Pakistan’s federal budget for the fiscal year 2023–2024, presented on June 9, 2023, introduces a variety of fiscal changes that impact taxpayers, businesses, and economic sectors across the country. A primary focus of the budget lies in reforming income tax policies to ensure a fairer system, improve compliance, and strengthen national revenue. This series delves into the budget’s income tax updates and their expected outcomes for different stakeholders.
New Income Tax Slabs for High-Income Individuals
The budget introduces an expanded set of income tax brackets targeting ultra-high-income individuals. Taxpayers earning more than Rs. 300 million annually are now subject to progressive taxation rates.
The structure begins with a 4 percent tax for incomes above Rs. 300 million, increases to 6 percent for incomes above Rs. 400 million, climbs to 8 percent beyond Rs. 500 million, and peaks at 10 percent for amounts exceeding Rs. 500 million. This strategy is designed to introduce greater equity in the tax regime.
Imposition of Cash Withdrawal Tax on Non-Filers
A daily cash withdrawal tax of 0.6 percent is now applicable to non-filers withdrawing amounts exceeding Rs. 50,000.
This policy is intended to reduce undocumented cash transactions and bring more people into the tax net by encouraging formal banking and financial behavior. By creating a financial disadvantage for non-filers, the government aims to motivate broader tax registration.
Bonus Shares Now Taxable
Investors who receive bonus shares will now face taxation based on their filing status. Taxpayers listed as active filers will pay a 10 percent tax on such bonuses, while non-filers are subject to a significantly higher 20 percent rate. This shift discourages avoidance of tax obligations via equity distributions and incentivizes formal compliance with tax laws.
Withholding Tax Increase on International Transactions
The withholding tax on transactions made through debit and credit cards outside of Pakistan has been revised upward.
Registered taxpayers will now face a 5 percent tax on international transactions, up from 1 percent. For non-filers, the withholding tax rate has increased from 2 percent to 10 percent. This change aims to boost tax collection from cross-border spending and encourage formal financial disclosures.
Enhanced SME Classification Threshold
In support of growing businesses, the definition of Small and Medium Enterprises has been expanded. The turnover cap for manufacturers qualifying as SMEs has risen from Rs. 250 million to Rs. 800 million.
In addition, businesses involved in information technology and IT-enabled services are now included in the SME category. This allows a broader range of businesses to access benefits tied to SME status.
Tax Credit Opportunities for Home Construction
To promote the construction sector and ease the housing shortage, tax credits are now available for individuals and builders during tax years 2024 to 2026. Individuals constructing their own residences can claim a credit up to Rs. 1 million or 10 percent of their tax liability, whichever is lower.
Builders constructing new housing units can receive a credit of up to Rs. 5 million or 10 percent of their tax due. These measures are anticipated to increase housing supply and create employment opportunities.
Exemptions for Overseas Pakistanis on Property Purchases
Non-resident Pakistanis using Foreign Currency Value Accounts or NRP Rupee Value Accounts to purchase property in Pakistan are now exempt from paying advance tax on these transactions.
This change is designed to encourage remittances and investments in the domestic property market from the overseas community, providing a boost to the real estate sector.
Foreign Remittance Limit Raised
To simplify remittance processing and reduce administrative barriers, the annual threshold for remittances not subject to inquiries has been raised to USD 100,000. Previously set at Rs. 5 million, this revision aims to attract more foreign exchange through formal channels, making it easier for expatriates to send money back home without procedural delays.
Simplified Compliance for IT Exporters
Exporters of IT and IT-enabled services will no longer be required to submit sales tax returns to benefit from reduced tax rates under the final tax regime.
This policy change removes an administrative hurdle and aims to foster increased IT exports by offering a streamlined process for compliance. It is especially important as Pakistan seeks to position itself as a regional technology hub.
Additional Strategic Goals
These income tax updates demonstrate a broader effort by the government to achieve tax equity, improve formal economic participation, and support sectoral growth.
By linking benefits and exemptions directly to tax filer status, the budget encourages more individuals and entities to enter the formal system. In doing so, it promotes transparency, accountability, and a stronger revenue base.
