• Govt expects to net Rs1.76 trillion from new revenue measures
• Significant increase in tax rates for the salaried, new progressive tax rates for property transactions

ISLAMABAD: The government has announced a stunning Rs1.761 trillion in new revenue measures for the next fiscal year, which, a deeper examination reveals, may contribute to another bout of inflation in the country.

The focus of the budget seems to be on withdrawing most exemptions from sales tax and customs duty which, though not fully reflected in the finance minister’s budget speech on the floor of National Assembly, is evident from the language of the Financial Bill 2024.

Federal Board of Revenue Chairman Zubair Tiwana avoided sharing details about the exemptions being withdrawn when he was asked relevant questions at a technical briefing held at the FBR’s headquarters. He also avoided sharing hard copies or any specifics of the measures being taken with the media, presumably to maintain the ‘positive impression’ that had been created by the budget speech.

The withdrawal of tax exemptions is expected to generate an additional Rs500 billion in revenue, according to the FBR chairman, but many analysts believe the quoted amount is modest and the revenue generated will be far greater.

In his briefing, Mr Tiwana said that Rs30bn in sales tax exemptions had been revoked from the health sector alone and another Rs47bn from the poultry sector. The withdrawal of exemptions in these two areas could spark an inflationary bout in the coming months as price increases are passed on to consumers.

A modification in income tax rates and slabs will unlock additional revenues of Rs70 billion from the salaried class, the FBR chairman said, estimating that exporters will also pay between Rs300bn and Rs350bn in income tax, and another Rs200bn is expected from increasing the advance sales tax on retailers and wholesalers. Changes in capital gains tax collection are also likely to boost collection by Rs50bn.

The automated revenue collection will be Rs11.1tr in FY25. The remaining revenue will be generated through these new measures, coupled with improved enforcement and documentation. It is also speculated that the government may reintroduce a sales tax on petroleum items in order to generate additional revenue. This alternative is open because the petroleum development levy has not been increased to the extent that was expected.

Salaried Class

The salary exemption limit has remained unchanged at Rs50,000 per month for the past three years. However, the government has now proposed drastic changes to taxable income above that threshold that will directly impact salaried individuals. This measure is believed to raise an additional Rs75bn.

Through the Finance Bill 2024, the tax rate for salaried individuals earning between Rs50,000 to Rs100,000 per month has been doubled. The proposed increase would see the tax rate go up from 2.5 per cent to 5pc on all income earned above Rs50,000 in this bracket.

Meanwhile, employees earning a monthly income between Rs100,000 and Rs200,000 will pay 15pc instead of 12.2pc on everything above Rs100,000, along with a fixed sum of Rs30,000 instead of Rs15,000 per annum in the past.

For individuals earning between Rs200,000 to Rs366,000 per month, the tax rate has been raised from 22.5pc to 25pc. Additionally, the fixed amount has been increased from Rs165,000 to Rs180,000 per annum.

If the monthly income ranges between Rs266,000 and Rs342,000, it will be taxed at a higher rate of 30pc compared to the previous rate of 27.5pc. Additionally, the fixed tax has also been raised to Rs430,000 from Rs300,000 per annum.

Lastly, the upper two slabs have been merged, which will increase the tax liability for those falling in the lower end of the new bracket. A tax rate of 35pc will now be applied to monthly salaries in excess of Rs342,000, which was previously applied on salaries of more than Rs1 million per month. Side by side, there has been a reduction of Rs395,000 in the fixed amount payable per annum for those falling in this tax bracket to rationalise the taxes.

Changes have also been made in the tax slabs for non-salaried individuals, with tax rates increasing progressively from 15pc to a maximum of 45pc. The FBR expects to raise an additional Rs150bn from these changes.

Taxes on Other Assets

The government has proposed different tax rates for the purchase and sale of properties, which vary according to the tax filer status of the parties. For example, tax returns filers will pay 3pc tax on property purchases under Rs50m, 3.5pc for properties between Rs50m and Rs100m, and 4pc for properties beyond Rs100m.

