This Tax Alert outlines the numerous changes introduced the Finance Bill, 2024 (the Bill), which was presented at the National Assembly on 12 June 2024. Proposals in the Bill include individual, corporate and indirect tax measures and are summarized in this Alert under the following enumerated sections:

1. Individual tax developments
2. Corporate tax developments
3. International tax developments
4. Indirect tax developments
5. List of abbreviations

A separate Global Tax Alert, tailored specifically for multinational entities and corporations, is available here.

1. Individual tax developments

1.1. Tax rates for non-salaried individuals and Association of Persons (AOPs)

Rates of tax for non-salaried individuals and AOPs, and corresponding income slabs (i.e., income/tax brackets) are revisited with the highest rate being 45% on income exceeding 5.6m Pakistani Rupees (Rs.5.6m) as against the existing income slab of Rs.4m taxable at 35%. The number of slabs is proposed to be reduced from seven to six. For taxpayers deriving income more than Rs.500m, total tax incidence will be 55% including "super tax" at 10%. The impact of proposed changes may be summarized as follows:

1.2. Salaried taxpayers

A salaried taxpayer is an individual whose income chargeable under the heading "salary" exceeds 75% of his taxable income for the year. The Bill proposes to change the income slabs for salaried individuals by reducing the tax base; however, the highest slab rate would remain unchanged at 35% on income exceeding Rs.4.1m as against the existing threshold of Rs.6m taxable at 35%. This will result in an increase in the tax burden on salaried individuals. The impact of proposed changes may be summarized as follows:

1.3. Capital gains on disposal of immoveable property

The rates of tax on capital gains arising on disposal of immovable property is proposed to be replaced as under:

The Bill does not propose any change in the tax incidence on disposal of immovable property purchased on or before 30 June 2024. However, the Bill does propose to tax the capital gain on the disposal of immovable property purchased on or after 1 July 2024 at 15% for persons appearing in the ATL on the disposal date of the property. For persons not appearing in the ATL, the gain on disposal of immovable property will be taxed at the applicable general tax rate for corporate and non-corporate persons. The tax rate for individuals and AOPs not appearing on the ATL shall not be less than 15%.

1.4. Advance Tax on sale or transfer of immovable property

Currently, a fixed rate of advance tax on sale of immovable property has been prescribed at 3% of the consideration received. The Bill proposes to replace this rate based on the gross amount of consideration received upon such sale as follows:

1.5. Advance tax on purchase of immovable property

Currently, the Income Tax Ordinance, 2001 has prescribed a fixed rate of advance tax on purchase of immovable property at 3% of the fair market value of the immovable property. The Bill proposes to replace this rate based on the fair market value of immovable property ranging from 3% to 4% as follows:

1.6. Principles of taxation for Association of Persons

Presently, the share of profit from an AOP is not separately taxable in the hands of its members, provided the tax due on the AOP's income has been duly paid.

The Bill proposes to add a condition requiring that this tax exemption on the share of profit from an AOP will be available to the members upon the AOP's submission of its audited financial statements with its income tax return. This proposed amendment will apply for AOPs with turnover of at least Rs.300m for the current year or for any preceding tax year.

1.7. Power to enforce filing of return of income

The Finance Act, 2022 introduced an amendment to broaden the tax base, whereby the Federal Board of Revenue (the Board) was empowered to impose restriction for use of certain amenities on persons who fail to file the return of income. The restrictions currently in place include:

• Disabling of mobile phones or mobile phone sims
• Discontinuance of electricity connection
• Discontinuance of the gas connection

The Bill seeks to further empower the Board to impose restrictions on foreign travel of such person. These restrictions, however, will not apply to:

• Minors
• Students
• Persons who hold a National Identity Card for Overseas Pakistanis (NICOP)
• Persons or classes of persons whom the Board specifically notifies in this regard

1.8. Wealth statement

At present, the Commissioner is empowered to require an individual to submit his wealth statement duly disclosing details of assets held either in his own name or in the name of his spouse, minor children or other dependents.

The proposed amendment would require the Commissioner to request the disclosure of foreign assets, alongside domestic assets in the wealth statement.

1.9. Rate of withholding tax on telephone/internet users

The standard rate of tax withholding applicable to telephone/internet users would remain unchanged (i.e., 15%). However, Bill proposes to enhance the rate to 75% of the amount of bill or sale price of prepaid internet/ telephone card for persons who fail to file required income tax returns (even after issuance of a notice requiring them to file a return of income) and are listed on the income tax general order issued by the Board in this regard.

1.10. Enhanced tax rates for late filers

The Bill proposes separate rates for deduction or collection of advance tax on the sale, purchase or transfer of immovable property for a person who fails to file a return of income and, only upon the sale, purchase or transfer of immovable property, files the return to appear on the ATL to avoid higher rates for non-filers. The proposed rates are higher for these filers than for timely filers, but lower than those for non-filers:

This tiered approach aims to maintain the incentive for timely tax compliance while offering a middle ground for those who file late, ensuring they do not benefit from the rates available to compliant taxpayers.

