ISLAMABAD: Pakistan’s Federal Board of Revenue (FBR) has rolled out a comprehensive set of amendments to the Income Tax Ordinance, 2001, under the newly enacted Finance Act, 2025, aimed at expanding the tax base, formalizing the digital economy, and tightening compliance across sectors.
The reforms, detailed in Circular No. 01 of 2025-26 issued Friday, introduce new tax regimes, revise existing rates, and impose stricter conditions on economic transactions, with implications for salaried individuals, e-commerce vendors, pensioners, and financial institutions.
E-Commerce Taxation Framework
In a bid to regulate Pakistan’s burgeoning online retail sector, the government has introduced Section 6A, which imposes a final tax on payments received for digitally ordered goods and services. Payment intermediaries and courier services are now required to withhold tax at 1% and 2%, respectively, depending on the mode of payment. Sellers must register with the FBR, and online marketplaces are barred from hosting unregistered vendors.
Pension Income Now Taxable
Pension income from former employers, previously exempt, is now subject to a 5% final tax if annual receipts exceed Rs. 10 million and the recipient is under 70. Pensioners above 70 or those receiving less than Rs. 10 million annually remain exempt. Continued employment with the same employer triggers taxation at normal slab rates.
Higher Tax on Cash Withdrawals
The advance tax on cash withdrawals exceeding Rs. 50,000 per day by non-filers has been increased from 0.6% to 0.8%, under Section 231AB.
Tax Rebate Restored for Educators
A 25% tax rebate for full-time teachers and researchers has been reinstated for three years, effective tax year 2023 through 2025, under Clause 3A of Part III of the Second Schedule.
Relief for Salaried Individuals
Revised tax slabs offer relief to salaried individuals, with income up to Rs. 600,000 exempt. Rates progressively increase to a maximum of 35% for income exceeding Rs. 4.1 million.
Appeal Filing Rationalized
Monetary thresholds for filing appeals have been removed, allowing taxpayers to choose between filing with the Commissioner Inland Revenue (Appeals) or directly with the Appellate Tribunal Inland Revenue (ATIR). Appeals to the High Court must now be filed within 60 days and pertain strictly to questions of law.
Recreational Clubs Taxed
Recreational clubs charging over Rs. 1 million in membership fees are no longer considered non-profit organizations and are subject to tax on income from goods and services provided to members.
Expenditure Disallowances Tightened
New clauses in Sections 21 and 22 disallow certain business expenses, including:
10% of purchases from non-NTN holders.
50% of expenses linked to cash sales over Rs. 200,000.
Depreciation on assets acquired without proper tax withholding.
Intangible Asset Amortization Shortened
The amortization period for intangible assets with indeterminable useful life has been reduced from 25 to 15 years.
Loss Adjustment Restrictions
Business losses can no longer be offset against income from property, limiting inter-head adjustments.
Group Relief Scheme Tightened
Companies not taxed under Division II of Part I of the First Schedule are now excluded from group relief eligibility under Section 59B.
Exemption Restructuring for Non-Profits
Entities with sovereign agreements or government mandates retain unconditional exemptions. Others must qualify under Section 100C for tax credits.
Minimum Tax Carry Forward Period Reduced
The carry forward period for minimum turnover tax has been cut from three years to two.
Restrictions on High-Value Transactions
Section 114C bars individuals lacking sufficient declared resources from purchasing luxury vehicles, high-value property, or making large investments. Transactions exceeding Rs. 100 million in cash are also prohibited.
Fast-Track Recovery of Tax Dues
Tax dues exceeding Rs. 200 million become immediately recoverable if upheld by all appellate forums, under new provisions in Sections 138 and 140.
Capital Gains on Debt Securities Taxed
Banks and custodians must now withhold 15% tax on capital gains from debt securities sold over the counter.
Higher Tax for Non-Resident Investors
Capital gains from debt securities held less than six months by non-residents will be taxed at 20%, up from 10%.
Service Tax Rates Increased
Withholding tax on unspecified services and sports persons has risen to 15%. Specified services now face rates of 6% under Section 153 and 8% under Section 152, except IT services which remain at 4%.
Exemption for Long-Held Residential Property
Advance tax and super tax exemptions are available for residential properties held and declared for 15 years, subject to conditions.
Bank-Tax Data Exchange Authorized
Section 175AA enables secure data sharing between FBR and banks to identify discrepancies in taxpayer declarations.
Time Condonation Limited
FBR’s power to condone delays is now capped at two years, with exceptions requiring committee approval.
Property Transaction Tax Adjusted
Advance tax rates on property purchases have been reduced by 1.5%, while seller rates have increased correspondingly.
Dividend Taxation from Mutual Funds Split
Dividends from mutual funds are now taxed at 25% for debt-derived income and 15% for equity-derived income.
Profit on Debt Tax Rate Increased
Tax on profit from bank deposits and government securities has risen to 20%, with a 100% increase for non-filers.
Sunset Clause for SEZ and STZ Exemptions
Exemptions for Special Economic Zones and Special Technology Zones now expire in 2035 or ten years from operational commencement.
Tribal Area Exemptions Extended
Tax exemptions for residents and entities in former tribal areas have been extended until June 30, 2026.
Cinema Income Exemption Limited
Exemption for cinema operations now ends on June 30, 2030, or five years from commencement, whichever is earlier.
Audit Selection Criteria Clarified
Taxpayers audited in any of the past three years are exempt from selection for audit under Sections 177 and 214C.
Banking Sector Tax Rules Updated
The Seventh Schedule has been revised to align banking income with taxable income, with stricter rules on bad debt claims and expense verification.
The FBR emphasized its commitment to fair enforcement and announced the formation of redressal committees to address taxpayer concerns.