The Finance Act 2023 has been passed on the 26th of June 2023 with various changes and budgetary reforms including higher rates of tax, regulatory duties, and long-awaited reforms in the pension rules.
Finance Act 2023 has been passed by the National Assembly and approved by the President on 26th of June 2023 with certain amendments including the imposition of additional customs duties, regulatory duties on the import of luxury items, Federal Excise Duty on fertilizers (5%), and sweet drinks (10 to 20%), and higher tax rates income tax for persons falling under higher income slabs.
Major Reforms and Changes in the Revised Approved Budget 2023-24
- The income tax slabs for individuals having a high bracket of income i.e. Rs.200,000/- per month or Rs.2,400,000/- per annum have been revised with an increase of 2.5% on the existing slab rates. A flat increase of 2.5% has been imposed on each slab.
- Withholding income tax on cash withdrawal from banks at the rate of 0.6%. The tax will be applicable on cash withdrawals exceeding Rs.50,000/- in a single day by non-filers.
- Withholding tax on bonus shares issued by the listed companies to the shareholders at the rate of 10% of the value of bonus shares. Previously, withholding tax on dividends paid by the companies was charged at the rate of 15%, however, profit distribution in the form of bonus shares was not taxed.
- A flat tax at the rate of Rs.2,000/- has been introduced on the sale of old technology electric fans. The purpose is to discourage the sale and use of inefficient electric fans and to promote the replacement of modern energy-saving fans to reduce the burden on the power sector. However, to give time to the existing manufacturers for upgradation/modernization of the manufacturing technology, the imposition of this tax has been pended till the 1st of January next calendar year giving six months to the industrialists for preparation/upgradation of technology.
- At present, there are about 62000 pending tax cases in different fora having tax impact of more than Rs. 3.2 trillion. Alternate Dispute Resolution Committees have been introduced as a system for speedy disposal/decision on pending cases comprising three members that will be headed by a retired judge of the Supreme Court or High Court, one member or representative of the FBR, and the taxpayer or his authorized representative. The decision of the three-member committee will be binding on the FBR, however, the taxpayer, if not satisfied with the decision, will have the right to challenge the decision in other higher courts.
- Minimum wages have been increased from Rs.25,000/- to Rs.32,000/- per month.
- The minimum monthly pension from EOBI has been increased from Rs.8,000/- to Rs.10,000/-.
Austerity Measures
Considering the fiscal deficit a cut in non-employee-related expenditure (other than development expenditure) of 15% has been kept intact in the current financial year. A total ban has been imposed on the purchase of all types of vehicles except essential vehicles such as Ambulances, waste management vehicles, etc.
Moreover, a ban on the purchase of Air Conditioners has been imposed in the current financial year.
Pension Reforms
Since the past few years, the pension expenditure had increased from the annual salary expenditure of the Government sector. Various reforms in this context were under consideration. In this regard, in the current year’s budget, a few reforms have been introduced which are as under:-
- No multiple pensions will be admissible to retired officers from now onwards. At present, various retired officers are enjoying benefits in the shape of multiple pensions from different departments. Now, they will have to opt for only one pension at a time. Initially, this step has been introduced for retired employees of grade 17 and above.
- As per the existing Pension Rules, after the death of a retired employee his or her spouse, then dependent children, and later unmarried or divorced daughters enjoyed a pension. Now, in the current budget, a time limit has been imposed. After the death of an employee, the spouse will get the family pension, however, after the death of the spouse, the descendants will enjoy a pension for a period of only ten years.
- Previously the ad-hoc increases in the pension had a compounding effect on the monthly take-home pension. This means, that the annual ad-hoc increases announced by the Government from time to time, were calculated in such a manner, that the increase was compounded taking the effect of earlier increases in the base amount. For example, in ‘year 1’ an increase of 10% was announced on the existing pension ‘P’, and in the next year, ‘year 2’, another increase of 10% was announced. The subsequent increases announced later on will be calculated on the cumulative amount as under:-
Increase in Pension (year 2) = (P + P*10%) * 10%.
With the implementation of reform approved in the current budget, the subsequent increases will be calculated on the initial existing pension without adding the increases allowed previously. The example of the calculation above, in this case, will be as under:-
Increase in Pension (year 2) = P + (P*10%) + (P*10%)
This step will also minimize the financial impact of the pension bill of the country in the long run.
Pension or Pay
At present it is in practice that many employees of the Government, after retirement get a pension which is continued in case of their re-employment. It is now approved that the retired employees in case of their re-employment will get either pension or salary related to their re-employment. This step is to discourage re-employment and to cope the unemployment in the country. This step will on the one hand give opportunity to fresh people for employment and on the other hand, will reduce the financial burden on the budget by giving multiple benefits to employees which is not justified in an underdeveloped country having limited resources.
Miscellaneous
Other miscellaneous points of the Federal Budget 2023-24 include
- Re-imposition of regulatory duties on non-essential items such as mobile phones, vehicles, etc.
- Abolishing duties on certain items including synthetic filament yarn of polyester and second-hand clothing
- Enhancement of monetary limit for foreign remittances from Rs.5 million to US$ 100,000 in terms of section 111(4) of the Income Tax Ordinance 2001 describing unexplained income for taxation.
- Imposition of five percent federal excise duty (FED) on fertilizers and the Di-Ammonium Phosphate (DAP) for generation of additional revenue of Rs35 billion.
- Raising the federal excise duty (FED) on sweet drinks from 10 to 20 percent.
- Increase the rate of withholding tax on buying and selling of property by one percent, especially for non-filers.
- All tax measures introduced in a mini-budget in mid-February 2023 have been kept intact in the Federal Budget 2023-24.
Conclusion
The changes in the Finance Act 2023 that were made after the presentation of the initial finance bill 2023-24 are a step towards the finalization of the IMF bailout program as the last installment of the said program is on hold since November last year. Although all the points of concern were addressed still, due to a gap in the external financing, the Government was unable to win the trust of the donner. The provisions finalized in the Finance Act 2023-24 are considered to enhance the trust level between the IMF and Pakistan Government. However, the impact of increased taxation will strike the general public especially the salaried class, that are already suffering from huge inflation for a long, particularly last year.
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Disclaimer
The post is for information and educational purposes. The information has been gathered by the team of Fiscal Updates from the direct sources, however, the information in this post may not be used in any legal document. For trading and investment decisions, proper professional advice should be sought.