1.11. Enhanced tax rates for non-filers

The Bill proposes to further increase the current rates for tax deduction or collection for individuals who are not on the ATL, as outlined in the Tenth Schedule of the Ordinance, for certain transactions. This initiative aims to heighten the financial impact of noncompliance, thereby encouraging non-filers to file their returns of income and take advantage of reduced tax rates. The increased tax rates for specific transactions, aimed at this category of taxpayers, are specified as:

2. Corporate tax developments

2.1. Exports

The proposed legislation seeks to introduce an extra advance tax of 1% on the proceeds exporters receive from goods they export. This would be on top of the existing 1% tax that foreign exchange dealers or banking companies already deduct on the proceeds from exported goods. Additionally, it appears from the language of proposed amendment that tax deducted (other than additional advance tax collection of 1%) would be considered a minimum tax liability. As a result, income derived from exports would be subject to Normal Tax Regime (NTR).

2.2. Quarterly advance tax

In the event that a taxpayer fails to disclose its turnover or the turnover is unknown, the Bill proposes to authorize the Commissioner to calculate the quarterly advance tax as 120% of the turnover from the latest tax year for which the taxpayer has filed a return, compared to the current rate of 110%.

Additionally, the Commissioner is proposed to have the authority to reject a taxpayer's estimate of advance tax if the supporting documentary evidence is deemed unsatisfactory or if the estimate does not include necessary details as required by law. In such cases, the taxpayer will be required to pay advance tax based on the tax-to-turnover ratio for the latest assessed tax year applied on the turnover of the quarter. The proposed amendment that would give the Commissioner the power to reject the estimate filed by a taxpayers of his advance tax was initially introduced by the Finance Act, 2018, but later repealed by the Finance Act, 2021.

The Bill mandates that taxpayers provide the following details to the Commissioner when calculating the estimate of the tax payable for the quarter:

• Turnover for the completed quarters of the relevant tax year
• Estimated turnover for the remaining quarters
• Documentary evidence supporting the estimated expenses or deductions used in computing income
• Evidence of tax payments and tax credits, along with the computation of the estimated taxable income

The requirement to submit this information could be duplicative, as it is already covered in section 147(6) of the Income Tax Ordinance.

2.3. Taxation of banking companies

• Provision for advances and off-balance sheet items

Specific rules are provided to allow provisions for advances and off-balance sheet items. Presently, bad debts classified as "sub-standard" or "doubtful" under the Prudential Regulations issued by the State Bank of Pakistan (SBP), are not allowable as an expense.

With the adoption of International Financial Reporting Standard 9 — Financial Instruments (IFRS-9), banks are now required to provide for possible future credit losses against advances, off-balance sheet items or any other financial asset classified in Stage I, II or III as performing, under-performing and nonperforming.

The Bill proposes to disregard any provision made in a bank's annual accounts classified as above while working out its taxable income. This will be allowed when the debt pertaining to nonperforming assets is classified as "loss" under the Prudential Regulations issued by the SBP.

The Bill also proposes to disregard any provision or Expected Credit Loss for advances and off-balance-sheet items or any other financial asset under IFRS-9 that existed before or after 1 January 2024.

• Notional gains and losses

Under the law, any adjustment made in the annual accounts on account of application of International Accounting Standards 39 (Financial Instruments: Recognition and Measurement) and 40 (Investment Property) is to be disregarded when determining a company's taxable income.

Pursuant to adoption of IFRS-9, the Bill now proposes that adjustments made in the annual accounts of a banking company due to any applicable accounting standard, policy, guidelines, or instructions of SBP shall be excluded in computing the taxable income.

• Levy of super tax

The Bill proposes to clarify that super tax shall be leviable on banking companies for the tax year 2023 and for all subsequent tax years.

2.4. Option to obtain exemption certificate withdrawn

The Bill proposes to abolish the concept of issuance of "exemption certificate" for tax withholding from payments to resident persons or nonresident persons having permanent establishment in Pakistan (for sale of goods or execution of contracts). Instead, such persons would be entitled to obtain "reduced rate withholding certificate."

2.5. Deduction of tax on payment against sale of shares of a private company

Under the Finance (Supplementary) Act, 2023, every person acquiring shares of a company, other than a listed company, is required to deduct from the gross amount being paid as consideration for the shares a tax at 10% of the fair market value of the acquired shares.

The Bill seeks to amend this requirement, proposing that withholding of tax is required at the earlier of when consideration is actually paid or upon registration of shares with the Securities and Exchange Commission of Pakistan/SBP. Consequently, it seems that deduction of tax will be required when the shares are registered even if actual payment for the shares has not been made. The Bill also proposes to introduce a penalty equal to 50% of the tax involved, for noncompliance with this withholding tax provisions.

