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Business Recorder
7 days ago
- Business
- Business Recorder
Documentation measures in Finance Act, 2025: an analysis
Pakistan is faced with the serious issue of non-documentation of economic transactions leading to substantial under-reporting of actual income from businesses. This is the main reason for low tax collection in the country. It is the author's view that under-reporting is an issue larger than people out of tax net. Various measures are introduced, from time to time, to curb under-reporting by incorporating various provisions in the tax laws for mandatory documentation. In the Finance Act, 2025 two such measures have been introduced which are the topic of discussion of this article. Section 21 (q) ten percent of the claimed expenditure made attributable to purchases made from persons who are not National Tax Number holders: Provided that in case of purchase of agricultural produce this clause shall only apply to the purchase made from middle man: Provided further that the Board may, by notification in the official Gazette, exempt persons or classes of persons from this clause subject to such conditions and limitations as may be specified therein; (s) fifty percent of the expenditure claimed in respect of sale where the taxpayer received payment exceeding two hundred thousand rupees otherwise than through a banking channel or digital means against a single invoice containing one or more than one transactions of supply of goods or provisions of services. At the outset, it is stated that in ordinary circumstances, under the normal course and generally acceptable fiscal systems both these amendments are incorrect and represent bad law. However, the situation on ground in Pakistan would have to be examined with reference to practices in the market and the continued resistance of the retailers and wholesalers against all measures to report correct incomes. With respect to provisions introduced under sub-section (s) it is stated that law in the present form is incomplete. Section 21 relates to expenditure claims by the tax payer. Whereas the transaction being included in this sub-section relates to supply of goods or rendering of services. This mismatch would have to be settled. The only possibility, without providing any basis, would be an ad-hoc system whereby a ratio will be determined for total supplies in that particular case with those without complying with the provisions under sub-section (s). For example, total supplies are of Rs 100 and those not complying the provisions are Rs 10 then 10 percent will be the ratio applied for expenditure disallowance in that particular case which may be treated at Rs 80. If so then 10 percent would be attributed to such supplies being Rs 8 and an actual disallowance will be made for Rs 4. This is the only possible way if the system has to work. If it is so then unanswered questions will be: a. Pakistan works under the self-assessment system and the return filed is treated as an assessment order under Section 120 of the Ordinance. It is not conceivable that every case would be examined before being treated as assessment order with respect to this section. This would mean that taxpayers would be required to 'voluntarily' add this amount in the return to be filed; and b. The status of expenditure such as depreciation, interest being financial charges, etc. In addition to the issues raised above, which are procedural in nature, in the author's view the primary problem in this case is with reference to the use of the words 'banking channel' and 'digital payment'. The word 'banking channel' has not been defined in the Income Tax Ordinance, 2001. We are also not aware of any related statute where this term has been defined. The Ordinance has used the word 'normal banking channel' in sub-section (4) of Section 111 of the Ordinance as under: (4) Sub-section (1) does not apply to any amount of foreign exchange remitted from outside Pakistan through normal banking channels not exceeding five million Rupees in a tax year that is en-cashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect. For the purposes of Section 111, the term means that remittance is received by the bank not via currency exchange etc. Furthermore, it required that remittance has been credited in the bank account of the person who claimed the immunity under sub-section (4) of Section 111 of the Ordinance. This, therefore, means that criterion is the trail to the bank account of the recipient not the bank account of the payer. The term 'digital payment' has also not been defined in the Ordinance; however, it is our view that the term 'digital means' as defined in 2(17B) of the Ordinance would include digital payment. It states as under: (17B) 'digital means' means digital payments and financial services including but not limited to—online portals or