The Federal Government of Pakistan presented the Federal Budget 2022–23 in the National Assembly on June 10, 2022. The Finance Bill 2022 was laid before the parliament by the Federal Minister for Finance and Revenue, Miftah Ismail, under the PML(N)-led coalition government. This budget was introduced at a time of pressing economic challenges, including rising inflation, fiscal imbalances, and the need for structural reforms to stabilize the national economy. The government stressed that economic stability was the foremost priority and that a sustainable framework for growth must be created to ensure long-term resilience.
We focus on the income tax measures introduced in the Finance Bill 2022. While the overall budget includes a variety of revenue and expenditure adjustments, the changes in income tax, particularly for salaried individuals, are among the most significant. These measures reflect the government’s dual aim of providing relief to the middle-income class while also increasing revenue collection from high-income earners and under-taxed sectors.
Objectives Behind the Income Tax Reforms
The income tax reforms in the Federal Budget 2022–23 were guided by two central objectives: to create a more equitable taxation system and to enhance the government’s revenue without burdening the most vulnerable segments of society. For several years, the tax structure in Pakistan has been criticized for being heavily reliant on indirect taxes while direct taxation remains underutilized. Salaried individuals often face disproportionate burdens compared to other sectors.
By increasing the taxable income thresholds and adjusting tax rates, the government aimed to give relief to middle and lower-middle-income earners. At the same time, higher-income individuals and businesses were targeted to bear a larger share of the tax burden. These steps were framed not just as revenue measures but as part of a structural attempt to broaden the tax base, encourage compliance, and align the system with principles of fairness.
Income Tax Threshold for Salaried Individuals
One of the most prominent announcements in the Finance Bill 2022 was the proposal to increase the minimum taxable income threshold for salaried individuals. The exemption limit was raised from Rs. 600,000 to Rs. 1,200,000 annually. This adjustment effectively doubled the tax-free income level, offering significant relief to employees who fall within the lower and middle tiers of the income bracket.
This measure was particularly important in the context of rising living costs. Inflationary pressures on essential commodities, fuel, and utilities had eroded disposable incomes. By allowing a larger segment of salaried individuals to remain exempt from taxation, the government sought to counterbalance the financial stress households were experiencing.
However, while relief was extended to those earning less than Rs. 100,000 per month, the Finance Bill introduced higher taxation for individuals in the top-income bracket. Salaried individuals earning more than Rs. 1.5 million per month, or Rs. 18 million annually, faced an increase in their effective tax liability. This change reflected a redistribution strategy: easing the burden for the majority while increasing contributions from those with higher capacity to pay.
Impact of Threshold Adjustments on Middle-Income Earners
For the middle class, the enhanced tax exemption threshold was seen as a positive step. Previously, many employees earning slightly above Rs. 50,000 per month found themselves liable to pay income tax, which became burdensome in an environment of rising inflation. The new threshold gave these individuals some breathing space, allowing them to use more of their earnings for household needs, savings, or investments.
Yet, this relief also raised questions about the government’s ability to collect sufficient direct taxes. By doubling the exemption threshold, a large number of individuals moved out of the tax net altogether. Critics argued that this could reduce the number of active taxpayers unless offset by higher compliance among wealthier individuals and businesses. Supporters, on the other hand, maintained that such measures could improve tax morale and encourage voluntary compliance in the long run.
Business Individuals and AOPs: Revised Thresholds
In addition to salaried individuals, the government also raised the minimum taxable income threshold for business individuals and Associations of Persons (AOPs). The exemption was increased from Rs. 400,000 to Rs. 600,000. This revision aimed to align business taxation with inflationary realities and provide relief to small-scale entrepreneurs and business operators.
However, for businesses earning annual taxable income above Rs. 1.2 million, the tax impact increased. The government intended to ensure that higher-income businesses contributed more while supporting smaller ventures through threshold adjustments. For the business community, this was a mixed development: relief for micro-businesses but greater obligations for those moving into the higher income brackets.
Tax on Profit from Behbood Certificates
The Finance Bill also addressed income derived from Behbood Certificates. The maximum tax rate applicable on profits from these certificates was reduced from 10 percent to 5 percent.
This step was particularly significant for pensioners and senior citizens who are major investors in such government-backed savings instruments. By reducing the tax burden, the government aimed to support fixed-income groups and encourage investment in safer, low-risk financial instruments.
