Comments on Finance Bill 2024

Syed Shabbar Zaidi & Co.

12 June 2024 1
General

The Finance Bill 2024 is an unusual document. It has prescribed many correct steps,
however, timing for those relevant actions is not appropriate on account of growth and
economic sustainability of the country. Some such items include tax on exports and capital
gains on listed securities.

The comments are limited to taxes.

The Pakistan government is trapped in the pressure of IMF viz-a-viz elasticity of the tax
environment of Pakistan. The collection has been kept at 12,970 billion which is on the
higher side keeping in view the measures introduced and status of the documented sector of
economy.

It appears that the budget document has been prepared to fill in the gap, without preparation
and homework, as the budget was necessarily required to be passed by June 30, 2024. We
do not find any medium and long term plan that is presumably being pursued in this budget.
This is the first budget of the new government and it was expected that a policy framework
will be given. Nevertheless, it is never too late. Corrective actions are expected in the
intervening period before finalisation of the same by the parliament.

From the viewpoint of the tax measures proposed, some of which are very good, it appears
that the document is a product under the IMF umbrella with input at second tier level at the
Federal Board of Revenue. It is a good paper for practitioners and technicians but this is
definitely not sufficient to take Pakistan out of an economic crisis. A country in severe current
account crises cannot afford to disturb the export sector which is already stagnant only for
the reason that lenders want to bring in horizontal equity. In that process we forget the
multiplier effect that would come on employment and industry.

Pakistani businesses are already subject to around 10 % higher tax rate on corporations in
the region. The essential corrective measure of abolition of super tax has not been done.
When we look at the horizon in front of us then it transpires that all the efforts, done in the
past, of bringing Pakistan in line with the region in income tax and VAT rates are spoiled by
‘Babus’ at FBR.

The documented sector of professionals, like Chartered Accountants have been badly
damaged. There is no case for a 45% tax rate. Those who pay taxes are being impliedly
asked to change their habits. It should not be forgotten that a higher rate of tax in countries
like us is a clear recipe for bigger corruption. Our bureaucracy has achieved these objectives
by persuading ill prepared politicians to play in their hands with a bigger size of cake in
corruption.

Sales tax and petroleum levy adjustment for POL products is not warranted. It is a VAT item
and should be handled.

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Income Tax

Tax on export of goods

For over 30 years exports of goods have been subjected to a very low presumptive tax
whereby a percentage of foreign exchange proceeds was deemed to be the final discharge
of liability for income from the export of goods. These provisions were contained in Section
154 of the Income Tax Ordinance, 2001. Through the Finance Bill 2024 tax deducted on
realisation of foreign exchange is proposed to be converted from final discharge of liability to
minimum tax. This means that henceforth exports will be taxed at the normal rate of 29% in
the case of companies and 45% plus super tax in other cases, if applicable.

It is agreed that exports have to be documented and said income has to be taxed. However,
timing and the rate is not appropriate. All businesses adjust their sales according to net after
tax income. Those who were paying tax at a very low rate should not have been brought to
the highest tax by way of one step. There was a need to have a gradual imposition of tax.

Most important subject in this regard is the tax rate on exports in the region and our
competitiveness. In Bangladesh being a competitor at least 50% of the export income is
exempt. In India the overall rate is low and there are many incentives for exporters including
SEZ. It is expected that this measure will be amended and a graduated rate over a period of
five years will be prescribed.

Tax on export of services which includes IT has remained the same.

Capital Gain on sale of listed securities

Capital gain on the sale of listed securities throughout the world is taxed in relation to the
holding period. There is always the concept of long and short term capital gains. Pakistan
has always adopted this system since the time capital gains were taxed in 2000’s. For the
first time in the fiscal history of Pakistan, all kinds of capital gains are proposed to be taxed
at the common rate of 15% for all capital gains on securities acquired after July 1, 2024. In
the case of a person not being on Active Taxpayers list there will be a minimum rate of not
less than 15%. In that case the applicable rate shall be that provided in the First Schedule
for individuals and AOP and companies at the rate of 45 and 29 percent respectively before
super tax, if applicable.