platforms for digital payments/receipts; online interbank fund transfer services; online bill or invoice presentment and payment services; over the Counter digital payment services or facilities; card payments using Point of Sale terminals, QR codes, mobile devices, ATMs, Kiosk or any other digital; payments enabled devices; or any other digital or online payment modes. In technical literature the terms used are: Digital payments: A digital payment, sometimes called an electronic payment, is the transfer of value from one payment account to another using a digital device or channel. This definition may include payments made with bank transfers, mobile money, QR codes, and payment instruments such as credit, debit, and prepaid cards. Digital payments can be partially digital, primarily digital, or fully digital. A partially digital payment might be one in which both payer and payee use cash via third-party agents, with payment providers transferring the payment digitally between the agents. A partially digital payment involves a combination of digital and physical cash transactions. A common example is when a worker in a city sends money to their family in a rural area using a money transfer service. The sender uses a digital platform or service to initiate the transfer, but the recipient receives the funds as physical cash from an agent at a physical location. A primary digital payment might be one in which the payer initiates the payment digitally to an agent who receives it digitally, but the payee receives the payment in cash from that agent. A fully digital payment is one in which the payer initiates the payment digitally to a payee who receives it digitally, and it is then kept and spent digitally. Over the counter digital payment and services have been included in the definition of digital means. There can be views whether or not the term 'digital payment' is exclusive or inclusive; however, taking a broader view in the context of the case under consideration it would include any manner of a 'digital credit' in the payment account of the seller being A in this case. Before any further discussion firstly the rationale for introduction of this sub-section would have to be identified. It appears that this sub-section has been introduced to discourage supplies/sales to people who do not make payment through banking channels. The ideal end is that all payments are made through a crossed cheque so that bank accounts of both buyer and seller are identified. Nevertheless the text of the law does not correspond to this ideal situation. This has been explained in the following paragraphs: In case if there is a supply of goods or rendering of services by A to B then B has following options: a. Cash payment; b. Payment by crossed cheque; c. Bank to bank transfer; d. Deposit of cash in the bank account of A with reference to particular invoice; e. Deposit of cash in the bank account of A on lump sum or f. The invoice remains outstanding. It is generally considered that only the transactions covered under (b) and (c) are permitted under sub-section (s). In the author's view, this presumption is not correct. Transactions covered under (d) and (e) cannot be targeted under this sub-section as the supplier has identified that payment for supplies has been made through the banking channel and the same falls under the digital payment as described above. In a strict sense, a banking channel or over-the-counter digital payment does not mean that amount must necessarily be routed or transferred from the bank account of B to the bank account of A. There can be varying views on the interpretation of the word 'banking channel' and over the 'counter digital payments'; however, for all practical reasons in case if FBR intends to apply the provisions in real market situations then transactions as referred to in (d) and (e) are to be treated as not subject to this sub-section. It is reiterated that the author is of the view that such transactions are already out of this provision. With respect to sub-section (q), it is stated that a minimum threshold would have to be necessarily provided in this sub-section as there are many people who are allowed to enter into commercial transaction in goods, not being agricultural goods, who are not required to obtain NTN such as a person having income for the year less than Rs 600,000. The law as enacted effectively means that a case has been made that a transaction of billions of rupees can be made with a person without NTN. The only penalty is disallowance of 10 percent of expenses so recorded. The correct course of action for documentation and tax compliance would be to state that purchases above a certain amount, say Rs 1 million, cannot be allowed if made from a person who does not possess a NTN. It is so as it is not practically possible to engage in such a level of activity without NTN. As stated earlier the author may not agree with the provisions introduced, however, keeping in view the ground realities and resistance by the under-reporting individuals and businesses, the provisions as introduced be implemented in the manner indicated. Copyright Business Recorder, 2025
