rs289 billion in taxes. It has imposed a Rs44,000 per kilogram federal excise duty on acetate tow and filter rods, generating Rs120 billion.
Chairman FBR said that a 5% excise duty is imposed on the first sale of property, generating another Rs50 billion. The excise duty on cement has been increased by another Rs1 per kg, raising Rs40 billion in taxes. In a controversial move, the government has also imposed a Rs15 per kg excise duty on sugar. He added that the tax will be charged by sugar millers on the supply of sugar to beverages and for other commercial uses.
The FBR chief further stated that a 2% additional custom duty has been imposed on all items currently exempted, including those in the 0% slab. This measure will generate Rs40 billion but will contribute to inflation.
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