Small Retailers and Final Tax Collection
In an effort to widen the tax net, the government introduced a final tax for small retailers to be collected through electricity bills. The tax range was fixed between Rs. 3,000 and Rs. 10,000. This method was chosen for its simplicity, reducing the need for complicated filing procedures for small shopkeepers and traders who often remain outside the formal taxation system.
The inclusion of small retailers is a step toward bringing the informal economy into the tax net. Retail trade constitutes a large segment of Pakistan’s economy, yet its contribution to tax revenues has historically been minimal. Collecting taxes via electricity bills ensures compliance and reduces administrative hurdles, although it also raises concerns among retailers about fairness and transparency in the system.
Taxation of Immovable Property
A major development in the Finance Bill 2022 was the introduction of deemed rental income taxation on immovable property. Resident individuals owning more than one immovable property with a value exceeding Rs. 25 million are now subject to a tax of 1 percent of the property’s fair market value. This tax was termed as deemed rental income, regardless of whether the property was rented out or not.
This measure reflects the government’s attempt to tap into wealth stored in real estate. The property sector in Pakistan has long been seen as a safe haven for wealth, often yielding substantial gains for investors without contributing adequately to tax revenues. By imposing deemed rental income taxation, the government intended to discourage speculative investment in real estate and enhance the taxation of wealthier individuals who often invest heavily in multiple properties.
Capital Gains Tax on Property
Another significant reform targeted capital gains from property transactions. Under the new rules, a 15 percent tax is imposed on properties sold within one year of acquisition. The rates then progressively decline depending on the holding period, with no capital gains tax applicable after a holding period of two to six years, depending on the type of property.
This progressive system of capital gains taxation is aimed at discouraging speculative buying and selling of property, which has been a driver of artificial price hikes in the real estate sector. Long-term investors are provided relief, while short-term speculators face higher tax burdens. By incentivizing longer holding periods, the government also hoped to stabilize property prices and channel investments into more productive sectors of the economy.
Tax on Disposal of Capital Assets
Beyond immovable property, the Finance Bill introduced new tax rates for the disposal of capital assets. Depending on the holding period, tax rates ranged from 2.5 percent to 15 percent. No tax applies once the holding period exceeds six years.
These measures aligned with international practices where capital gains taxes are structured to encourage long-term investment. The government emphasized that these reforms were not merely about revenue but also about directing investment flows toward sustainable economic growth rather than speculative trading.
Advance Tax on Property Transactions
The budget also increased advance taxes on property transactions. For property sales, the rate was doubled for filers, from 1 percent to 2 percent, and raised significantly for non-filers, from 2 percent to 5 percent. For property purchases, the advance tax for non-filers was increased from 2 percent to 3.5 percent.
This policy clearly distinguished between compliant taxpayers and non-filers. By creating sharper differences in tax obligations, the government sought to incentivize individuals to join the Active Taxpayer List. Property transactions have been a major avenue for tax evasion, and these adjustments were meant to curb non-filing practices.
Implications for Salaried Individuals in the Wider Economic Context
For salaried individuals, the changes in the Federal Budget 2022–23 carry both relief and challenges. Middle-income earners, particularly those earning less than Rs. 100,000 per month, benefit significantly from the raised exemption threshold. They retain more of their income, which can help offset inflationary pressures.
However, higher-income earners face increased liabilities, aligning with the government’s redistribution strategy. This dual approach reflects a deliberate policy to balance equity with revenue generation. While some critics argue that these measures may discourage high-skilled professionals or promote tax planning to avoid liability, the government maintains that such progressive taxation is essential for fairness and fiscal responsibility.
Business Taxation Reforms in the Finance Bill 2022
Businesses form the backbone of economic activity, and their contribution to tax revenues is essential for fiscal stability. In the Finance Bill 2022, several measures were introduced to adjust the thresholds, tighten compliance, and increase the tax burden on high-earning entities while offering some relief to smaller players.
Revised Thresholds for Business Individuals and AOPs
The government increased the minimum taxable income threshold for business individuals and Associations of Persons (AOPs) from Rs. 400,000 to Rs. 600,000. This change provides some relief to small-scale entrepreneurs and micro-businesses, many of whom operate on tight margins and were significantly affected by inflationary pressures and rising input costs.