2.6. Advance tax on sales to distributors, dealers and wholesalers

Currently, manufacturers or commercial importers engaged in pharmaceuticals, poultry and animal feed, edible oil and ghee, auto parts, tires, varnishes, chemicals, cosmetics, information technology (IT) equipment, electronics, sugar, cement, iron and steel products, fertilizer, motorcycles, pesticides, cigarettes, glass, textiles, beverages, paint or foam sectors are required to collect advance tax at specified rates at the time of sales to distributors, dealers and wholesalers.

The Bill proposes to expand the scope of this advance tax collection to encompass all items sold by manufacturers or commercial importers to distributors, dealers and wholesalers.

2.7. Advance tax on sales to retailers

Similarly, manufacturers, distributors, dealers, wholesalers or commercial importers operating in pharmaceuticals, poultry and animal feed, edible oil and ghee, auto-parts, tires, varnishes, chemicals, cosmetics, IT equipment electronics, sugar, cement, iron and steel products, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint, or foam sectors are obligated to collect advance tax at specified rates during sales to retailers. Additionally, every distributor or dealer transferring goods to other wholesalers within these sectors is also subject to this requirement.

The Bill proposes to broaden the application of this advance tax collection to include all items sold by manufacturers, distributors, dealers, wholesalers or commercial importers to retailers and distributor or dealer to another dealer, distributor or wholesalers.

2.8. Consequences of not furnishing income tax return for discontinued business

Every person discontinuing a business is required to notify the Commissioner in writing of the discontinuance. Moreover, the business is also required to furnish a return reporting income for the period commencing on the first day of the tax year in which the discontinuance occurred through the date of discontinuance.

If a notice of discontinuance is not filed, and the Commissioner has reasons to believe that the business has been discontinued or is likely to be discontinued, the Commissioner may issue a notice requiring the business to file a return of income for a specified period within the time specified in the notice. Currently, if the business fails to comply with the notice issued as above, no penal action has been prescribed under the law.

The Bill proposes to introduce penalty for nonfiling of return in respect of a discontinued business, pursuant to a notice issued by the Commissioner, which is to be levied at the higher of:

1. 0.1% of the tax payable in respect of that tax year for each day of default
2. Rs. 1,000 per day of default

The minimum penalty is proposed at Rs.10,000 for individuals and Rs.50,000 in all other cases.

Similarly, the Bill proposes to treat the failure to file a return of income in respect of a discontinued operation, after receiving a notice from the Commissioner, as a prosecutable offence, which could entail a fine or imprisonment for a term not exceeding one year, or both. Any subsequent default may further entail a fine up to Rs.50,000 or imprisonment for a term not exceeding two years, or both. Additionally, the Bill proposes that if the person responsible for the discontinued business fails to furnish his last return of income, the Commissioner may proceed with a best judgement assessment.

2.9. Default surcharge

The Bill proposes to impose a default surcharge at the Karachi Interbank Offered Rate (KIBOR) plus an additional 3% per annum. At present, the surcharge is set at a flat rate of 12%, which is substantially lower than the prevailing interbank rate.

This modification is intended to bring the surcharge in line with the current economic and market conditions, thus creating a deterrent against late payment of taxes.

2.10. Tax appeals system

On 3 May 2024, the Tax Laws (Amendment) Act, 2024 (TLAA) was enacted, bringing significant changes in the appeal procedures provided in the federal tax laws. According to the changes introduced, pecuniary thresholds were prescribed for appeals to be filed against orders passed by the Revenue Officers. For cases concerning income tax, if the "value of assessment of tax" or "refund of tax" in an order passed by a Revenue Officer exceeds Rs.20m, the appeal would lie directly with the Appellate Tribunal. In cases below the Rs.20m threshold, the appeal would be filed before the Commissioner (Appeals). The next forum in both cases would be the High Court.

Due to varied interpretations of these requirements, the Bill proposes the following definitions:

• "Value of assessment of tax" means the net increase in tax liability as a result of the order sought to be assailed.
• "Value of refund" means net reduction in [tax] refund as a result of the order sought to be assailed.

Although the amendments to the appeals procedure took effect from 3 May 2024, all appeals that met the pecuniary threshold of Rs.20m and were pending before the Commissioner (Appeals) were to be transferred to the Appellate Tribunal by 16 June 2024. The Bill proposes to replace this date with 16 September 2024.

The Bill also proposes to clarify that the time limit for filing of appeals in respect of appellate orders passed by the Commissioner (Appeals) or the Appellate Tribunal and served before 3 May 2024 would follow the law in place before promulgation of TLAA.

2.11. Tax rate on dividend income

The rates of tax on dividends, including dividends received from mutual funds remains unchanged for the tax year 2024. However, the Bill proposes to tax dividend received from a mutual fund deriving 50% or more of its income through profit on debt at 25%.

Corresponding changes have also been made in the withholding tax provisions.