Express Tribune
16-07-2025
- Business
- Express Tribune
PM advises FBR to go slow on curbing cash economy
Listen to article Prime Minister Shehbaz Sharif has directed officials to gradually implement the decision of treating half of cash expenses above Rs200,000 as part of income as the business community defers its strike, except for the Lahore Chamber that will press ahead with plans to close shops on Saturday. The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) postponed the strike for one month after meeting the government's economic team at the Ministry of Finance on Tuesday. However, the Lahore Chamber of Commerce and Industry (LCCI), which was once considered close to the PML-N, announced that it would go on strike on July 19. LCCI President Mian Abuzar Shad said that his chamber would observe the strike due to rejection of its demand to defer the enforcement of the law for one month. The business community wants immediate withdrawal of the Federal Board of Revenue's (FBR) authority to arrest people on allegations of fraud, powers to add back 50% of cash expenditure above Rs200,000 to the income and depute taxmen in factories. It also demanded that the FBR's discretion to determine input adjustments and the enforcement of electronic invoicing should be suspended. In a meeting held at the PM Office on Monday, Shehbaz Sharif asked tax authorities to adopt a go-slow policy instead of swiftly enforcing the recently approved tax law, according to the government sources. They said that the PM was of the view that the FBR may gradually implement the condition of adding back the cash expenditure of over Rs200,000 to the income. The step has been taken in the budget to discourage the use of cash by traders and firms. According to new Section 21S and Q of the Income Tax Ordinance, 50% of the expenditure claimed in respect of sale where the taxpayer received payment exceeding Rs200,000 otherwise than through a banking channel or digital means against a single invoice containing one or more than one transactions of supply of goods or provision of services will be treated as income. Section 21(q) states whereby 10% of the claimed expenditure attributable to purchases made from persons who are not National Tax Number (NTN) holders shall be disallowed. However, the tax authorities were trying to find a mechanism to adopt a gradual approach as it would require amendment to the ordinance. One of the options was to issue an explanatory note but it would lack the binding legal force. Pakistan's leading business chambers on Tuesday again asked Finance Minister Muhammad Aurangzeb to immediately suspend the laws that authorise the arrest of taxpayers and penalise the use of cash. The government claimed that it could not suspend the law until the International Monetary Fund (IMF) was taken into confidence. Interestingly, last week the government bypassed the IMF to exempt taxes on sugar import. In a press note, the finance ministry said that an important meeting was held with representatives from the business community, chambers of commerce and traders' organisations. The meeting thoroughly discussed concerns over Section 37A and other related matters introduced under the Finance Act 2025. Aurangzeb assured the business community of the government's full cooperation, emphasising that the objective was to prevent large-scale tax fraud and not to harass legitimate and honest businesses. It was decided in the meeting that a committee would be formed under the chairmanship of Special Assistant to Prime Minister on Industries and Production Haroon Akhtar Khan. Besides government officials, the committee will also comprise nominated representatives from the business community. The committee will hold detailed consultations over 30 days and present a mutually agreed solution to the PM. After the meeting, FPCCI President Atif Ikram Sheikh announced the postponement of the strike for one month. However, he was immediately interrupted by the LCCI president, who said that Lahore would observe the strike because of the rejection of its demand. The finance ministry first announced that the business community had postponed the strike but later it issued an amended version and deleted the sentence related to the strike. Suhail Altaf, representing the Rawalpindi Division, said that the government had assured that it would not create hurdles in the way of business activities until the matter was resolved by the committee. The FBR on Tuesday also issued new instructions to empower the district administration to seize cigarettes being sold without valid tax stamps.