Capital gain on sale of immovable property

Capital gain on the sale of immovable property has been taxed by the Federal Government
after the 18th Amendment to the Constitution at various rates according to the holding period
of such property. Through Finance Bill 2024 this system is proposed to be changed and all
capital gains on the disposal of immovable property acquired after July 1, 2024 are proposed

12 June 2024 3
to be subject to tax at the rate of 15% of the amount of gain. In the case of a person not
being on Active Taxpayers list there will be a minimum rate of not less than 15%. The
applicable rate shall be that provided in the First Schedule for individuals and AOP and
companies at the rate of 45 and 29 percent respectively before super tax, if applicable.

Tax rate on non-salaried income

Tax rates on non-salaried income have been substantially increased. Now the maximum rate
has been placed at 45% before super tax, if applicable. This is a very high rate of tax.

There is a logic for the said higher rate as the rate of tax for non-corporate income after
super tax should be higher than the corporate tax rate including tax on dividends..

However, the increase as proposed in the Finance Bill 2024 is abrupt and undesired. Super
tax should have been withdrawn if there had been this tax. This is a big blow to documented
professionals etc.

Disallowance of payment to associates for brands, logo etc

A new provision has been inserted whereby payments to associates on account of use of
brand , logo etc will be disallowed to the extent of 25%. There was no such provision in the
past. The placement of the section is not correct. This provision effectively appears to be
applicable to two preceding years from the tax year 2024. Retrospective effect is a subject to
be examined.

Tax rate for salaried person

Tax rates for salaried persons have substantially remained the same. The threshold has
been kept at Rs. 600,000, however, income above Rs 600,000 which was earlier taxed at
the rate of 2.5 % is now taxable at the rate of 5%. Similarly rates applicable with various
slabs have been increased which will effectively increase the tax on salaries above Rs
600,000. Nevertheless, the maximum rate of 35% before super tax, if applicable,has been
maintained.

Withholding Tax on Sale of Unlisted Companies

Through Finance Act 2023 sub-sections (6) to (10) were inserted with respect to withholding
tax provisions relating to capital gain arising on sale of shares (both for Pakistani and foreign
companies). Rules for that purpose are laid down in Rule 19H of the Income Tax Rules
2002. The Finance Bill 2024 proposes two amendments in these provisions. Firstly the word
‘payable’ has been inserted for determining the incidence of tax withholding provision. This
means that liability will arise whenever the binding contract is made whether or not payment
has been made. This is an unusual requirement with respect to withholding provisions.
Secondly it has been proposed that withholding provision will also trigger when such shares
are registered with the Securities & Exchange Commission of Pakistan or the State Bank of
Pakistan whichever is earlier.

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Losses of PIA

Losses of PIA from 2017 are proposed to be carried forward for a period of 10 years instead
of 6 years.

Tax Credit for Thar Coal

The tax credit for That Coal under Section 65F proposed to be available only to income from
coal mining projects supplying coal to power generation projects.

Exempt Income of AOP

The income of AOP which is exempt from tax under Section 92 of the Ordinance is proposed
to be available only when the financial statements have been audited by Chartered
Accountants or Chartered Management Accountant and a return has been filed.

Tenth Schedule

Tenth Schedule which is a prohibitive provision relating to persons who do file the return is
proposed to be applicable to the persons who do not file return by the due date or the
extended date.

Restriction on foreign travel

The Federal Government has been empowered to stop travel outside Pakistan for persons
who were required to file the return of income however the same has not been filed. This
provision will however not be applicable for persons having NICOP, students, minors and
such other classes as the FBR may prescribe.

Collection of Tax at Import Stage

Under the Income Tax Ordinance, 2001 there was no right of the income tax department to
change the value of imported goods for the purposes of determining tax required to be
collected at the import stage. Now it is proposed that such a right can be enforced by the tax
department. This will handle under invoicing cases. Furthermore a concept of minimum
value has been prescribed.