Sales Tax Reforms and Sectoral Impacts
The second part of the federal budget 2023–2024 focuses on changes made to the sales tax regime, impacting diverse sectors such as energy, retail, IT, healthcare, and food.
The goal of these reforms is to boost tax collection while reducing the cost burden in key areas that affect the daily lives of citizens. The reforms aim to refine the tax structure, expand the tax base, and support high-growth sectors.
Reclassification of Electricity in the Tax Framework
One of the most important policy changes in this year’s budget is the removal of electricity from the federal sales tax definition of “goods” and “supply.”
Generation, transmission, and distribution of electricity will no longer be treated as taxable goods for federal purposes.This reclassification is meant to provide regulatory clarity and remove unnecessary confusion regarding tax treatment in the energy sector.
Elimination of Tier-1 Retailer Status Criteria
A major step has been taken to simplify compliance for retailers. The previous criteria for classifying Tier-1 Retailers, which included shop size and integration with the Federal Board of Revenue’s Point of Sale system, have been withdrawn.
This change especially benefits businesses with retail areas of 1000 square feet or more, furniture shops above 200 square feet, and jewelers. Removing this classification is intended to ease administrative processes and foster voluntary compliance among medium-sized businesses.
Increase in Sales Tax for Leather and Textile Products
The sales tax rate applicable to Tier-1 Retailers dealing in leather and textile items has been increased from 12 percent to 15 percent. The aim is to enhance revenue from these high-value sectors while maintaining simplicity in enforcement.
Given the large consumer base and high profit margins in these industries, this adjustment is considered a strategic move to bring additional income into the public exchequer.
Sales Tax Exemption for IT-related Imports
Software exporters registered with the Pakistan Software Export Board are now permitted to import IT-related goods without incurring any sales tax.
This exemption covers a wide range of technology equipment and services that are essential for the development of software and digital platforms. By lowering the cost of essential inputs, this initiative seeks to promote export-oriented growth in the digital economy.
Reduced Sales Tax on Pharmaceutical Products
Healthcare affordability has been a consistent challenge, and the government has responded by reducing the sales tax on registered drugs and pharmaceutical substances from 18 percent to 1 percent.
This significant cut is expected to reduce the retail cost of essential medicines and improve public access to health services. It also relieves financial pressure on hospitals and pharmacies that rely heavily on these products.
Withdrawal of Exemption on Branded Edible Products
The government has proposed to withdraw the existing sales tax exemptions on the bulk sale of branded edible products such as milk, yogurt, and red chilies.
These items, which were previously exempt, will now be subject to regular taxation. This measure is designed to generate more consistent tax revenue from the food sector, which accounts for a large portion of consumer spending.
Clarification of Scope and Compliance Responsibilities
The removal and revision of exemptions, especially in sectors like food and health, highlight the need for a more precise definition of taxable supplies.
Businesses must now update their compliance processes to reflect new tax requirements, especially those previously falling under exempt or concessional categories. Enhanced enforcement and digital monitoring are also expected to be introduced to ensure consistent implementation.
Harmonization Across Provinces and Federal Authorities
The reclassification of electricity and removal of certain exemptions reflect broader efforts to harmonize tax policies between provincial and federal authorities.
With overlapping jurisdictions often creating confusion, these steps could lead to a more unified sales tax regime that reduces compliance complexity and facilitates better tax administration.
Impact on Consumer Prices and Business Planning
While some sectors will benefit from reduced input costs, others may experience price increases due to the withdrawal of exemptions and higher tax rates.
Businesses in the retail and manufacturing sectors will need to reassess pricing strategies, supply chain planning, and customer demand forecasts in light of these developments. Transparency in tax application will also be important to avoid compliance issues.
Encouraging Documentation through Policy Adjustments
The overall theme of the sales tax changes is to incentivize businesses to become more transparent and aligned with documented economic activity.
By simplifying rules and removing arbitrary classifications, the government intends to reduce tax evasion and promote a culture of compliance. This approach supports the larger objective of widening the tax net and increasing public revenue without overburdening compliant taxpayers.
