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Pakistan Approves Introduction of Money Bill to Reform Tax Laws

Strategic Insights

— 2 min read

The government of Pakistan, led by Prime Minister Imran Khan, has decided to introduce a Money Bill in the National Assembly next week to withdraw around 80 income tax exemptions and reform the tax laws. This move is aimed at fulfilling a prior condition set by the International Monetary Fund (IMF) for the revival of its $6 billion bailout program. The IMF has asked Pakistan to withdraw income tax exemptions worth Rs140 billion, although the exact quantum can only be determined once the bill is laid in the National Assembly.

The Income Tax (Second Amendment) Bill 2021 will seek to streamline the tax regime for non-profit organizations, listing of firms in the stock market, exemptions for oil refineries, special economic zones (SEZs) under the China-Pakistan Economic Corridor, and Independent Power Producers (IPPs). Prime Minister Imran Khan chaired a meeting to review these exemptions, followed by another meeting in the Federal Board of Revenue (FBR). The government has decided to withdraw income tax exemptions available to IPPs, tax credits for investment in balancing, modernization, and replacement of plant and machinery by the manufacturing sector, and tax exemptions for Real Estate Investment Trusts.

Key Takeaways:

  • 80 income tax exemptions will be withdrawn through the introduction of the Income Tax (Second Amendment) Bill 2021.
  • The bill aims to fulfill a prior condition set by the IMF for the revival of its $6 billion bailout program.
  • The government has decided to withdraw income tax exemptions available to IPPs, which cost the national kitty Rs27 billion last year.
  • Tax credits for investment in balancing, modernization, and replacement of plant and machinery by the manufacturing sector will not be extended beyond June 30, causing a revenue loss of Rs65 billion last year.
  • The tax exemption on income of Sukuk holders from Sukuk issued by the Second and the Third Pakistan International Sukuk Company Limited will be withdrawn.
  • Tax credit equal to omitted exemption will be offered for donations paid to Prime Minister's Special Funds for Victims of Terrorism, Flood Relief Fund, and to the Chief Minister's (Punjab) Relief Fund for Internally Displaced Persons (IDPs).
  • The income tax exemption available to sports boards and reduced rate for Pakistan Cricket Board can be withdrawn.
  • The income tax regime of the film industry may also undergo changes.

Statistics:

  • Income tax exemptions worth Rs140 billion will be withdrawn as per the IMF's condition.
  • The government has estimated the total cost of tax exemptions at Rs1.15 trillion, including Rs378 billion income tax exemptions.
  • The cost of tax credits is Rs104.5 billion, and exemptions from total income amounted to Rs212 billion.
  • Pakistan will take additional revenue measures equal to 1.4% of the size of its economy or over Rs700 billion to achieve a tax collection target of around Rs6 trillion in the next fiscal year under the IMF deal.
  • The FBR will need to collect an additional Rs1.3 trillion in the next fiscal year, including over Rs700 billion through additional revenue measures.

Sources:

  • Prime Minister's Office
  • Federal Board of Revenue (FBR)
  • International Monetary Fund (IMF)
  • The Express Tribune
  • Pakistan International Sukuk Company Limited

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