Express Tribune
11-07-2025
- Business
- Express Tribune
Businessmen slam punitive laws
Listen to article Pakistan's leading business chambers on Friday asked the government to immediately suspend the laws that authorise the arrest of taxpayers on allegations of fraud and penalise the use of cash for over Rs200,000 worth of business transactions or else they will begin an agitation campaign. The demands were made from the platform of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) in the presence of Minister of State for Finance Bilal Azhar Kayani and members of the Federal Board of Revenue (FBR). Finance Minister Muhammad Aurangzeb did not attend the FPCCI meeting, where representatives of almost all the chambers and associations were present. The business community wants the immediate withdrawal of the FBR's authority to arrest people on allegations of fraud, powers to add back 50% of cash expenditure above Rs200,000 in income and depute taxmen in factories, said FPCCI President Atif Ikram Sheikh. Sheikh demanded that the FBR's discretion to determine input adjustment and the enforcement of electronic invoicing should also be suspended. The government has taken these measures to minimise the use of cash in the economy and to crack down on tax fraud. "A thief will be called a thief but we will ensure that the law is not wrongly applied," said Minister of State Bilal Kayani while responding to demands from the business community. He stressed that those powers could not be suspended until the law was amended by parliament. "We may not agree with everything that the business community has demanded but discussions will continue in the coming days," said Kayani while indicating the government's resolve to withstand the pressure from the traders and business leaders. The easiest thing was that the government should have left the arrest powers in the hands of assistant commissioners but it introduced safeguards in it, said the minister of state. He added that the explanatory memorandum on budget would be issued on coming Tuesday, which should address some of their concerns. The FPCCI president said that the business community wanted to resolve the issue through negotiations but other participants of the meeting threatened to go on strike from July 19 if those powers were not withdrawn. Kayani said that there were many businesses that did formal transactions but there were others that dealt in cash and those should not be rewarded. According to new Section 21S and Q of the Income Tax Ordinance, 50% of the expenditure claimed in respect of sales, where the taxpayer received payment exceeding Rs200,000 otherwise than through a banking channel or digital means against a single invoice containing one or more than one transactions of supply of goods or provisions of services will be treated as income. Section 21(q) states that 10% of the claimed expenditure attributable to purchases made from persons who are not National Tax Number (NTN) holders shall be disallowed. These steps are taken to discourage the use of cash in business transactions. "People are extremely angry and it is getting difficult for us to control them," warned FPCCI Patron-in-Chief SM Tanveer. He said that the economy was passing through a difficult phase for the past two years and the government had chosen to harass taxpayers in the middle of this. "We do not want a strike on July 19 but the message from the government is that the FBR is the new NAB," said Sohail Altaf, a leading business leader from Rawalpindi. He warned that if the agitation began, it would be difficult for the government to reverse the negative perception. Saqib Fayyaz Chohan, another business leader, said that if the FBR did not withdraw the arrest powers and continued the implementation of e-invoicing, it would be difficult for them to move along. FBR Member Operations Hamid Ateeq Sarwar explained that those powers were only meant to be used against the people involved in tax fraud through fake sales tax invoices. He said that the adding-back income clause would also not impact return filing for tax year 2025 and any such question would be asked next year. Pakistan Vanaspati Manufacturers Association Chairman Sheikh Omar Rehan said that the FBR had deputed its staff in ghee factories that paid taxes at the import stage, urging them to withdraw the officers immediately. Sardar Tahir Iqbal, a representative of the real estate sector, said that the Capital Development Authority (CDA) chairman violated the prime minister's instructions and increased transfer fee charges from Rs250 per yard to 3% of the property value. He said that this single increase denied the benefit of reduction in withholding tax rates for the buyers of properties. Ajmal Baloch, who claimed that he had support of 12.5 million traders, threatened to go on strike if the powers to arrest and add-back income were not withdrawn immediately.
