Changes in Taxation for Exporters in Pakistan: A Shift Towards Regular Income Tax Regime

Published on Oct 14, 2024

Key Changes and Implications

A major change is afoot in Pakistan’s tax landscape as the government moves to abolish the Exporters Facilitation Scheme (EFS) and subject exporters to the regular income tax regime. This decision, necessitated by the International Monetary Fund (IMF’s) requirements, aims to streamline revenue collection and broaden the tax base.

1. Regular Income Tax Regime: Exporters will now be required to pay income tax at the standard rates, departing from the preferential treatment enjoyed under the EFS. This shift could potentially increase the tax burden on exporters.
2. VAT Credits: A positive development for exporters is the introduction of value-added tax (VAT) credits on locally purchased inputs. This means that exporters can claim refunds for the VAT on goods and services used in their export activities, reducing their overall tax liability.
3. Provincial Tax Alignment: To ensure uniformity and compliance, the government has mandated that all provinces align their agricultural income tax laws with federal tax laws by January 2025. This move is expected to simplify the tax landscape for agricultural businesses and reduce potential disputes.

Impact on Exporters

The abolition of the EFS and the subsequent shift to the regular income tax regime could have positive and negative implications for exporters. On the one hand, the increased tax burden could make it more challenging for some exporters to compete in the global market. However, introducing VAT credits could provide some relief and encourage domestic input sourcing.

Potential Challenges and Opportunities

• Increased Costs: Exporters may face higher operating costs due to the increased tax burden, which could impact their profitability.
• Competitive Disadvantages: The new regime could put Pakistani exporters at a competitive disadvantage compared to exporters from other countries with more favorable tax incentives.
• Administrative Burden: Complying with the regular income tax regime may require additional administrative effort and resources for exporters.
• Incentivizing Domestic Sourcing: The VAT credit scheme could incentivize exporters to source more inputs locally, boosting the domestic economy.
• Improved Tax Compliance: A more unified tax regime could improve tax compliance and reduce revenue leakage.

Conclusion

The abolition of the Exporters Facilitation Scheme and the subsequent implementation of the regular income tax regime represent a significant shift in Pakistan’s tax policy. While the short-term implications for exporters may be challenging, the long-term benefits of a more streamlined and equitable tax system could outweigh the costs. The government’s decision to introduce VAT credits and align provincial tax laws is a step in the right direction towards creating a more conducive business environment for exporters.