2.12. Capital gain tax rates on disposal of securities

The Bill proposes to replace the tax rates on capital gains arising on sales of securities. For securities purchased on or before 30 June 2024, no change is proposed. However, the Bill proposes to rescind the concessional rate of tax on sales of securities based on the holding period of securities purchased on or after 1 July 2024. This income would be taxed at 15% for persons appearing on the Active Taxpayers' List (ATL) on the date of acquisition and on the date of disposal. For persons not appearing on the ATL, capital gain is proposed to be taxed at the corporate tax rate for companies, and applicable slab rate with a minimum rate of 15% for individuals and Associations of Persons (AoPs). The proposed rates of capital gain tax on securities for the tax year 2024 and onward follow:

The tax rate for companies' debt securities remains at 29%.

For mutual funds, collective investment schemes or real estate investment trust (REIT) schemes, capital gain tax on redemption is proposed to increase from 10% and shall be deducted as follows:

For stock funds with dividend income that is less than capital gains, the withholding tax rate is proposed to increase from 12.5% to 20%.

Further, no capital gain shall be deducted if the holding period of the securities acquired on or before 30 June 2024 is more than six years. This proviso applies only in case of a mutual fund or collective investment scheme or REIT scheme.

2.13. Withholding tax on toll manufacturing

The Bill proposes to increase the withholding tax rate on payments to be made the sale of goods by a toll manufacturer from 5% to 9% in the case of a company and to 11% in other cases.

2.14. Advance tax on purchase, registration and transfer of motor vehicles

The Bill proposes to revise the rates of collection of advance tax on purchases, registrations and transfers of motor vehicles, as follows:

3. International tax developments

3.1. Transactions with associates

In relation to transactions between associates, the Commissioner is empowered to distribute, apportion, or allocate income, expenditures or tax credits between associates.

The Bill proposes to introduce a new condition whereby, notwithstanding the arm's-length principle, a claim of expenditure for sales promotion, advertisement and publicity (SAP) would be allowed to the extent of 75% of the total expenditure if any amount, in addition to SAP, is claimed for a royalty paid or payable (directly or indirectly) to an associate for the tax year or the two preceding tax years. The remaining 25% of SAP expense will be disallowed and allocated to the associate.

In this context, royalty is considered to be attributable to consideration on account of use of, or the right to use brand name, logo, patent, invention, design or model, secret formula or process, copyright, trademark, scientific or technical knowledge, franchise, license, intellectual property or other like property or right or contractual right.

Note that a Pakistan-source royalty earned by a nonresident person is taxable on a gross basis under the Final Tax Regime. Under such circumstances, the SAP expense allocated to the nonresident associate earning the royalty from Pakistan would not be allowed as an expense.

It is important to note that the Bill proposes to give retrospective effect to the application of the above principle by making it applicable for the tax year 2024 and onward.

4. Indirect tax developments

SALES TAX

4.1. Electronic invoice and licensed integrator

At present, the Board is authorized to specify persons or any class of persons to integrate their electronic invoicing system with the Board's computerized system for real-time sales reporting. The Bill proposes that every registered person specified by the Board, would be required to issues an e-invoice through a system implemented through "licensed integrator."

The Bill further proposes to define licensed integrator to mean a person licensed by the Board to provide an electronic invoicing system. Further, a penalty would apply amounting to the greater of Rs.1m or 1% of sales suppressed, for a licensed integrator who fails to integrate a registered person's system as required under the Sales Tax (ST) Act or ST Rules.

4.2. Taxability of Medicament

The Finance Act, 2022, introduced a reduced rate of 1% for substances registered as drugs under the Drug Act 1976. However, there was ambiguity regarding availability of the reduced rate on Medicaments. Through the Finance Act, 2023, Medicaments were allowed a reduced rate of 1% with retrospective effect. It is now proposed to withdraw the reduced rate of 1% on Medicaments, which would make them taxable at standard rate.

4.3. Sales tax on cellular phones

The Ninth Schedule lists the persons who are liable to pay sales tax on imported or locally manufactured cellular mobile phones in completely knocked down (CKD)/completely built units (CBU) form. Presently the tax on import and manufacture of mobile phones are on fixed value or ad valorem rate depending on the value of mobile phones. It is now proposed to have the following uniform ad valorem rates in VAT mode where the manufacturer and can adjust input tax paid at import of CKD/SKD.

¹ CKD refers to completely knocked down

² SKD refers semi-knocked down

4.4. Goods Chargeable to Sales Tax at Retail Price (Third Schedule)

The Bill seeks to insert the DAP (UREA) (i.e., a type of fertilizer) in the Third Schedule. Currently, DAP is taxable at the reduced rate of 5% on the value of supply subject to the condition that refund of excess input tax, if any, shall not be admissible.

The proposed addition will render the item subject to sales tax at the rate of 5% on retail price.

4.5. Goods Chargeable to Sales Tax at Zero Rate (Fifth Schedule)

The Bill seeks to withdraw the following entries:

4.6. Goods Exempt from Sales Tax (Sixth Schedule)

The Bill seeks to withdraw the following entries from Table I, effectively exemptions on import and local supply of these goods would no longer be available for the following items:

The Bill seeks to add the following entries in Table I for granting exemptions on import and supply of following goods:

The Bill seeks to withdraw the following entries from Table II, effectively eliminating the exemption on local supply of such goods:

The Bill seeks to insert the following entry in Table II for providing exemption on local supply of following goods:

4.7. Goods Subject to Sales Tax at Reduced Rates (Eight Schedule)

The Bill seeks to omit the following entries:

The Bill seeks to enhance the sales tax rate on the following goods:

4.8. Tax fraud

Scope of "tax fraud" has been clarified and enlarged to prescribe specific instances that would be considered tax fraud. Onus would be on the taxpayer to prove that he is not involved in the tax fraud.