Payments to Non-residents

The Commissioner of Income Tax in certain specified cases is entitled to give a ‘’NIL’ or
reduced rate certificate to a person making payment to a non-resident if the respective
conditions have been fulfilled. A strange amendment has been made whereby the words
‘without deduction of tax’ are proposed to be replaced by the word ‘with’. This means that in
no circumstances a ‘Nil’ withholding certificate can be made; however a Commissioner may

12 June 2024 5
issue a withholding certificate with a .0005 % rate. This incorrect and illogical amendment is
required to be withdrawn.

Payment for Goods, Services rendered and contracts executed, etc

Presently the Commissioner of Income Tax was allowed to issue a ‘Nil’ withholding certificate
in cases where conditions under the law are complied. The concept of ‘Nil’ withholding is
being dispensed with. Now it is proposed that only a reduced rate certificate can be issued.
Such rate may be .0005 %. This incorrect and illogical provision should be withdrawn.

Wealth Statement

In the provisions relating to Wealth Statement it is proposed that the term ‘assets’ shall
include foreign assets. This is a wrong insertion as foreign assets are already included and
the statement of foreign assets under 116A is only an Annexure to the main statement. This
insertion will justify the wrong statement filed earlier where foreign assets were not included.
It has to be withdrawn.

Advance Tax by distributors and dealers

At present supply of following products is subject to collection of advance tax by the

manufacturer, commercial importer, distributor, dealer and wholesaler as the case may be:

a. Pharmaceuticals
b. Poultry
c. Animal Feed
d. Edible Oil and Ghee
e. Auto parts
f. Tyres
g. Varnishes
h. Chemicals
i. Cosmetics
j. IT Equipment
k. Electronics
l. Sugar
m. Cement
n. Iron & Steel Products
o. Fertiliser
p. Motor Cycles
q. Pesticides
r. Cigarettes
s. Glass
t. Textile
u. Beverages
v. Paint, or
w. Foam

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This law is governed by Section 236G and 236H of the Ordinance. Now it is proposed that
all supplies will be subject to collection of advance tax by the respective manufacturer,
distributor, dealer or the wholesaler as the case may be. The general rate is 1% and .05%
for others and retailers respectively.

This is an excellent step. However, in practice it is counter productive as most of the dealers,
distributors, wholesalers and retailers are not registered and the advance tax becomes the
cost of the manufacturers etc .

Income of Persons in Tribal Area

The exemption from tax and withholding provisions which is expiring on June 30, 2024 is
proposed to be extended to June 30, 2025.

Rate of Tax on distribution of cigarettes

The present rate of tax deduction at source is proposed to be increased from 1% to 2.5%.

Reduction in tax rate for full time teachers

There is a reduction in the rate of tax for a full time teacher. It is proposed to be withdrawn.

Non-performing Loans in Banking Companies

It is proposed that any non-performing loan so classified in the financial statement of a

banking company subject to tax under the Seventh Schedule as per IFRS 09 shall not be
treated as an allowable expense. There is no need for this provision.

This provision is in contradiction with the primary concept of the Seventh Schedule where
financial statements as furnished to the State Bank of Pakistan form the basis of determining
the tax liability. Furthermore there is adequate safeguard in other provisions of the Seventh
Schedule to this effect.

There is no need to disturb the main theme of the Seventh Schedule where the financial
accounts of the bank form the basis of determining the tax liability.

Furthermore the proposed insertion that only the amount treated as loss shall be allowed as
deduction is again, against the primary theme of the Seventh Schedule and is apparently in
contradiction of present rules.

Tenth Schedule

Tenth Schedule is a prescription of prohibitive rate of collection/ withholding in cases where

the person is not in the active taxpayers list. Substantial changes are proposed in this
schedule.

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Rate of Tax on acquisition of
Property to be paid by the
purchaser and collected by
the registration authorities

Market value does not 12%

exceed Rs 50 million

From 50 to 100 million 16%

Exceeds 100 million 20%

Profit on Debt Section 151 35%

Advance Tax on sale or 10%

transfer of immovable
property

Advance on sale to 2%
distributor, dealers and
wholesalers, other than sale
of fertiliser

Advance tax on sales to 2.5%

retailers

Tax on persons who are on

active taxpayers list but
have not filed the return of
income by the due date or
extended due date

Advance tax on sale of

immovable property

Market value does not 6%

exceed 50 million

50 to 100 million 7%

Above 100 million 8%

Advance tax on purchase of

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immovable property

Market value does not 6%

exceed 50 million

50 to 100 million 7%

Exceeds 100 million 8%

Federal Excise Act

Federal Excise duty at the rate of 5% is proposed to be imposed on allotment or transfer of

commercial property and first allotment or transfer of residential property in such mode and
manner and subject to such conditions and restrictions as may be prescribed by the Board.