Late filers would pay somewhat higher rates of 6pc, 7pc, and 8pc for the same property value groups. Non-filers will pay much higher rates: 12pc for properties under Rs50m, 16pc for properties between Rs50 and Rs100m, and 20pc for properties beyond Rs100m.

The proposed progressive advance tax rate deducted at source for the sale of immovable property is 3pc for properties worth up to Rs50m. A withholding tax rate of 4pc is proposed for properties from Rs50m to Rs100m and 5pc for properties worth more than Rs100m. Non-filers will pay a 10pc tax for all properties, regardless of value. Late filers will pay a tax rate of 6pc, 7pc, or 8pc based on the value of their property.

It has been proposed that filers will pay a flat 15pc tax on gains from the disposal of immovable property acquired on or after July 1, 2024, regardless of the holding period. Non-filers will face progressive tax rates based on slab rates in Division I of Part I of the First schedule, with a minimum tax rate of 15pc.

The government has also proposed a new capital gains tax rate on the sale of securities by removing the condition pertaining to the holding period. Filers will pay a flat 15pc tax on capital gains from the sale of securities, while non-filers will pay standard tax rates with a minimum of 15pc and a maximum of 45pc. Furthermore, capital gains income from mutual funds and collective investment plans has been increased from 10pc to 15pc.

It has also been proposed that the dividend rate be increased from 15pc to 25pc for mutual funds that earn 50pc or more of their income from profit on debt.

It is further proposed that incomes from exports also be taxed at standard rates, with one percent of export proceeds treated as the minimal tax. Earlier 1pc was considered the final tax liability of exporters.

Lastly, the advance tax rate on profit on debt for non-filers is being increased from 30pc to 35pc in order to raise the cost of noncompliance, and the exemption from income tax and withholding tax on FATA/PATA regions has been extended for another year up to June 30, 2025.

Sales Tax Measures

The government has imposed a 10pc sales tax on stationery and a 6pc tax on the supply and import of plant machinery to tribal areas as well as electricity supplies to tribal areas on residential and commercial connections.

Similarly, a 10pc sales tax has been imposed on the local supply of vermicelli, sheer mal, bun and rusk, excluding those sold in bakeries, and sweet shops, local supply of poultry feed, cattle feed, sunflower seed meal, rape seed meal and canola seed meal, newsprint and books, but excluding brochures, leaflets and directories.

The government has also imposed a 10pc tax on oil cake and tractors.

A standard rate of 18pc has been imposed on mobile phones other than mobile phones whose value exceeds $500, which will remain chargeable at the existing rate of 25pc.

The sales tax rate has also been enhanced from 15pc to 18pc on supplies made by POS retailers dealing in leather and textile products, and a withholding sales tax has been imposed on lead, coal, scrap of paper and plastic, silica, etc.

Federal Excise Duty

The FBR forecasts that excise revenue measures will generate an additional Rs70bn in taxes.

The government has imposed FED on acetate, nicotine pouches and e-liquids. It has also proposed imposing FED of Rs15 per kilogramme on sugar supplied to manufacturers.

The FED rate on cement is being increased from Rs2 to Rs3 per kg. Similarly, a 5pc FED has been imposed on commercial properties and the first sale of residential properties.

Customs Duty Measures

The government has imposed additional customs duty on 1,600 tariff lines. This measure alone will raise Rs40bn under customs collection. The regulatory duty on import of used vehicles has been brought to par with new cars and the concessions offered on import of hybrid cars have also been withdrawn.

On the recommendation of the tariff policy board, government has also imposed duty on import of raw materials and semi-finished products to protect local industries.

The customs duty exemption has also been withdrawn on import of fresh and dry fruits. Similarly, there has been a reduction in the concession on customs duties on import of electric vehicles having value above $50,000. Moreover, the government has offered a host of incentives for those manufacturing solar panels and allied equipment.

Published in Dawn, June 13th, 2024