4.9. Deregistration, blacklisting and suspension of registration.

Presently, if the Commissioner is satisfied that a registered person has issued sham invoices or engaged in tax fraud, he may "blacklist" the person. Blacklisting by the Commissioner is appealable before the Appellate Tribunal Inland Revenue.

The Bill proposes to remove the right to appeal a backlisting order before the Appellate Tribunal. Instead, the Chief Commissioner would be empowered, either on his own motion or upon application from the registered person, to examine the matter after providing the registered person an opportunity for a hearing. After examining the record of proceedings of the blacklisting order and making the necessary inquiries, the Commissioner may modify the blacklisting order as he deems fit.

4.10. Returns

Every registered person is required to submit monthly sales tax return. If sales tax returns are not filed, the assessing officer can only impose a penalty. The Bill proposes to give tax authorities the power to require any person to submit a sales tax return within 15 days from the date of serving notice or any other period specified in the notice.

An assessing officer may issue notice within the five-year period that follows the end of financial year in which return was due to be filed. However, this time limit is extended to 15 years in case of tax fraud.

4.11. Certain transactions not admissible

A taxpayer is required to make payment through banking channels if a transaction exceeds Rs.50,000. If the taxpayer fails to do so, corresponding input tax is disallowed to a registered buyer. The Bill proposes to apply the requirement for making payments through bank channels if a transaction exceeds Rs.50,000 in aggregate.

This proposal follows reported instances in which suppliers bifurcated their invoices to avoid being required to comply with the payment requirement. Apparently, the word "in aggregate" is proposed to be added for avoiding invoice splitting.

4.12. Value of supply

Currently, the Board is empowered to fix the value of supply of goods and imports. The Bill proposes to empower the Board to fix the value of imported goods that are taxable on the basis of retail price as well.

4.13. Time of supply

The collection of sales tax on advance payments was removed through the Finance Act, 2021. Now the Bill proposes to reintroduce advance payments to the definition of time of supply.

4.14. Default surcharge

It is proposed to enhance the rate of default surcharge from 12% to Karachi Inter-Bank Offer Rate (KIBOR) plus 3%.

4.15. Audit of sales tax affairs

The Bill proposed to clarify the mechanism for selecting and conducting tax audits.

The process for selecting tax audits has remained under litigation due to lack of clarity regarding mechanism for audit selection. The Bill proposes to require the Commissioner to communicate the reasons for audit selection; however, the Commissioner is not required to provide the taxpayer any opportunity to respond upon selection of audit proceedings. Further, the Bill proposes that audits may be selected based only on scrutiny of available records and not mere verification of taxpayer's declaration except any risk factors that are identified.

The proposed new law provides detailed procedures for assessing tax and auditing the affairs of the taxpayer in a comprehensive manner. Once the audit proceedings are completed, the assessing officer will shall make an assessment order and give the taxpayer an opportunity to respond.

The Bill also proposes to insert a new section on investigative audits. If during the course of an audit, tax authorities suspects that taxpayer is involved in tax fraud, they may move to investigative audit with prior approval of the Commissioner.

4.16. Investigative audit

If during an audit the Inland Revenue officer suspects that a registered person is involved in tax fraud, he may, with the prior approval of the Commissioner, initiate investigative audit against such person. For this purpose, the officer may call further information and collect evidence under other provisions of the Act within 90 days. After completing the investigative audit, the officer, provides an opportunity for a hearing and may assess due tax by issuing an assessment order. If the taxpayer fails to provide information and documentation, the officer may pass a best judgment order or blacklist the person and impose penalties or take other actions on account of tax fraud.

4.17. Assessment proceedings

Currently, all assessment-of-tax issues are addressed under a single section. The Bill now proposes to introduce a new section to outline assessment proceedings that apply to different situations. Examples of situations that have been proposed follow:

• Appeal effect orders

The timeline/procedure for issuing appeal effect orders is proposed to be aligned with that available in the Income Tax Ordinance, 2001.

• Best judgment assessment

The concept of best judgment assessment is proposed to be introduced in the law. Under this provision, if a person fails to file the return, the tax authorities are now empowered to pass an order and recover tax as per their best estimate. A corresponding change has also been introduced in the law that empowers the tax authorities to obtain a return from such person.

Various appellate orders have held that because the law currently does not empower tax authorities to pass a best judgment assessment order, noncompliance with tax audit proceedings could not lead to an ex-parte best judgment assessment. The Bill would fill this lacuna in the law, proposing that if a person fails to submit records/documents in compliance of tax audit proceedings, the tax authorities may make best judgment assessment.

