Analysing Finance Act 2024

Pakistan has begun its new fiscal year by enforcing the Finance Act 2024 effective from July 1, 2024 onwards unless any retrospective implications have been specified otherwise.

It has been noticed that the amendments earlier proposed by the Finance Bill 2024 and the amendments enacted have several differences. The most important question circulating these days is whether this Act is another document for achieving revenue targets to meet the lender’s demands or is there any measure that will also benefit the people of Pakistan.

Taxpayers are curious to know whether the government has taken any initiative to widen the tax base or it has just opted for the usual route of taxing the existing taxpayers only. They further want to know whether they have been penalised again for those who are not in the tax net and are contended with operating in the informal sector without going into the documentation process.

Businesses want to know whether the tax reliefs announced by the then government and the allied policies have been applied by the current government or there has been a significant shift in the policies, which will affect their businesses and investment decisions.

At the same time, people want to know if the government has levied new taxes across the board or it has come under pressure from certain sectors or classes, which contribute more to the gross domestic product (GDP), yet they are exempted from the taxes. The government has set a total revenue target of Rs17.815 trillion for fiscal year 2024-25, which is 46% more than the revised target of Rs12.199 trillion for FY24.

The total revenue comprises the tax revenue target of Rs12.970 trillion and non-tax revenue target of Rs4.845 trillion, up 40% and 64% year on year, respectively. Last year, the revised targets were Rs9.252 trillion and Rs2.947 trillion. The tax-to-GDP ratio for FY24 was 8.7% while for the new fiscal year it is 10.44%.

As the numbers depict that the government needs to collect additional tax revenue of Rs3.718 trillion, then it goes without saying that the Finance Act 2024 is a cluster of measures with the core objective of generating revenue to give support to the ailing economy with less or no concern for public welfare.

However, it is interesting to note that this year again a major amount of Rs9.775 trillion will be paid in interest payments and the share of provinces will be Rs7.438 trillion, after which the federal government will be left with only Rs602 billion. This means that almost all expenses on defence, pension, emergency, the running of government, etc will have to be borne with additional financing.

The overall fiscal deficit after incorporating the provincial surplus is Rs7.283 trillion, which is 5.87% of GDP. However, the government anticipates a growth rate of 2.38% as compared to the negative growth of 0.21% in FY24. This Act has only focussed on how the tax revenue can be increased, which can also be substantiated by the amendments made to the document.

Tax rates on individuals and the Association of Persons have been increased significantly with a maximum rate of 45% on non-salaried individuals and 35% on salaried individuals excluding the newly introduced 10% surcharge on the income tax imposed at normal rates.

A major shift for exporters of goods has taken place where the final tax regime has ended and they would be paying tax at the higher tax rate or normal tax rate. This again is separate from the additional advance tax that would be collected from them at the rate of 1%. Until June 30, 2024, the Income Tax Ordinance 2001 had only two bifurcations between the taxpayers, either active taxpayers or non-active taxpayers. Those who were not classified as active taxpayers were subject to a 100% extra tax rate under the Tenth Schedule of the ordinance, unless otherwise specified.

Now, the Finance Act 2024 has introduced the concept of ‘late filers’, which is the third category. Any person who files tax return after the end of due dates and then becomes an active taxpayer would be treated as a late filer and separate rates on the purchase or disposal of immovable property would apply to him, which would not be that of the active taxpayer.

The high tax rates and related measures like recent travel restrictions on non-active taxpayers are something that can be used as a tool to bring more people into the tax net but so far no effort has been made in this area except for deriving more and more taxes from these non-active taxpayers.

At the same time, this will also place an obligation on those who are not obliged to file returns to file it so that they are not charged the extra tax rates. Where we fail is the area of collecting tax on the actual income from those who are liable to file, as they file it just for the sake of becoming an active taxpayer with low or zero income.

The introduction of a flat tax rate on capital gains arising from the disposal of securities and immovable properties on the acquisition made on or after July 1, 2024 irrespective of the holding period is yet another revenue measure that might affect the performance of these sectors too.

The Finance Act 2024 has increased the tax rate on dividends received from mutual funds deriving 50% or more income from profit on debt, from 15% to 25%.

Similar revenue measures have been taken in the Sales Tax Act 1990 and the Federal Excise Act 2005. Many items that were previously subject to zero-rating or exemptions have now been subject to either a reduced rate or standard rate of sales tax.

The inconsistency of policy is also evident from the fact that initially retail outlets were encouraged to integrate the reporting of their real-time sales with the Federal Board of Revenue, in case the supplied goods are finished fabric and locally manufactured finished articles of textile and textile made-ups and leather and artificial leather, subject to the condition that they have maintained 4% of value addition during the last six months to avail the reduced tax rates.

Now, they have also been subject to the standard tax rate. This discontinuation of policies just shatters the trust of taxpayers and investors in the government.

The major question that remains is whether without bringing political stability and reducing the distrust amongst taxpayers in tax administration and formulation of investor-friendly policies and their continuation, etc, would the government be able to bring any economic turnaround. Apparently, it seems difficult rather it will continue to do firefighting without resolving these matters.
The writer is a member of the Institute of Chartered Accountants of Pakistan