‘Raising tax on interest income may incentivize shift towards equity investment’

KARACHI: Through one of the latest tax measures, the government has proposed introduction of Section 114C in the Finance Bill, imposing a restriction on economic transactions by non-filers.

The restriction on economic transactions for non-filers would mean they could not purchase securities above a threshold as well as automobiles above 850cc or open IPS (Investor Portfolio Securities) account except for Asaan Account.

“For the first time, the budget includes modest relief measures, such as a reduction in income tax rates for salaried class and a cut in the super tax,” Muhammad Awais Ashraf, Director Research at AKD Securities told Hum News English.

Read more: An Rs17.57tr Pakistan budget sees 20pc hike in defence allocations

From the equities standpoint, raising the tax rate on interest income from debt instruments to 20 per cent coupled with the introduction of proportional taxation on mutual funds dividends from equities at lower rates, may incentivize a shift towards equity investments. Additionally, progress on circular debt payments is expected to benefit the entire energy sector, Ashraf went on to say.

REMOVAL OF FATA/PATA SALES TAX EXEMPTIONS

Steel, ghee and other industries operating in erstwhile FATA/PATA were exempted from taxes. However, the government has now removed sales tax exemption on these industries and imposed 10 per cent GST.  It will increase by 200bps each in next three fiscal years, according to the budget documents and Topline Securities summary of the budget. 

This was a long-standing demand of steel and ghee players as products were dumped from FATA to other parts of Pakistan, especially in Punjab. It is going to produce positive effects for steel and edible oil companies.

INCREASE IN TAX ON INTEREST INCOME

At the same time, the government has increased tax on interest income from 15 per cent to 20 per cent. “We believe this will encourage more participation in other asset classes like equities, which are taxed at preferred rates, thus positive for the market,” Topline Securities said.

WITHHOLDING TAX HIKED ON CASH WITHDRAWALS

Increase in withholding tax on cash withdrawal of over Rs50,000 from 0.6 per cent to 0.8 per cent for non-filers.

PDL ON FURNACE OIL

In line with commitment to the IMF, the government has imposed PDL on furnace oil, however, the rate is not disclosed yet.

CARBON TAX

The government has imposed a carbon tax (levy) of Rs2.5 litre on petrol, diesel and furnace oil for FY26.

INCREASE IN LOCAL E-COMMERCE SALES TAX

Meanwhile, the government has also hiked local ecommerce sales tax from 1 per cent to 2 per cent for non-active taxpayers.

PENSION TAX

In an unprecedented move, the government has imposed 5 per cent pension tax on above Rs10 million for the people below 70 years of age.

INCREASE IN GST ON AUTOS BELOW 850cc

The reduced GST rate of 12.5 per cent on autos below 850cc is removed. Therefore, normal tax rate of 18 per cent will be applied, negatively affecting for small car manufacturers like Suzuki Pakistan.

IMPORTED SOLAR PANELS TO BE TAXED

Currently, solar panel imports are exempted from sales tax, but the budget 2025-26 proposes 18 per cent, which, the experts believe, will be neutral for the market.

WITHHOLDING TAX ON SPECIFIED SERVICES HIKED

According to the budget proposals, the government wants to increase withholding tax rate for specified services from 4 per cent to 6 per cent with the exception of IT and IT-enabled services For other non-specified services, a flat 15 per cent withholding tax will be imposed, which is increased from 10 per cent to 15 per cent on sportspersons.

Meanwhile, the government has also enhanced the dividend tax rate to 25 per cent.

IMPOSITION OF OFF GRID LEVY

On the other hand, the government has estimated Rs105 billion under the head of off-grid levy (captive levy) for FY26.

Meanwhile, the carry forward of minimum tax losses is reduced from three to two years.

RELIEF MEASURES

• As far as the relief measures are concerned, a 10 per cent pay raise is proposed for the government employees, with the pensions to be increased by 7 per cent.
• On the other hand, the government has proposed to slash the existing 5 per cent tax on income between Rs60,000-120,000 per month to 1 per cent. While in subsequent two slabs, the tax rates have reduced from 15 per cent to 11 per cent and from 25 per cent to 23 per cent. The surcharge is reduced from 10 per cent to 9 per cent.
• Meanwhile, income tax along with withholding tax exemption for erstwhile FATA/PATA regions is to be extended for one year.
• A 25 per cent tax rebate against tax payable by full-time teachers and researchers will be restored retrospectively with effect from FY23 to FY25.
• Moreover, the government intends to restore tax credit on mortgage facility for houses up to 10 marla and flats up to 2000 sq feet.
• On the other hand, the government has removed 7 per cent FED (federal excise duty) and reduced advance tax by 150bps on immovable property. In this connection, experts see positive impact on the construction sector, helping in lifting sentiments not only the industry but also the allied sectors and stocks.
• At the same time, the government has allocated a housing subsidy of Rs5 billion and mark-up subsidy of additional Rs5 billion for FY26.
• Super tax rates under Section 4C are to be reduced by half a percentage point for income slabs between Rs200 million to Rs500 million against each slab respectively.
• Currently, a 10 per cent GST is collected on the sales of buns and rusks. However, the products will now enjoy exemption.