Government Implements New Tax Measures to Align with IMF Criteria, Hits Property and Travel Sectors

In an effort to meet the criteria set by the International Monetary Fund (IMF), the government has rolled out a series of new tax measures and amendments, aiming to generate additional revenue for the coming fiscal year. Announced by Finance Minister Muhammad Aurangzeb in the National Assembly, these changes impact a wide range of sectors including property, travel, and corporate taxes.

Property and Travel Sectors Face New Taxes

One of the most significant changes is the introduction of a capital value tax (CVT) on properties within Islamabad. The new measures include a CVT of Rs500,000 for farmhouses between 2,000 and 4,000 square yards and Rs1 million for those exceeding 4,000 square yards. Residential properties in the capital will also be affected, with a CVT of Rs1,000,000 for houses ranging from 1,000 to 2,000 square yards, and Rs1,500,000 for properties larger than 2,000 square yards.

The travel sector is also hit hard with the Federal Excise Duty (FED) on air tickets seeing a substantial increase. Economy and economy-plus foreign travel tickets will now incur a duty of Rs12,500, up from the previous Rs5,000, representing a 150% hike. For other classes, the tax rates have been raised by 40%. These changes will take effect from July 1 and apply to various IATA Traffic Conference Areas, with specific rates set for different regions.

Corporate and Income Tax Adjustments

Exporters will now face the standard corporate tax rate of 29%, alongside a super tax where applicable, moving away from the previous 1% tax on export turnover. For individuals and associations of persons earning over Rs10 million annually, a 10% surcharge on income tax will be implemented. This shift has faced opposition but is deemed necessary to align with IMF requirements.

In an attempt to support environmentally friendly practices, the government has extended reduced tax rates for hybrid vehicles until June 30, 2026, as part of the auto policy. However, the Federal Excise Duty on cement has been increased from Rs3 to Rs4 per kilogram.

Broader Tax Exemptions and Penalties

The amended Finance Bill also includes a range of exemptions and reduced rates aimed at specific sectors and demographics. Sales tax benefits for the erstwhile FATA/PATA regions have been extended for another year. Exemptions on the sale or transfer of immovable property have been widened to include war-wounded persons and serving or ex-personnel of the armed forces and federal or provincial governments.

The penalty for non-compliant telecom operators has been reduced, with fines now set at Rs50 million and Rs100 million. A new tax fraud investigative wing will be established within the Federal Board of Revenue (FBR) to tackle tax evasion and fraud more effectively. Additionally, the dividend withholding tax rate has been lowered from 20% to 15%, and a 25% rebate for teachers and researchers has been reinstated.

Mixed Impact on Commodities and Services

The Finance Bill introduces an 18% sales tax on milk supplied by corporate dairy farms and a 5% Federal Excise Duty on lubricating oil. The FED on the minimum price for selling cigarettes at retail has been reduced to 55% from 60%. Furthermore, the bill levies a capital value tax on the construction and sale of residential, commercial, or other buildings and on the development and sale of plots.

Specific goods and services have also been exempted from sales tax, including newsprint and books, various medical disposables and equipment, and certain imports under the Sixth Schedule of Sales Tax. This includes bovine semen and certain pharmaceuticals for personal use.

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