At the same time, businesses earning more than Rs. 1.2 million annually now face an increased tax burden. The intent is clear: support small ventures but ensure that medium to large-scale enterprises pay a fair share of taxes. The adjustment reflects a balancing act between encouraging entrepreneurship and mobilizing resources from profitable businesses.
Small Retailers and the Electricity Bill Mechanism
To bring retail trade into the formal tax system, the government introduced a simplified mechanism where small retailers are subject to a fixed final tax collected through electricity bills. The tax ranges between Rs. 3,000 and Rs. 10,000 depending on the retailer’s scale of operations.
Retail trade accounts for a significant portion of Pakistan’s economy, but its contribution to direct taxes has historically been minimal. Many small shopkeepers operate outside the formal tax net. By linking tax collection to electricity consumption, compliance is made easier, and administrative costs are reduced. However, this measure has also been controversial, as retailers argue it may unfairly penalize them, especially when electricity bills already reflect higher tariffs and fuel adjustments.
Poverty Alleviation Tax
Another major reform was the introduction of an additional 2 percent Poverty Alleviation Tax on companies and AOPs earning income exceeding Rs. 300 million annually. This tax is designed to target high-income entities and redirect resources toward social welfare initiatives.
The government has justified this levy by emphasizing the need for wealth redistribution in a society where income inequality is a growing concern. By taxing those with the greatest ability to pay, the state hopes to generate funds that can be used for poverty reduction programs, social protection schemes, and development projects aimed at vulnerable groups.
Taxation in the Property Sector
Real estate has historically been one of the least taxed yet most lucrative sectors in Pakistan. Wealth is often parked in property, with investors reaping large capital gains through rising land and housing prices. The Finance Bill 2022 addressed this by introducing a series of reforms to ensure that the property sector contributes more fairly to the tax system.
Deemed Rental Income
Resident individuals who own more than one immovable property with a value exceeding Rs. 25 million are now subject to a 1 percent tax on the fair market value of the property. This tax is categorized as deemed rental income, irrespective of whether the property is rented out.
This measure aims to address the concentration of wealth in real estate. Multiple property owners often keep assets idle without generating taxable rental income. By taxing them on deemed rental value, the government is seeking both to increase revenues and discourage speculative property accumulation.
Advance Tax on Sale and Purchase of Property
The budget significantly increased advance tax rates on property transactions. For sales, the rate was doubled for filers from 1 percent to 2 percent and raised steeply for non-filers from 2 percent to 5 percent. On purchases, the rate for non-filers rose from 2 percent to 3.5 percent.
The rationale behind these changes is to differentiate between compliant taxpayers and those outside the system. By imposing higher rates on non-filers, the government aims to push individuals toward becoming registered taxpayers. Property transactions are among the largest financial dealings in Pakistan, and strengthening tax enforcement in this area can potentially yield substantial revenues.
Capital Gains on Immovable Property
The government also restructured capital gains tax on immovable property to discourage short-term speculation. A 15 percent tax now applies to properties sold within one year of acquisition. The tax rate then reduces progressively with the duration of ownership.
For certain property types, the exemption period is set at two years, while for others, it extends up to six years. After the holding period expires, no capital gains tax is payable. This progressive taxation model incentivizes long-term holding while discouraging frequent trading in property, which has been a driver of inflated real estate prices.
Capital Gains on Other Capital Assets
Beyond real estate, the Finance Bill 2022 also revised the taxation of capital assets more broadly. The tax rates range from 2.5 percent to 15 percent depending on the holding period. As with immovable property, assets held for more than six years are exempt from capital gains tax.
This system aligns with the global practice of encouraging long-term investments. By gradually reducing the tax burden with the length of ownership, the government promotes stability in financial markets and discourages speculative trading. Investors who hold assets for extended periods contribute to steady economic growth, while those seeking quick profits face higher taxation.
Withdrawal of Tax Credits and Allowances
An important aspect of the Federal Budget 2022–23 was the withdrawal of certain tax credits and allowances. These include tax benefits previously available on health insurance premiums, investments in shares, mutual funds, voluntary pension funds, and profit on debt.