Under the Federal Excise Act 2005 excise duty can be levied on any item provided in the
First Schedule to the Federal Excise Act,2005. This provision has been used for the levy of
excise duty on property as referred above. However an immovable property is a subject
having a special connotation under the Federal Legislative List. Therefore it would have to
be constitutionally decided whether or not any excise duty can be levied on immovable
property.

An excise duty has been proposed on supply of sugar to any manufacturer Rs 15 per kg.

Sales Tax

Sales Tax on Advances

Sales tax incidence arises at the time of supply. Advances received as not subject to sales
tax. In that past, prior to amendment in the law made by the Finance Act, 2007, such
advances were treated as supplies which were subsequently deleted. Now it is again
proposed that sales tax incidence will be there at the time of receipt of advances. This is a
wrong law and the proposal is required to be withdrawn.

Sales Tax on Retail Price

DAP fertiliser shall be subject to tax under the Third Schedule which is retail price

Fifth Schedule

Zero rating of sales tax is proposed to be finished on the following products

a. Infants products and writing equipments etc (Entry 12)

b. Milk (PCT 04.01) (Entry 16)
c. Fat Filled Milk (PCT 1901.9090) (Entry 17)

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 d. Plant and Machinery for Exporter etc (Entry 21)

Zero rating for import by Charitable Hospital shall not be zero rated.

Exemption from sales tax

Exemption from sales tax on import or supplies have been withdrawn for the following items
however some items have been placed under the reduced rate.

Description Entry in the New rate

Sixth
Schedule

a. Edible vegetable from Afghanistan 13

a. Fruits imported from Afghanistan excluding 15

apples

b. Newsprint and books but excluding brochure 32 10%

leaflet and directories

c. Colours in sets 86 10%

d. Writing, drawing and making inks 87 10%

e. Erasers 88 10%

f. Exercise books 89 10%

g. Pencil sharpener 90 10%

h. Other drawing instruments etc 96 10%

i. Pens etc 97 10%

j. Pencil including colour pencils 98 10%

k. Medical equipments (all kinds) 112

l. Medical equipment diagnostics etc 120

m. Supplies of machinery in Tribal areas 151 6% till June 30,

2025 and
afterwards
12% to June
30, 2026

n. Supplies of electricity to Tribal areas etc 152 6% till June 30,

2025 and
afterwards
12% to June

12 June 2024 10
 30, 2026

o. Goods excluding electricity and natural gas 166

supplied to hospital run by charitable hospitals
of 50 beds or more

p. Oil cakes and other solid residues 169 10%

q. Tractors 170 10%

r. Machinery and equipment imported under 174

special concessionary regime

On Local Supplies

Exemption from tax on local supplies has been omitted and a new rate has been prescribed.

a. Vermicularis, sheemal, bun etc (10% new rate proposed)

b. Poultry feed, cattle feed, sunflower seed meal, rapeseed meal and canola seed meal
(10%)

New Exemption on imports and local supplies

Description Reference

a. Imports of goods received in the 175

event of national disaster etc from a
foreign government

b. POL Products 176

1. MS Petrol
2. High Speed Diesel Oil
3. Kerosene
4. Light Diesel Oil

Local supplies

a. Milk except branded (see zero rating proposal also)

b. Iron and steel scrap

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Sales Tax at a special rate Eight Schedule

Following items are now proposed to be subject to general rate of sales tax

a. LPG Rate at present is 10

b. Integrated retailer Rate at present is 15
c. Locally manufactured by hybrid vehicles

Imported personal computers and laptop computers, note books whether or not
incorporating multimedia kit is subject to sales tax at the rate of 5% to 10 %