Business Recorder
12-05-2025
- Business
- Business Recorder
Eliminating FED alone won't revive Pakistan's real estate, says ABAD chairman
Withdrawal of the Federal Excise Duty (FED) on property transactions will not lead to substantial real estate activities as a reduction in the overall tax burden - currently up to 15% - is also necessary to boost the sector, according to Hassan Bakshi, chairman of the Association of Builders and Developers of Pakistan (ABAD). In an exclusive interview to Business Recorder, ABAD chairman welcomed the reports that the government plans to eliminate the FED on property transactions after Prime Minister Shehbaz Sharif approved a summary submitted to the federal cabinet. However, he urged the government to reduce what he called tax burden over the sector. 'There are various types of taxes applied during property transfers, totaling up to 15%, with the FED accounting for 3% to 7% of that,' Bakshi explained. 'When transferring a property, filers have to pay 13% to 15% in taxes, whereas non-filers have to pay between 35% to 40%.' Non-filer overseas Pakistanis should be allowed to purchase property at filer tax rates. Earlier in February this year, Finance Minister Muhammad Aurangzeb reiterated the government's commitment towards structural reforms, saying it would not support the 'plots and files' business, a speculative practice prevalent in Pakistan's real estate sector, calling it unsustainable. 'ABAD does not support file trading,' Bakshi clarified. Regarding a property package was to be offered by the government, Bakshi stated that no property package could be successful without a reduction in taxes. ABAD chairman also urged the government to ease tax policies for overseas Pakistanis who wish to invest in the country's real estate sector. 'Non-filer overseas Pakistanis should be allowed to purchase property at filer tax rates.' He proposed that once the property was purchased, the Federal Board of Revenue (FBR) could request their NTN (National Tax Number), and if they failed to provide it, they should be given a 15-day grace period to enter the system — or the system should automatically register them as filers. Commenting on the growing trend of Pakistanis investing in Dubai real estate, he noted that the surge was due to multiple factors, including: Fixed dollar-to-dirham parity Clear property titles where ownership is transparent and secure; A digitised system Rational exchange rates '[Moreover,] a flat 4% transfer tax in Dubai, regardless of whether the investor is a filer or non-filer. 'In the event of legal disputes, court cases are resolved quickly in Dubai and do not drag on for 20 years.' Bakshi stated that 10 million Pakistanis are employed abroad, and if the government facilitates them, it would create 'a positive impact on the real estate sector'. 'Real estate is an allied industry in which one sector is interconnected with another — if one sector grows, the others automatically gains momentum as well.' He further noted that currently the allied industries are operating at 30% to 50% capacity, and if their share reached 80%, the government could collect an additional Rs2 trillion in tax revenue. While discussing the allied industries, he expressed concern over the recent increase of Rs60 per 50kg bag in cement prices, despite a decline in inflation and interest rates. SBP reduces key interest rate by 100bps, takes it to 11% Bakshi also pointed out that the Pakistan Stock Exchange is associated with about 300,000 people, with a market capitalisation of Rs10 trillion, whereas the real estate sector involves one million individuals and has a market capitalisation of Rs90 trillion. 'First-time investors in real estate should be offered subsidised loans, and the installment of such loans should be equivalent to the rental income of the property being purchased. 'With government-led subsidised loans to home seekers, builders and developers can take care of the housing supply.' In response to another question about the growing trend of portions in Karachi, ABAD chairman said investments in different projects such as Malir Development Authority (MDA), Lyari Development Authority (LDA), and Taiser Town had been stuck for 25 to 30 years. 'The government has failed to hand over properties. As a result, people have been forced to seek alternative housing solutions. This is a failure of the government that couldn't transfer plots to rightful owners within the promised time.' ABAD chairman further noted that under the Benazir Income Support Programme (BISP), multiple sub-programmes are being run such as Benazir Kafalat Programme, Benazir Taleemi Wazaif (Educational Stipends), Benazir Undergraduate Scholarship Programme, and Benazir Nashonuma Programme. 'The government should reallocate a portion of Rs461 billion budget of the Benazir Kafalat Programme to launch a Benazir Housing Subsidy Programme, offering subsidised loans to people. 'If only 10% of the Kafalat Programme's budget is redirected, it will not place any extra financial burden on the government, and a number of people will be able to own a house.' He added that the Benazir Housing Programme could be exclusively for first-time home buyers. Meanwhile, Pakistan Real Estate Investment Forum (PREIF) president Shaban Elahi stated that in the upcoming budget for the financial year 2025-26, incentives should be provided to those investing in real estate, whether they are local investors or overseas Pakistanis. 