The withdrawal of these incentives marks a shift in policy. Instead of providing multiple exemptions and credits, the government is moving toward a simplified tax system where fewer deductions are available, but rates are adjusted to ensure equity. While this reduces complexity, it has raised concerns among professionals and middle-class investors who previously benefited from these credits.
Another key change was the removal of the tax credit for IT export services. Instead, a 0.25 percent tax on export proceeds is now applied. The government’s stance is that the IT industry has matured to a level where it should contribute more directly to the tax system, though the sector argues this may undermine its competitiveness in global markets.
Effective Tax Rate for Banking Companies
The banking sector also saw significant changes in the Federal Budget 2022–23. The effective tax rate for banking companies was increased to 45 percent, up from 39 percent, which includes a 4 percent super tax.
This adjustment reflects the government’s intent to extract more revenue from the financial sector, which continues to post strong profits despite challenging economic conditions. Banks have historically been more compliant compared to other sectors, making them a reliable source of direct tax revenue. However, the higher rates may also lead to higher costs of borrowing for businesses and individuals, with potential knock-on effects on economic activity.
Withholding Tax on International Transactions
A new measure introduced in the Finance Bill was the imposition of withholding tax on international transactions made through debit and credit cards. Filers are charged 1 percent, while non-filers are subject to 2 percent.
This initiative is designed to track and tax foreign currency outflows, which have increased in recent years with the growth of online shopping, foreign travel, and international services. By distinguishing between filers and non-filers, the government continues to incentivize tax compliance while also mobilizing revenue from high-spending consumers.
Advance Tax on Motor Vehicles
The Finance Bill also raised advance tax rates on motor vehicles above 1600 cc. For non-filers, the rate of additional advance tax was doubled from 100 percent to 200 percent. This measure primarily targets wealthier individuals who purchase high-end vehicles, ensuring they contribute proportionally to the national exchequer.
By imposing heavier taxes on non-filers, the government seeks to discourage tax evasion among affluent citizens. The automobile sector has often been a reflection of wealth accumulation, and taxing luxury vehicles is a way to both generate revenue and promote fairness in the taxation system.
Expanding the Definition of Resident
The definition of a resident for tax purposes has been broadened to include Pakistani citizens who are not considered tax residents in any other country. This closes a loophole where individuals exploited gaps in residency rules to avoid taxation.
By expanding the definition, the government ensures that Pakistanis benefiting from local resources and maintaining ties to the country contribute to the tax system, even if they claim non-residency elsewhere. This move strengthens the integrity of the tax net and brings more individuals into compliance.
Compliance and Disclosure Requirements
To enhance transparency, the Finance Bill requires companies and AOPs to file and update particulars of their beneficial owners. This provision aligns with international best practices aimed at combating tax evasion, money laundering, and illicit financial flows.
By mandating disclosure of ultimate ownership, the government can better track financial activities and ensure that taxes are collected from the actual beneficiaries of income. This measure is part of a broader agenda of fiscal transparency and accountability, which is essential for building trust in the tax system.
Sales Tax Exemptions and Incentives
Sales tax remains one of the most important sources of revenue for the government. In the budget, several targeted exemptions and adjustments were announced, focusing on energy, health, and agriculture. These exemptions are intended to reduce costs for vital sectors and encourage sustainable practices.
Exemption on Solar Panels
One of the most notable measures was the exemption of sales tax on the import and local supply of solar panels. Energy shortages and rising fuel costs have made renewable energy a necessity for households, businesses, and industries. By removing sales tax, the government aims to encourage the adoption of solar technology, lower dependency on imported fuels, and reduce pressure on the national grid.
This measure has the potential to make solar systems more affordable, especially for middle-income households and small businesses. It also aligns with the broader vision of moving toward renewable energy sources, which can help Pakistan achieve energy security in the long term.
Relief for Health Sector
Goods supplied to non-profit and welfare hospitals with a capacity of 50 beds or more were granted exemption from sales tax, excluding electricity and gas. The measure is designed to support charitable institutions providing healthcare services at minimal or no cost.
Healthcare has always been a sector under stress due to limited government spending and rising demand. By reducing the tax burden on welfare hospitals, the government indirectly supports access to medical facilities for low-income groups. This also helps such institutions reinvest savings into better infrastructure and medical equipment.
