FBR unveils new tax regime with levy on social media income, relief for salaried class

ISLAMABAD: The Federal Board of Revenue (FBR) has introduced sweeping changes to the income tax system, including faceless audits and assessments, algorithm-based settlement of tax disputes, greater digital monitoring of banking transactions and new taxes on some life insurance and social media income.

The changes were introduced through the Finance Act 2026 and amendments to the Income Tax Ordinance, 2001, according to details issued by the FBR.

The reforms also reduce some taxes for salaried individuals, lower advance tax on international credit, debit and prepaid cards, cut advance tax on property purchases and sales, and remove super tax for certain taxpayers, according to Express News.

At the same time, the government has tightened tax compliance requirements for businesses, exporters, e-commerce operators, service providers and entities required to integrate their systems electronically with the FBR.

Faceless tax system

The FBR will be able to establish a National Faceless Centre to conduct audits, assessments and quality control for specified cases and tax years.

Under the new system, separate officers will handle auditing, assessment and quality control, while communication between tax officials and taxpayers or their representatives will take place electronically.

Where a hearing or sworn statement is required, it will be conducted electronically. The identity of the tax officer handling the case will remain confidential.

The reforms also introduce an algorithmic settlement mechanism for resolving tax disputes.

The system may generate a settlement offer based on factors including the stage of proceedings, the taxpayer’s previous compliance record and the nature of any discrepancy.

A taxpayer will have 10 days to accept the offer through the FBR’s IRIS system, deposit the specified amount and file a revised return.

Once an offer is accepted, issues covered by the relevant audit, notice or proceedings will be treated as settled. The settlement will not affect proceedings relating to other issues or tax years.

The FBR has also made approval from an independent case scrutiny committee mandatory before filing references in a high court or appeals or review petitions before the Federal Constitutional Court and Supreme Court.

The committee will include a retired judge of a superior court as chairman, a lawyer with at least 15 years’ experience in tax and commercial cases and a serving or retired FBR officer of Grade 20 or above. A chartered accountant may be included as a non-voting member.

The committee’s recommendations will be binding on the relevant commissioner.

Digital monitoring and compliance

The reforms introduce a new mechanism for monitoring banking transactions and comparing financial data with tax records.

Banks and electronic financial institutions will be required to electronically upload specified information on account holders whose deposits or withdrawals exceed Rs100 million during a reporting period to a central data hub.

The information will be compared algorithmically with tax and banking data. Where significant discrepancies are identified, cases may be referred to the FBR’s compliance risk management system.

Businesses that fail to install or integrate required electronic systems with the FBR’s computerised system may face a deduction equivalent to 3 per cent of claimed expenses.

The law also provides a tax credit equivalent to 10 per cent of the actual investment made in the installation, integration and configuration of electronic systems, which can be set off against normal tax.

Penalties for non-compliance with electronic requirements have also been increased.

A first default involving the failure to install, use or maintain required electronic resources may attract a penalty of 1 per cent of turnover or Rs1 million, whichever is higher. Each subsequent quarterly default will attract a penalty of Rs2 million.

Failure by an integrated entity to integrate its IT platform or share data may result in a penalty of Rs500,000 for the first default and Rs1 million for each subsequent default.

Audited financial statements submitted as images, scanned documents, password-protected files or otherwise inaccessible formats will be treated as blank or incomplete documents.

A taxpayer claiming excess credit over tax deducted and deposited at source will also face a penalty equal to the amount of the excess claim.

New tax on social media income

A 5 per cent withholding tax has been imposed on income earned through social media platforms.

Banks and non-bank financial institutions will deduct the tax when crediting or receiving such income into the account of the recipient.

For a resident taxpayer, the levy will be treated as minimum tax, while for a non-resident without a permanent establishment in Pakistan it will be treated as final tax.

Life insurance payments

The Finance Act has also introduced a final tax on certain payments received under life insurance policies, family takaful certificates or similar arrangements.

For tax year 2026 and subsequent years, the taxable amount will be calculated after deducting the total premiums or contributions paid from the relevant payment, benefit, surrender value or maturity proceeds.

Payments made in the event of death or disability, as well as payments made after completion of four years from the issuance of the policy, certificate or plan, will remain exempt.

A 15 per cent tax will apply where payment is made within one year, while payments made after one year but before completion of four years will be taxed at 10 per cent.

The tax will be treated as final tax.

Relief for salaried taxpayers

The government has reduced tax rates for salaried individuals and individual taxpayers.

Annual taxable income of up to Rs600,000 will be taxed at zero per cent.

For income between Rs600,000 and Rs1.2 million, tax will be 1 per cent on the amount exceeding Rs600,000.

Income between Rs1.2 million and Rs2.2 million will attract tax of Rs6,000 plus 11 per cent of the amount exceeding Rs1.2 million.

For income between Rs2.2 million and Rs3.2 million, tax will be Rs116,000 plus 20 per cent of the amount exceeding Rs2.2 million.