Simultaneously, the tax authorities are being empowered to disallow input tax if the taxpayer is unable to provide documentary evidence or circumstances giving rise to the claim.

Further, the Bill proposes that if a best judgment assessment is issued based on failure to file a return, and the taxpayer thereafter files the return and pays the penalty and default surcharge, the best judgment assessment order would no longer be effective.

• Assessment and recovery of tax

A separate section has been proposed that would deal with assessment of tax against a taxpayer in certain scenarios – specifally, where the taxpayer has: 

• Not paid or short-paid sales tax that is due
• Claimed an input tax credit or refund that is not admissible
• Obtained an amount of refund that is not due

Simultaneously, the tax authorities are empowered to disallow input tax in case where the taxpayer is unable to provide documentary evidence or circumstances giving rise to the input tax claim.

It is further proposed that, in case of later two situations mentioned above, the tax amount of tax to be recovered would be proportionate amount based on the value of supply.

• Recovery of short/non-withholding of sales tax

If a person required to withhold tax either fails to withhold tax or, having withheld tax, fails to deposit it in the Government treasury, the tax authorities may recover the tax from the person along with a penalty levy and default surcharge.

• Time limit for passing orders 

A separate section is proposed that provides the timeline for issuance of show cause and the maximum time period by which an assessment order could be passed. It may be noted, however, that timelines remain the same as currently applicable.

4.18. Increase in sales tax withholding

The Bill proposes that persons engaged in supply of following items be required to withhold sales tax at 80%:

• Lead batteries
• Gypsum or limestone flux under chapter 25
• Coal under chapter 27
• Waster paper and paper board
• Plastic waste
• Crushed stone and silica

4.19. Offenses and penalties

Revision of penalties

The following penalties are proposed to be substituted:

Additions in penalties

Serial No. 25A levied strict penalties on Tier 1 retailers who fail to integrate their business with Federal Board of Revenue (FBR) systems. The Bill proposes to apply the same noncompliance penalties persons who fails to integrate their electronic invoicing system with Board’s Computerized System for real time reporting of sales.

The following new entry 25AA is proposed to be introduced:

FEDERAL EXCISE DUTY

4.20 Default surcharge

Similar to the amendments proposed in the Ordinance and ST Act, the Bill seeks to amend the rate of default surcharge from 12% per annum of the duty due to KIBOR plus 3% per annum.

4.21. Offenses, penalties, fines, and allied matters

The Bill proposes to impose fine up to Rs.50,000 or five times of duty involved, whichever is higher and to punishment with imprisonment extendable to five years or both on the person who, without the prior permission of the Commissioner, installs plant and machinery, commences production or removes plant and machinery, having value of Rs.50m and above.

It is also proposed that the retail outlet of any retailer shall be liable to be sealed, in a manner as may be prescribed, who is engaged in the sale of cigarette packs without affixing, or affixing counterfeited, tax stamps, banderoles, stickers, labels or barcodes.

4.22. Pecuniary jurisdiction in appeal

Section 33A was inserted through Tax Laws (Amendment) Act, 2024 effective from 3 May 2024, whereby all the cases pending before Commissioner (Appeals) that have a value of assessment of tax or refund of tax assessed exceeding Rs.5m will be transferred to Appellate Tribunal Inland Revenue on the 16 June 2024. The Bill now proposes to substitute the date 16 June 2024 with 16 September 2024.

4.23. Savings

The Bill seeks to reduce the time period specified in the relevant sections in respect of filing of appeal before the Appellate Tribunal Inland Revenue or reference to the High Court. Under the proposed amendment, the time period specified in the relevant sections for filing appeal of reference shall continue to apply if the Order of the Commissioner (Appeals) or the Appellate Tribunal Inland Revenue is received prior to the commencement of the Tax Laws (Amendment) Act, 2024.

4.24. Amendments in the First Schedule

The Bill proposes following amendments in Table I of the First Schedule to the FE Act:

Currently, under Sr. No. 9 and 10, duty applies to locally produced cigarettes at (1) Rs.16,500 per 1,000 cigarettes if their on-pack printed retail price exceeds Rs.9,000 per 1,000 cigarettes and (2) Rs.5,050 per 1,000 cigarettes if their on-pack printed retail price does not exceed Rs.9,000 per 1,000 cigarettes. The Bill proposes to amend both Sr. No.9 and 10 by enhancing the threshold of on-pack printed retail price of locally produced cigarettes from Rs.9,000 per 1,000 cigarettes to Rs.12,500 per 1,000 cigarettes.

The Bill proposes to insert the following entries in Table I of the First Schedule to the FE Act to levy duty on the goods provided therein.

The duty proposed under serial no.63 may not be in line with the provisions of section 3(1), providing scope for levy of duty read with section 3(5), on persons liable to pay duty, which may give rise to disputes. Further, similar dispute risk may also exist with respect to proposed levy of duty on supply of sugar by trader under Sr. No.64.