Additional Incentives for the Digital Sector
The digital sector, particularly software and IT services, receives further encouragement through reduced tax obligations.
These policy updates are part of a larger national vision to build a technology-driven economy and strengthen Pakistan’s presence in international software markets. By reducing barriers for digital exporters, the government seeks to position the country as a competitive tech destination.
Administrative Reforms and Policy Execution
Effective execution of these tax changes depends on efficient administration by the tax authorities. Training, systems integration, and updated digital platforms will be key components in supporting businesses through the transition. Clear guidance and timelines will be essential for ensuring that businesses of all sizes can comply with the revised tax rules.
Alignment with Broader Economic Objectives
The changes in the sales tax regime are consistent with the government’s broader objectives to formalize the economy, improve healthcare access, support technology exports, and increase self-reliance through domestic revenue generation. These updates are not only fiscal adjustments but also structural reforms aimed at long-term economic sustainability.
Introduction to Customs Duties in Pakistan
Customs duties are a significant source of revenue for Pakistan and also serve as a tool to regulate trade, protect local industries, and manage the balance of payments. In the 2023–2024 federal budget, the government introduced major changes in customs duties and tariffs with the aim of facilitating industrial growth, reducing smuggling, and supporting the export sector.
We explore the key reforms in customs policies, highlight sector-specific changes, and examine the implications for importers, exporters, and domestic industries.
Objectives of Customs Duty Reforms
The reforms introduced in the 2023–24 budget were aligned with broader fiscal, trade, and industrial objectives. The main goals include:
- Promoting import substitution by protecting local manufacturing.
- Reducing duty rates on raw materials and machinery to support industrial production.
- Rationalizing tariffs to simplify customs procedures and curb under-invoicing.
- Encouraging exports through duty drawbacks and exemptions.
- Strengthening enforcement to combat smuggling and misdeclaration.
Tariff Rationalization Measures
The government has continued its policy of gradually rationalizing the tariff structure. Multiple slab rates that previously created complexity in customs clearance have been merged or revised. The following reforms were introduced:
- A reduction in customs duty on over 1,600 tariff lines, especially raw materials not produced locally.
- Elimination of regulatory duties and additional customs duties on several goods.
- Revision of tariff slabs, especially for industrial inputs.
- Unification of duty rates on comparable products to prevent classification disputes.
These measures aim to make the tariff regime more predictable, efficient, and business-friendly.
Sector-Specific Reforms
Automotive Sector
The budget provided targeted relief to local car assemblers and parts manufacturers:
- Reduction in customs duty on import of electric vehicle components.
- Lowered duties on completely knocked down (CKD) kits for hybrid and electric vehicles.
- Duty exemptions for localized parts to promote domestic production.
Textile Industry
To support textile exports and value-added production:
- Duty reduction on textile machinery and spare parts.
- Zero-rating of customs duty on synthetic fibers and fabrics not manufactured locally.
- Simplified procedures for duty drawbacks for exporters.
Agriculture and Food Processing
The agriculture sector also benefited from lower import duties on:
- Seeds and fertilizers.
- Agricultural machinery and irrigation equipment.
- Packaging materials for food exports.
IT and Electronics
Customs duties were reduced or exempted on imports of:
- Laptops, computer parts, and accessories.
- Telecommunication equipment and software development tools.
This is in line with the government’s digital economy goals.
Renewable Energy Sector
Incentives were provided through exemptions and lower customs duties on:
- Solar panels and batteries.
- Wind turbines and related equipment.
- Energy storage and conversion systems.
These reforms aim to reduce energy costs and promote sustainable development.
Import Substitution Strategy
The budget focused on reducing dependency on imported finished goods by encouraging local production. Key changes include:
- Higher customs duties on luxury and non-essential items.
- Duty protections for industries producing locally manufactured substitutes.
- Duty-free import of plant, machinery, and equipment for new industrial units under the Temporary Importation Scheme.
This is designed to boost domestic capacity and create employment.