Agricultural Machinery and Seeds
The government also exempted agricultural machinery and seeds from sales tax. Agriculture is the backbone of Pakistan’s economy, contributing significantly to GDP and employment. However, the sector faces rising input costs, water scarcity, and outdated technology.
By removing sales tax on machinery and seeds, the government aims to encourage mechanization and improve crop yields. This incentive could also benefit farmers in reducing costs and improving productivity, though its effectiveness will depend on whether machinery and inputs remain accessible and affordable in practice.
Broader Measures in Sales Tax
Beyond exemptions, the Finance Bill 2022 also included measures designed to strengthen compliance and widen the tax base.
Further Tax on Non-Registered Persons
To encourage taxpayers to register with the system, further tax was imposed on transactions involving non-registered persons not appearing in the Active Taxpayer List. This creates an additional financial burden for those avoiding formal registration and aims to reduce the prevalence of unregistered businesses operating outside the tax net.
Such measures are critical for improving tax compliance in a country where informal economic activity represents a large portion of overall GDP. By imposing further tax on non-registered entities, the government hopes to incentivize registration and formalization of businesses.
CNIC Requirement Withdrawn
Previously, sellers were required to obtain the Computerized National Identity Card (CNIC) of buyers for certain transactions. This requirement has now been withdrawn. The move is intended to reduce friction between buyers and sellers and address concerns raised by the business community.
While the CNIC condition was aimed at ensuring documentation of transactions, it created administrative hurdles and often discouraged legitimate sales. The withdrawal indicates a shift toward simpler compliance mechanisms while the government continues to explore alternative methods to document economic activity.
Jewelers as Tier-1 Retailers
Jewelers were brought into the scope of Tier-1 retailers, meaning they will now be subject to stricter documentation and compliance requirements. The jewelry sector has historically been lightly taxed despite involving high-value transactions. Bringing jewelers under Tier-1 classification ensures that large retailers in this sector contribute their fair share of taxes.
Input Tax Adjustment for Listed Companies
Listed companies are now allowed to adjust input tax only up to 90 percent of the output tax. This restriction ensures that companies pay a minimum portion of sales tax, limiting the practice of fully offsetting liabilities through input adjustments. The measure is meant to safeguard government revenues while still allowing businesses to claim reasonable credits for tax already paid on inputs.
Financial Sector Adjustments
The financial sector plays a central role in economic stability and development, and the budget included significant reforms affecting this area.
Higher Taxation for Banking Companies
The effective tax rate for banks has been increased to 45 percent. The justification lies in the fact that banks continue to post healthy profits, even in times of economic slowdown. By increasing the tax rate, the government aims to tap into this profitability for revenue mobilization.
However, this change could have downstream effects. Banks may pass on some of the increased costs to borrowers through higher lending rates, which may raise the cost of financing for businesses and consumers. Over time, this could dampen investment and consumption.
Withholding on International Card Transactions
The government imposed withholding tax on international debit and credit card transactions. Filers are taxed at 1 percent, while non-filers face a rate of 2 percent. This measure is aimed at tracking cross-border financial flows and ensuring that high-spending individuals contribute to the tax system.
It also reflects growing concern over foreign exchange outflows at a time when Pakistan’s reserves have come under pressure. By imposing withholding on such transactions, the government not only raises revenue but also discourages unnecessary spending abroad.
Broader Economic Impacts
The Federal Budget 2022–23 is more than just a collection of tax measures. It reflects the government’s fiscal strategy, its response to economic challenges, and its broader vision for sustainable growth.
Strengthening the Tax Base
One of the consistent themes across the budget is the attempt to broaden the tax base. Measures such as advance tax on property transactions, withholding on card transactions, and further tax on non-registered persons are all designed to capture revenue from previously untaxed areas.
Broadening the tax base is essential for reducing reliance on external borrowing and ensuring fiscal sustainability. By bringing more individuals and businesses into the net, the government can distribute the tax burden more equitably and reduce pressure on compliant taxpayers.
Addressing Inequality
Several measures in the budget reflect an effort to address inequality. The additional Poverty Alleviation Tax on high-earning entities, deemed rental income tax on multiple property owners, and increased taxation on luxury vehicles are all aimed at wealthier individuals and corporations.
At the same time, exemptions for solar panels, welfare hospitals, and agricultural inputs provide relief to sectors that directly affect middle- and lower-income groups. This dual approach demonstrates the government’s attempt to balance social equity with revenue needs.