Income between Rs3.2 million and Rs4.1 million will be taxed at Rs316,000 plus 25 per cent of the amount exceeding Rs3.2 million.

For income between Rs4.1 million and Rs5.6 million, the tax will be Rs541,000 plus 29 per cent of the amount exceeding Rs4.1 million.

Income between Rs5.6 million and Rs7 million will attract Rs976,000 plus 32 per cent of the amount exceeding Rs5.6 million.

For income above Rs7 million, tax will be Rs1.424 million plus 35 per cent of the amount exceeding Rs7 million.

The 9 per cent surcharge previously imposed on salaried individuals with taxable income above Rs10 million has also been removed.

A 10 per cent surcharge, however, remains applicable to other individuals and associations of persons meeting the relevant income threshold.

E-commerce and deemed income

Tax on deemed income under Section 7E has been abolished.

The tax treatment of e-commerce has also been revised. For taxpayers with annual turnover exceeding Rs200 million, e-commerce tax will be adjustable.

Those with turnover of up to Rs200 million will have the option, from tax year 2027 onwards, to opt for the normal tax regime when filing their returns.

Property transactions

Advance tax rates on transactions involving immovable property have also been revised.

Advance tax on the sale or transfer of property has been set at 2.75 per cent of the gross consideration received, while the rate on purchases has been set at 1.25 per cent of the fair market value.

For inherited immovable property, the cost will be determined according to its fair market value at the relevant time under Section 68.

International cards and entertainment sector

Advance tax on payments made through international credit, debit and prepaid cards has been reduced from 5 per cent to 0.5 per cent.

The advance tax previously imposed on television dramas and advertisements has been abolished.

Services, securities and exports

Withholding tax on certain services has been increased from 6 per cent to 7 per cent.

The rate on independent professional services has been set at 15 per cent, while terminal and port operating services will be subject to a 12 per cent rate. Other unspecified services will face a 14 per cent withholding tax.

Capital gains tax on the sale of debt securities has been increased from 15 per cent to 20 per cent.

For exporters, the 1 per cent adjustable advance tax under Section 147(6C) has been abolished. Advance tax on exports has instead been set at 1.25 per cent as minimum tax.

A reduced tax rate of 0.25 per cent on exports of IT and IT-enabled services has been extended until 2029.

The government has also removed the 1 per cent adjustable advance tax for importers and set advance tax at 1.25 per cent as minimum tax under the relevant provisions.

Super tax changes

The Finance Act has revised the super tax regime.

For most taxpayers with income of up to Rs500 million, super tax has been abolished.

For other taxpayers with income above Rs500 million, the super tax rate has been set at 8 per cent.

However, certain categories remain subject to super tax. Banking companies with income exceeding Rs150 million will continue to pay super tax at 10 per cent. The same rate applies to certain specified persons and taxpayers earning income from fertiliser sales where income exceeds Rs150 million.

Exporters with income above Rs500 million will be exempt from super tax if more than 80 per cent of their total turnover consists of export receipts during the relevant tax year.

Shipping and financial institutions

New tax obligations have also been introduced for non-resident shipping operations.

An authorised shipping agent will be treated as the representative of a non-resident ship owner, charterer or operator and will be jointly and severally responsible for specified tax obligations.

A return must be filed for each ship or voyage covering gross freight and related amounts. Electronic verification of return filing and tax payment will be required before port clearance.

The government has also been given powers, subject to specified conditions, to reduce certain withholding tax rates by up to 1 percentage point where the rates constitute minimum tax and economic viability warrants such a reduction. Any such reduction must be presented before the National Assembly during the relevant financial year.

The FBR has introduced procedures for calculating and determining capital gains for certain banking companies, mutual funds and insurance companies through the National Clearing Company of Pakistan.

Banks will also be required to deduct tax on certain capital gains arising from investments through foreign currency and non-resident accounts.

Limited liability partnerships have been included in the definition of an association of persons, while profits distributed by an LLP to a member may be included in that member’s income in specified circumstances.

Companies will be required, for tax year 2026 and subsequent years, to submit financial statements with their returns in electronically readable file formats.

The FBR will also be able to appoint experts from panels designated by the board to conduct re-audits, inventory revaluations or actuarial valuations in cases involving complex or high-volume transactions.

Taxpayer compliance and enforcement

The FBR has established a new directorate general for field compliance and expanded the scope of the special tax regime for small traders and shopkeepers.

The reforms also provide for the involvement of auditors, audit mentors and sectoral experts in certain cases, subject to specified conditions.

The surcharge for individuals who are not included on the Active Taxpayers List has also been increased. An individual may be exempted from the requirement by submitting an affidavit to the commissioner undertaking not to purchase, acquire or own property, or obtain a beneficial interest in property, for six months from the date of submission.

The FBR said the reforms were aimed at strengthening compliance while providing assistance to taxpayers in implementing the new provisions.

It said grievance redressal committees comprising representatives of the business community and the FBR would also be available to address complaints.

The tax authority said it would provide support for implementing the new legal provisions and ensure that enforcement measures were applied fairly.