Pharmaceuticals

Substances registered as drugs under the Drugs Act, 1976 (XXXI of 1976) and medicaments
as are classifiable under chapter 30 of the First Schedule to the Customs Act, 1969 (IV of
1969) except the following, even if medicated or medicinal in nature, namely:- (a) filled
infusion solution bags imported with or without infusion given sets; (b) scrubs, detergents
and washing preparations; (c) soft soap or no soap; (d) adhesive plaster; (e) surgical tapes;
(f) liquid paraffin; (g) disinfectants, and (h) cosmetics and have been made from the 1st day
of July, 2022 are subject to sales tax at the rate of 1% without any input tax.

It is proposed that henceforth the reduced rate and special system will be applicable only for
‘Substances registered as drugs under the Drugs Act, 1976 (XXXI of 1976)’. Other items are
now subject to full rate of tax.

Special manner of collection of Sales Tax on Cellular Phones in CKD/CBU

Cellular Mobile phones or satellite phones to be charged on the basis of import value per
set, or equivalent value in rupees in case of supply by the manufacturer at the rate as
indicated against each category:

Description Sales tax on CBU Sales Tax on Sales tax on

at the time of imports in CKD / locally
import or SKD condition manufactured in
registration / IMEI CBU condition in
number or CMOs addition to tax
under column (4)

a. Not 18% ad valorem 18% ad valorem 18% ad valorem

exceeding
USD 500

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 b. Exceeding 25% ad valorem 18 ad valorem 18% ad valorem
USD 500

Collection of Sales Tax by the buyer

Under the Eleventh Schedule registered persons are required to collect tax from the supplier
of certain goods, mostly raw material and deposit it to the government.

Withholding Agent Supplier Category % of Sales tax

a. Registered Person Lead for battery 75 to 80 percent

b. Registered person Supplying gypsum under 0 to 80%

manufacturing chapter 25 or limestone flux
cement under chapter 25

c. Registered person Person supplying any kind 0 to 80%

of coal under Chapter 27

d. Registered person Person supplying any kind 0 to 80%

of waste of paper and paper
board

e. Registered person Person supplying any kind 0 to 80%

of plastic waste

f. Registered Person supplying any kind 0 to 80 %

of crushed stone and silica

At the moment this schedule is subject to the condition that supplies are made by an Active
Taxpayer as defined in the Sales Tax Act, 1990 to other registered persons with exception of
advertisement services. This clause is proposed to be substituted by the following:

‘Supplies made an active tax payer as defined in the Sales Tax Act 1990 to another
registered with the exception of supplies referred to in serial number
a. Advertisement services
b. Supplier of lead to battery manufacturers
c. Supplies of gypsum and limestone flux
d. Coal;
e. Waste of paper and paper board
f. Plastic waste
g. Crushed stone and silica’

This is a correct amendment as many Active Taxpayers were not depositing sales tax
collected by them from the manufacturers.

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Petroleum Levy

Sales tax on POL products has been withdrawn and levy has been proposed on the POL
products under The Petroleum Products (Petroleum Levy) Ordinance, 1961 as under:

Petroleum Unit Minimum Maximum

Products Petroleum levy Petroleum levy
rate (in rupees per rate (in rupees per
unit) unit)

High speed diesel Litre Rs 60 Rs 80

oil (HSDO)

Motor gasoline Litre Rs 60 Rs 80-

Superior Kerosene Litre Rs 50 Rs 50

Oil (SKO)

Light Diesel Oil Litre Rs 50 Rs 75

(LDO)

Hi Octane Blending Litre Rs 50 Rs 75

component (HOBC)

E-10 Gasolene Litre Rs 50 Rs 75

Liquified Petroleum Metric ton Rs 30,000 Rs 30,000

Gas (produced /
extracted in
Pakistan)

This is not a correct measure for the reason that in this manner the buyers will not be eligible
to claim input tax unless specifically allowed. Furthermore, there will be issues with respect
to allocation of proceeds to provinces under NFC. This is a VAT and is required to be a part
of the overall VAT system.

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