Impact on Inflation and Consumption
While the budget includes incentives in certain sectors, overall, higher taxation on property transactions, banking, and vehicles may have inflationary effects. Costs of borrowing, housing, and automobiles are likely to rise, which could dampen consumer demand.
On the other hand, reduced sales tax on renewable energy and agriculture-related goods could ease inflationary pressures in those specific areas by making essential inputs cheaper. The net effect will depend on implementation and market dynamics.
Encouraging Documentation of the Economy
A recurring objective of the reforms is to increase documentation of the economy. By imposing higher taxes on non-filers, expanding the definition of residents, and requiring beneficial ownership disclosure, the government is signaling its commitment to transparency. Documentation not only improves tax collection but also enhances investor confidence and reduces opportunities for money laundering and illicit flows.
Sectoral Reactions and Future Challenges
The changes proposed in the Finance Bill 2022 have elicited mixed reactions across sectors. Businesses, professionals, and investors have welcomed certain exemptions and simplifications, while others have expressed concern over increased tax burdens.
Real Estate Sector
Property developers and investors argue that higher taxes on transactions and capital gains could reduce activity in the sector. However, policymakers see these measures as necessary to curb speculative investment and redirect capital toward productive areas of the economy.
IT and Exports
The withdrawal of tax credits for IT exports and the imposition of a 0.25 percent tax on proceeds have raised concerns in the technology sector. Industry representatives fear this could affect competitiveness, especially when neighboring countries offer incentives to attract global outsourcing.
Retail and Trade
Retailers, especially smaller ones, remain critical of the tax collection mechanism through electricity bills. While it simplifies administration, many argue it does not account for seasonal or regional variations in sales and may impose unfair burdens.
Budget’s Direction
The Federal Budget 2022–23 is ambitious in scope, attempting to strike a balance between fiscal consolidation, social protection, and economic growth. By increasing taxes on wealthier individuals and entities while granting targeted exemptions in critical sectors, the government is seeking to build a more equitable and sustainable tax system.
The long-term impact of these measures will depend not only on legislative approval but also on effective implementation, enforcement, and the ability to address resistance from stakeholders. While challenges remain, the reforms represent a significant step toward reshaping Pakistan’s fiscal and economic framework.
Conclusion
The Federal Budget 2022–23 reflects a decisive attempt by the government to stabilize Pakistan’s fragile economy, broaden the tax base, and redirect resources toward sustainable growth. Through reforms in income tax, property-related taxation, sales tax exemptions, and sector-specific measures, the budget outlines a balanced approach of increasing revenue while providing relief to critical areas such as renewable energy, agriculture, and healthcare.
For individuals, the budget delivers relief for middle-income earners by raising minimum taxable thresholds, while simultaneously imposing higher burdens on ultra-high-income earners and luxury asset owners. For businesses and associations, the revised tax rates, disclosure requirements, and new levies emphasize the government’s determination to expand documentation and curb tax evasion. The measures introduced for property transactions, capital gains, and deemed rental income mark a significant shift toward discouraging speculative investment and encouraging productive economic activity.
On the sales tax front, exemptions for solar panels, welfare hospitals, and agricultural machinery demonstrate a focus on energy security, social welfare, and food security. Meanwhile, the imposition of further tax on non-registered persons and inclusion of jewelers as Tier-1 retailers indicate an effort to close gaps in compliance and ensure fairer contribution across sectors.
The financial sector, too, has been placed under sharper scrutiny with higher effective tax rates on banking companies and withholding taxes on international card transactions. These measures reflect both fiscal necessity and the urgent need to manage foreign exchange reserves. While they may increase costs in the short term, they align with the broader fiscal consolidation strategy.
Taken together, the budget attempts to balance competing priorities: easing pressure on vulnerable groups, raising much-needed revenues, and steering the economy toward formalization and transparency. Challenges remain, including potential inflationary pressures, pushback from certain industries, and the administrative capacity required to enforce reforms effectively. Yet, the direction is clear: Pakistan is moving toward a tax system that emphasizes equity, documentation, and long-term sustainability. If successfully implemented, the Federal Budget 2022–23 could mark a turning point in building a stronger, more resilient economic foundation for Pakistan.