The Tax Laws (Amendment) Bill, 2024, introduced by FM, aims to tighten the government’s grip on non-filers and enhance tax compliance across the country. While the intent is clear—curbing unregistered economic activities and expanding the tax base—the bill raises several concerns, particularly around its implementation and the lack of clarity in some provisions.
The bill targets significant amendments in the Income Tax Ordinance, 2001, the Sales Tax Act, 1990, and the Federal Excise Act, 2005, with a focus on improving tax compliance and reducing economic informality. However, certain aspects of the bill present challenges that may hinder its effectiveness.
Income Tax Ordinance, 2001
The bill introduces important insertions/amendments under the Income Tax Ordinance, 2001, specifically in Section 114C (Restriction on economic transactions by certain persons). This section now defines "Eligible" and "Ineligible" persons for tax purposes. An "Eligible" person is one who has filed a tax return for the preceding year with sufficient declared resources (130% of cash/assets in wealth or financial statements), including immediate family members. "Ineligible" persons are those who fail to meet these criteria.
Ineligible persons will face restrictions on transactions, including the purchase of motor vehicles, immovable properties, and securities. Section 114C also imposes banking restrictions, such as limitations on account operations and cash withdrawals. However, exemptions apply for certain low-CC vehicles, non-resident transactions, and public companies, though cash withdrawal limits remain in effect.
Another key provision under the Income Tax Ordinance is Section 175AA (Exchange of banking & tax information related to high-risk persons), which mandates the sharing of taxpayer data (including data algorithms) between the tax authorities and banks. Banks will be required to report discrepancies in accounts, helping tax authorities identify high-risk individuals.
The bill also amends Section 222 (Appointment of Auditors), empowering the tax board to appoint auditors (contractual or third-party) for tax purposes. These auditors will be included as income tax authorities under Section 207, expanding the oversight role of the tax authorities.
The richest 10% in Pakistan earn 16 times more than the poorest 10%, contributing to a deeply unequal tax system that disproportionately benefits the elite while leaving the rest of the population marginalised.
Sales Tax Act, 1990
The Sales Tax Act, 1990 amendments in the Tax Laws (Amendment) Bill, 2024 focus on improving tax compliance and enforcement. A significant change is the introduction of a "data-based risk management system," which may limit input tax claims based on taxpayer profiles and risk assessments.
Additionally, the Commissioner is empowered to take strong enforcement actions, including freezing accounts, seizing assets, and sealing business premises for non-registered persons.
Further, the bill gives the Board and the Commissioner the authority to appoint experts for audits, investigations, litigations, or valuations. This extends the role of external experts in tax compliance. Furthermore, Section 73 of the Sales Tax Act will be amended to revise input tax credit limits. The new limits, which will be decided through Sales Tax General Orders, will replace the current annual limit (Rs. 100 million) and tax period limit (Rs. 10 million).
Federal Excise Act, 2005
The Federal Excise Act, 2005 is amended with a focus on goods that do not comply with required tax stamps or tracking mechanisms. Section 26 (Power to seize products) is extended to include goods without properly affixed tax stamps, barcodes, or labels. The bill allows for the seizure of counterfeit goods or goods that do not meet these requirements.
Section 27 (Confiscation of products) now extends to include products without the required monitoring stamps, as well as counterfeit goods. The bill also authorises the Board to delegate confiscation and destruction powers to Federal or Provincial officers by notification in the official Gazette, subject to certain conditions.
Broader Tax Challenges
Pakistan’s tax system remains heavily reliant on withholding taxes, with much of the burden falling on the already compliant taxpayer base (taxing the taxed). Sectors like agriculture, retail, and real estate have consistently evaded taxation, with only Punjab legalising agricultural income tax while other provinces remain stagnant. This reluctance to confront entrenched interests highlights a broader issue in Pakistan’s tax system, where political considerations often override necessary reforms.
Public expenditure continues to prioritise rent-seeking sectors, with State-Owned Enterprises (SOEs) costing the government Rs. 828 billion in financial losses during FY23, despite an already deficit-ridden budget for FY 2025. Meanwhile, the revenue shortfall has increased, estimated at Rs. 321 billion during the first six months (July-December 2024), even with a 23.3% year-on-year increase in tax collection.
Pakistan’s low tax-to-GDP ratio, coupled with limited public expenditure on social security (0.5% of the GDP spent on social security versus 7% of GDP by Uzbekistan), contributes to a disillusioned populace that remains outside the documented economy. Many individuals are excluded from the formal tax system due to a lack of financial literacy and resources to hire chartered accountants and claim advance tax paid on their behalf. As aptly highlighted by Dr. Ikram Ul Haq time and again, this leads to inflated tax collection figures anyway.
The income gap between the top and bottom percentiles of the population further discourages participation in the formal economy. The richest 10% in Pakistan earn 16 times more than the poorest 10%, contributing to a deeply unequal tax system that disproportionately benefits the elite while leaving the rest of the population marginalised.
Pakistan must address the informal economy estimated to be 34% more than the documented economy in FY23, introduce clearer regulations, and overcome political resistance to tackling entrenched interests
A Critique
This Bill presents several challenges in terms of its clarity and implementation. First, it includes undefined provisions, such as the "data-based risk management system" and “data algorithms,” which raise concerns about how high-risk individuals will be identified, creating uncertainty about the bill’s effectiveness. Additionally, the restrictions on transactions for "ineligible" persons, including limitations on cash withdrawals and asset acquisitions, may be difficult to enforce without clear guidelines on implementation. This lack of clarity could lead to enforcement challenges and administrative bottlenecks, resulting in confusion, delays, and potentially increased litigation.
Furthermore, the bill’s reliance on external auditors and third-party experts to manage tax compliance, despite of glaring conflict of interest, could strain the capacity of tax authorities, especially as they take on expanded powers under the new provisions. More importantly, the bill fails to address the broader structural issues in Pakistan’s tax system, such as political resistance to reform, dependence on withholding taxes, and widespread tax evasion in sectors like agriculture, retail, and real estate. Without tackling these systemic issues, the provisions of the bill may offer only a partial solution, perpetuating the challenges of low tax compliance and underreporting in the long run.
Conclusion
The Tax Laws (Amendment) Bill, 2024 aims to address critical gaps in Pakistan’s tax system by targeting non-filers and improving tax compliance. While it introduces necessary provisions, such as restrictions on ineligible persons and enhanced enforcement measures, its success depends on clear implementation guidelines and effective enforcement, along with much-needed structural reparation.
For sustainable tax reform, Pakistan must address the informal economy estimated to be 34% more than the documented economy in FY23, introduce clearer regulations, and overcome political resistance to tackling entrenched interests. Until these structural issues are addressed, the bill’s provisions may only provide a partial solution to Pakistan’s broader tax challenges.