Pakistan plans to increase tax revenue to 12.3% of GDP

Pakistan has announced plans to raise government tax revenues to 12.3% of GDP through measures amounting to over PKR 1,723 billion ($6.15 million), or 1.4% of GDP, during the current fiscal year.

An International Monetary Fund (IMF) country report outlines the steps involved, which include personal and corporate income tax (PIT and CIT) measures projected to generate PKR 357 billion.

This will be achieved by integrating exporters into the regular tax regime, streamlining PIT for salary (SI) and non-salary individuals (NSI), reducing tax slabs to five, and raising the maximum rate for NSI to 45%. Exporters will join the regular income tax regime.

Sales tax reforms are expected to generate PKR 286 billion by moving most exempt and zero-rated products to the standard rate, while certain education, health, and agricultural products will be taxed at reduced rates of 5 and 10%.

Limited exemptions will be retained for essential food and health items, charitable hospital acquisitions, textbooks, fuel, fertilizers, and pesticides, as well as for compliance with international and bilateral agreements.

The budget will also terminate the preferential Export Facilitation Scheme for locally purchased inputs.

Expansion of FED

Expanding the coverage of Federal Excise Duty (FED) and enhancing its rates are anticipated to generate PKR 413 billion by introducing FED on property sales, sugar, acetate tow, and lubricants.

This includes harmonizing FED on locally manufactured cigarettes, e-cigarettes, and nicotine pouches with that on imported cigarettes, and increasing FED on cement and airline tickets.

Enhancing withholding taxes and direct taxation will generate PKR 240 billion. This involves raising withholding tax rates for non-filers under advance tax collections by manufacturers from distributors and wholesalers, expanding it to all sectors; increasing taxes on property transactions with progressive rates; eliminating reduced rates for capital gains; and removing the 1% concessional rate on cigarette and pharmaceutical distributors.

The withholding tax on motor vehicle registration will be transformed from a nominal value to an ad valorem tax.

Other measures include capping the exemption granted by a commissioner to 80% of the corresponding withholding tax and capping the deduction for advertising expenses on brands allocated to associates at 75% of the total value.

Additionally, income tax on dividend income from mutual funds will be increased from 15% to up to 25%, and the methodology for calculating the income tax base for developers and builders will be amended.

Rationalizing tariffs and eliminating concessions on customs duty, additional customs duty, and regulatory duty will generate PKR 65 billion by withdrawing exemptions and concessionary rates.

Moreover, improving compliance measures is expected to generate PKR 157 billion through the imposition of a minimum import value on specific items for the collection of withholding tax and GST; converting withholding tax into a minimum tax; introducing a withholding regime to prevent fraud; enhancing cross-adjustment of sales tax with provinces; and re-evaluating property valuation tables to align them with market rates.

Revenue administration measures, including incorporating retailers into the tax net through the Tajir Dost scheme, implementing the Compliance Risk Management (CRM) framework, and expanding the Compliance Improvement Plan (CIP), will generate PKR 250 billion.

Outstanding GST credit claims to companies commercializing POL products will see arrears totaling PKR 80 billion cleared within this fiscal year, with the Finance Division transferring PKR 35 billion to partially cover the payment.