CUSTOMS

4.25. Amendments in the Third Schedule

The Bill proposes to insert a new serial no.23 to grant exemption on imports made by diplomats, diplomatic missions, privileged persons and privileged organizations that are covered under various Acts, Orders, Rules, Regulations and Agreements passed by the Parliament or issued or agreed by the Government of Pakistan falling under heading/sub-heading numbers 99.01, 99.02 and 99.05.

4.26. Resolution of controversies through Appellate Tribunal, Alternate Dispute Resolution and High Court

The Bill proposes to completely substitute the existing provisions governing the constitution and procedures of the Appellate Tribunal, the Alternate Dispute Resolution Committee (ADRC), and the reference to the High Court. The proposed amendments are consistent with those made in May 2024 to the Income Tax, Sales Tax, and Federal Excise Laws through the Tax Laws (Amendment) Act, 2024 (TLAA, 2024).

Appellate Tribunal

The principal changes relating to Appellate Tribunal include:

• Appointment of the Appellate Tribunal: The proposed provisions stipulate that the composition and appointment of the Appellate Tribunal, as well as rules, regulations, procedures, operations, member appointments, bench formations, case management systems, case distribution, and other related matters, will be governed by rules prescribed by the Federal Government.
• Appeals to Appellate Tribunal: The proposed provisions detail the appeal process for customs matters, requiring appeals to be filed within 30 days of the decision, along with a fee of Rs.20,000 for companies or Rs.5,000 for others. The Appellate Tribunal may accept late appeals with sufficient cause and can stay the recovery of duties and taxes for up to 90 days upon application, despite an ongoing appeal.
• Decision from Appellate Tribunal: The proposed amendment mandates that the Appellate Tribunal must resolve appeals within 90 days of their filing. Should a decision not be made in this period, the Tribunal, with the agreement of both parties and documented justification, may extend the deadline by an additional 60 days. At the initial hearing, the Tribunal will present the appellant with the alternative dispute resolution (ADR) option. If the appellant declines ADR and prefers to continue with the appeal, the Tribunal, in agreement with both parties, will set the hearing and decision dates according to the rules. Furthermore, the Tribunal is obliged to decide on appeals as scheduled, and adjournments are only permissible for compelling reasons, which must be written down and require a payment of at least Rs.50,000. Additionally, the Tribunal's order will be held in abeyance for 30 days, during which the Collector or the other party involved in the appeal may refer the case to the High Court.

Alternate dispute resolution

The key changes proposed in the Bill relating to ADR include:

• The application to opt for ADR must be accompanied by an initial proposal for dispute resolution from the applicant, which should include an offer of payment for duties and taxes.
• The timeframe for the Board to form an ADRC upon receiving an application would be reduced from 30 to 15 days.
• Additionally, a retired officer of the Customs Service of Pakistan at BS-21 would be added to the Committee's composition.
• The Committee would be required to resolve the dispute by a majority within 40 days, a reduction from the previous 90-day timeline, with the possibility of a 15 days’ extension.
• If satisfied, the aggrieved party would be required to withdraw any pending appeals and notify the Collector within 30 days. Following the withdrawal, the Collector would be obligated to withdraw any pending appeals within 30 days of the communication from the aggrieved party.

Reference to High Court

The key changes relevant to reference to High Court are as follows:

• The timeframe for referring a case to the High Court has been shortened to 30 days from the Appellate Tribunal's order, down from 90 days. The reference to the High Court must include a question of law or a mixed question of law and fact arising from the order.
• The filing of a reference, other than by the Customs department, shall be accompanied by a fee of Rs.50,000, an increase from the previous Rs.100.
• The amendment requires the High Court to implement a case management system to ensure that a reference filed under this section is resolved within the prescribed six months.
• Despite a reference to the High Court, duties are to be paid in accordance with the Appellate Tribunal's order. The Collector's recovery is suspended for 15 days following the communication of the Tribunal's order.
• If the High Court's judgment reduces the duties and taxes, resulting in a refund, the High Court may, upon application by an authorized Custom's officer within 30 days of the judgment, allow the officer to delay the refund pending a potential appeal to the Supreme Court.

4.27. Power to determine the customs value

The Bill introduces the concept of a "Publication Valuation Ruling” (PVR) alongside the existing "Valuation Ruling” (VR). The amendment specifies that no provisional determination of value shall be allowed in cases where either a VR or a PVR is in effect, regardless of whether any review or revision against such rulings is pending. This change aims to clarify and expand the scope of rulings that preclude provisional determination of value.

4.28. Punishment for offenses

The Bill proposes to introduce new offenses and impose penalties, as well as to replace certain existing penalties, as detailed below.

New offenses and penalties

Radioactive and nuclear material

New offenses are proposed concerning the smuggling of nuclear and radioactive material and the applicable terms are defined consistent with those in Pakistan Nuclear Regulatory Authority Ordinance, 2001.

These offenses are categorized based on the type and quantity of nuclear material involved. It is noted that if any offense involves a breach of national security, it will be addressed under the National Command Authority Act, 2010.