'Real estate sector is the backbone of any economy, and if the government reduces taxes, investment in real estate will increase, which in turn will lead to higher tax revenues for the government,' Elahi said. The government should implement a friendly real estate investment policy that remains consistent for at least 5 to 10 years Regarding expected abolition of the FED, PREIF president made similar remarks that taxes on the real estate sector should also be reduced along with FED. 'Due to high tax rates in Pakistan, even local investors do not see profitability in real estate. Moreover, when investors do invest, they begin receiving various notices from the FBR, which creates an atmosphere of fear and discouragement,' he maintained. In contrast, he highlighted that in Dubai, local investors made substantial real estate investments over the past five years. Conduct of FBR officers visiting private premises closely monitored by civil agencies: Finance Division 'Overseas investment that previously flowed into Pakistan has significantly declined. The major reasons for this is the excessive taxation on real estate and the constant inquiries from the FBR.' Elahi urged the government to create an investor-friendly environment to boost both local and overseas investments in the real estate sector. 'The government should implement a friendly real estate investment policy that remains consistent for at least 5 to 10 years. This will help restore investor confidence.' He also suggested that Sections 236C and 236K (advance taxes) of the Income Tax Ordinance should be reduced to 1%. Lowering the rates under 236C and 236K would increase the volume of transactions, ultimately benefiting the government, enhancing real estate investment, and creating employment opportunities, he suggested. Real Estate Professional Forum Pakistan's president Abdul Sattar Sheikh proposed the immediate formation of a task force to 'revive the real estate activities', including experts from the ABAD other professionals from the sector. 'Instead of relying on instructions from international financial institutions, the government should take the initiative and fully support the real estate sector.' When asked about the upcoming fiscal year's budget, he expressed optimism, urging the government to act on the proposals presented by the ABAD chairman and other experts. Adeel Ahmed, a real estate professional, stated that slowdown in the real estate sector was not only due to excessive taxation. 'The system itself is not functioning properly,' he said. Ahmed mentioned that there are more than 60 industries connected to real estate, including cement, steel, tiles, sanitary ware, and others. 'If the government simply resumes development work in areas like Taiser Town and Hawke's Bay, which have been stalled for many years, it will restore public confidence and lead to a boost in the real estate business.' He highlighted that while there was much discussion around taxes on real estate, 'no one talks about the widespread bribery that occurs during property transfers'. Ahmed emphasised that abolishing the FED might bring some activity to the real estate sector, but real growth would only occur when corruption and bribery in property transactions were eliminated.
Express Tribune
30-01-2025
- Business
- Express Tribune
FBR refuses to ease property purchase restrictions
Listen to article The Federal Board of Revenue (FBR) has rejected proposals by the Association of Builders and Developers (ABAD) to ease restrictions on property purchases, following a recent meeting of the National Assembly's Standing Committee on Finance. During a meeting chaired by Bilal Azhar Kiani, a member of the ruling Pakistan Muslim League-Nawaz (PML-N), FBR officials confirmed that the requirement for questioning property purchases above Rs10 million cannot be waived. The officials stated that tax filers would still be required to disclose their sources of income via a revised wealth statement, and that changes to property evaluation for tax purposes—such as allowing gold, stocks, bonds, or inherited properties to be considered—are not permissible under current laws. In the meeting, ABAD suggested that there should be no inquiries for properties worth up to Rs25 million and the first house purchased for up to Rs50 million. They expressed concern that FBR's new regulations could drive investment out of Pakistan. However, FBR officials responded that property purchases would be recorded under the NTN (National Tax Number) when the property is purchased, and the registrar will ensure that the new property is entered into the system. Buyers will then approve the property entry via their accounts. Kiani, suggested that efforts should be made to simplify the property purchasing process. He proposed amendments in tax laws to include spouses, children, and dependents, to clarify the eligibility for cash and cash equivalents, and to allow revisions in wealth statements. The subcommittee also recommended that the FBR chairman submit a revised draft of the tax amendment recommendations for further review.
