Finance Bill 2023 Introduces significant changes in Taxation

June 27, 2023 (MLN): The Finance Bill 2023 has undergone notable amendments that will impact income tax, sales tax, and federal excise duty.

Income Tax

Tax Impact on Salaried Persons with change in tax rates:

Moreover, virtual business presence in Pakistan now falls under the definition of Permanent Establishment (PE). This includes businesses conducting transactions through electronic mediums, regardless of physical presence.

The Finance Bill originally increased the annual turnover limit for Small and Medium Enterprises (SMEs) from Rs250 million to Rs800m and included IT or IT-enabled services. However, the Finance Act has omitted these changes.

Exemptions under Section 7E, such as capital assets and properties subject to income tax, are now inapplicable to individuals not appearing in the Active Taxpayer List (ATL), except for those not required to file returns or statements.

The threshold under Section 21(m) has been raised from Rs25,000 to Rs32,000.

The second proviso was added to Section 37A, excluding certain share disposals from its application, including those of listed companies not settled through NCCPL and those made during the IPO listing process.

Section 44A now includes advance tax under the purview of exemptions or taxation as provided by the Foreign Investment (Promotion and Protection Act) 2022.

Tax credit for the construction of houses introduced in the Finance Bill has been omitted in the Finance Act.

Tax on windfall income, profit, and gains, previously applicable to every person for the past five tax years, now applies only to companies for the previous three tax years. The government is empowered to determine what constitutes windfall income through a notification.

Section 134A introduces Alternative Dispute Resolution (ADR) for tax liabilities of Rs100m or above, refund admissibility, waiver of default surcharge and penalty, and other specific relief.

A committee appointed by the Board will resolve disputes mentioned in the application, with pending court cases being eligible for ADR except where criminal proceedings are initiated.

Advance tax obligations are imposed on individuals deriving income from construction, disposal of buildings, and development and sale of plots. The tax is payable on a project-by-project basis in four equal installments for the tax year.

Section 236C (2A) requires proof of discharge of Section 7E liability before registering, recording, or attesting property transfers.

The exemption for overseas Pakistani buyers or transferees from advance tax, previously introduced, has been removed.

Capital gain tax on securities acquired before July 01, 2013 has been zero rated.

Advance tax on motor vehicles having engine capacity more than 2000cc has been based on value ranging from 6% to 10%.

For vehicles where engine capacity is not applicable, (i.e. EV) and value is more than Rs5m, the rate of advance tax will be 3%

Sales Tax

Similarly, for the sales tax, the rate of further tax has increased from 3% to 4%.

The price limit for zero rating of preparations for infant milk for retail sale has been raised from Rs500 to Rs600 per 200 gms.

DAP (Di-ammonium Phosphate) is no longer exempt from fertilizers and is now subject to a 5% sales tax without input adjustment.

Several exemptions introduced in the Finance Bill, such as contraceptives, bovine semen, saplings, and agricultural machinery, have been withdrawn.

Wheat Bran is provided with backdated exemption since 01-07-2018.

The fixed tax regime and restriction of input tax adjustment have been extended to the supply chain for drugs and raw materials of APIs, previously applicable only to importers and manufacturers.

Sales Tax on Services (Islamabad)

The rate of tax on IT and IT-enabled services was initially reduced from 16% to 5% without input adjustment. However, it has now increased to 15%.

Federal Excise Duty (FED)

Fertilizers are now subject to a 5% FED.

The applicability of FED on inefficient fans and bulbs, introduced in the Finance Bill, will be effective from January 01, 2024.

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