Additionally, a proposed amendment to section 6 allows the Board to delegate customs functions to officers of the “National Command Authority” and the “Pakistan Nuclear Regulatory Authority.”

The categories of the offenses and proposed penalties are as follows:

Smuggled Goods

Removal of Seized Goods

Substituted penalties

Smuggling of goods

Negligence of police officer

Obstructing a custom officer

Possession of prohibited goods

4.29. Delegation of powers

The Bill proposes to expand the Board's ability to delegate its functions and powers. Key changes include allowing the Board to delegate authority directly to the Chairman and extending the delegation hierarchy to enable specified officers to exercise the powers of their superiors, such as Members or Director Generals acting on behalf of the Board or Chairman, and Collectors of Customs assuming the powers of Chief Collectors of Customs.

4.30. Intelligence Bureau to assist the Officers of Customs

The Bill seeks to include the Intelligence Bureau in the list of entities whose officers are empowered to assist customs officers.

4.31. Detention, seizure and confiscation of prohibited goods

The Bill proposes to grant the Additional Collector of Customs or Additional Director the authority to extend the time period for the detention, seizure, and confiscation of prohibited goods. Previously, this power was vested in the Chief Collector or Director General, respectively.

4.32. Formulation of new directorates

The Bill proposes to formulate two new directorates namely Directorate General of National Targeting Centre and Directorate General of Trade-Based Money Laundering.

Each directorate will be led by a Director General and will include Directors, Additional Directors, Deputy Directors, Assistant Directors, and other officers as appointed by the Board.

4.33. Amendments in First Schedule

• Customs duty on following goods is proposed to be changed as per rates below:

• For the following goods, specific PCT codes are proposed to be created to charge the customs duty:

^* Rate is proposed to increase from 3% to 11%

^** Rate is proposed to increase from 0% to 20%

• The description of following PCT Codes is proposed to be amended and updated in the following manner:

• It is proposed to withdraw the customs duty on the temporary import of asafoetida, cumin, and other medicinal herbs from Afghanistan for subsequent exportation.

4.34. Amendments in Fifth Schedule

• Customs duty on the following goods is proposed to be changed as per rates given below:

• Exemption of Customs duty on following goods is proposed to be withdrawn and tax as per rates given in the First Schedule:

• The Bill seeks to reduce the duty to 0% on following goods, if imported by the local assembler/manufacturer registered under the Sales Tax Act and subject to annual quota determination by IOCO:

• The Bill seeks to reduce the duty to 0% on following goods (machinery and equipment), if imported by the local manufacturing units subject to the fulfillment of conditions mentioned below.
• The Engineering Development Board (EDB) shall certify in the prescribed manner that the imported goods are bona fide project requirement. The authorized officer of the EDB shall furnish all relevant information online to Pakistan Customs Computerized System against a specific user ID and password obtained under section 155D of the Customs Act.
• The goods shall not be sold or otherwise disposed of without prior approval of the FBR and payment of customs duties and taxes leviable as prescribed by FBR.
• Condition (iv) of the Part 1 of the Fifth Schedule.

• The Bill seeks to expand the scope of exemption of customs duties on import of fish or shrimp farming, seafood farming and sea food processing machinery and equipment as set out below:

• The Bill seeks to streamline the conditions under the chapter related to "Imports of Aviation Related Goods (i.e., Aircrafts and Parts, etc.) by Airline Companies/Industry under National Aviation Policy 2015" as follows:
• The exemption shall be admissible to the Airline Companies having valid registration and license from the Aviation Division, Government of Pakistan duly shared with the Customs Computerized System or Pakistan Single Window to the effect that the intending importer is operating in the country or intends to operate in the country in the airline sector.
• The Chief Executive, or the person next in hierarchy duly authorized by the Chief Executive or Head of the importing Company shall certify that the imported goods/items are the company's bona fide requirement and shall be used for the purpose as defined/notified by the Aviation Division, Government of Pakistan under the Aviation Policy. The importer shall declare all relevant information to the Customs while claiming exemption regarding genuineness of the claim through Customs computerized system or Pakistan single window.
• In case of deviation from the above stipulations, the Collector of Customs shall initiate proceedings for recovery of duty and taxes under the relevant laws.

4.35. Changes in Additional Customs Duty (ACD) and Regulatory Duty (RD)

The following measures have been outlined in the key features of the Budget 2023-24 concerning ACD and RD:

• Exemption of ACD on raw materials for fluids and powders used in hemodialyzers
• The imposition of ACD on localized auto parts to encourage the local manufacturing sector
• The imposition or increase of RD on flat-rolled products of iron and non-alloy steel, among other items, to encourage local manufacturing
• The rationalization of RD on the import of new and used vehicles
• The withdrawal of the exemption of RD on the import of ground nuts and margarine by the Food Confectionery, silver cans and lollipop sticks

PETROLEUM LEVY

4.36. Amendments in the Petroleum Products (Petroleum Levy) Ordinance, 1961

• The Bill seeks to fix the existing rates as minimum and has proposed to revise maximum rates as follows:

5. List of abbreviations