Export Facilitation Measures
Several changes in the customs regime were made to support exporters:
- Enhanced duty drawback schemes based on FOB value.
- Expansion of the Export Facilitation Scheme to include more product lines.
- Simplified refund process for exporters using bonded warehouses.
- Special exemptions for re-export of imported goods used in export processing zones.
These steps help improve cash flows and competitiveness of exporters.
Automation and Digitalization of Customs
To improve transparency and efficiency, the customs system is being modernized. Key upgrades include:
- Expansion of the Web-Based One Customs (WeBOC) system.
- Implementation of risk-based clearance and electronic scrutiny.
- Introduction of pre-arrival clearance mechanisms.
- Integration of customs records with trade databases for better audit trails.
These digital reforms reduce clearance times and enhance enforcement.
Combating Smuggling and Under-Invoicing
The budget emphasized enforcement to curb illicit trade. Reforms include:
- Strengthening customs intelligence and field enforcement units.
- Increased penalties for misdeclaration and under-invoicing.
- Use of non-intrusive inspection technologies at border checkpoints.
- Data sharing with banks and shipping lines to detect discrepancies.
These changes aim to protect legitimate businesses and increase revenue.
Free Trade Agreements and Customs Tariffs
The tariff structure is being aligned with commitments under:
- Pakistan-China Free Trade Agreement (Phase II).
- Preferential Trade Agreements with Malaysia, Sri Lanka, and Indonesia.
- South Asian Free Trade Area (SAFTA).
As part of compliance, duty reductions have been made on specified goods originating from these countries.
Impact on Business and Industry
The customs duty and tariff reforms have mixed implications:
- Importers benefit from lower duties on inputs but face higher costs on luxury items.
- Exporters gain from facilitation and exemptions.
- Local manufacturers get protection from cheaper imports.
- Consumers may experience short-term price volatility depending on product categories.
Customs Valuation Reforms
The Federal Board of Revenue has revised customs valuation rules:
- Valuation rulings are being updated more frequently.
- Importers are required to provide detailed cost breakdowns.
- Penalties for submitting false invoices or misclassification have been increased.
These reforms help prevent revenue leakage and promote fairness.
Role of the National Tariff Policy Board
The National Tariff Policy Board continues to coordinate with stakeholders for data-driven tariff policy decisions. In the 2023–24 budget, it:
- Recommended rationalization of thousands of tariff lines.
- Conducted sector-wise consultations with manufacturers and importers.
- Issued new guidelines for tariff protection based on competitiveness.
This centralized approach helps align tariff policy with national economic goals.
Challenges and Risks
Despite the reforms, certain issues may hinder effectiveness:
- Persistent lobbying from interest groups may dilute intended policy goals.
- Weak border control in remote areas may limit anti-smuggling efforts.
- Capacity constraints in enforcement and dispute resolution mechanisms.
- Fluctuations in global commodity prices may affect import volumes.
Continuous monitoring and adjustment are essential to overcome these hurdles.
Future Outlook for Customs Policy
The customs reforms in the 2023–24 budget set the stage for:
- Enhanced compliance through automation and data analytics.
- Greater reliance on trade facilitation as a growth driver.
- Shift from revenue collection to strategic trade management.
- Expansion of bonded warehouses and temporary importation schemes.
Further consultations and performance reviews will guide next year’s policies.
Addressing Inflationary Pressures
Inflation remains one of the most significant economic challenges for Pakistan. The federal budget outlines various monetary and fiscal strategies to mitigate inflation, including subsidies for essential commodities and tighter control over monetary supply. Although these steps are designed to cushion vulnerable populations from price hikes, the success of such measures depends heavily on their execution and continuous monitoring.
Additionally, targeted subsidies on wheat, sugar, and edible oil aim to offset the burden of rising global prices. However, if these subsidies are not appropriately channeled or monitored, they risk creating black markets or being misused, which would nullify their intended purpose.
Impact on Poverty and Inequality
The government has continued its focus on poverty alleviation through increased funding to the Benazir Income Support Programme (BISP) and other direct cash transfer schemes. These efforts aim to reduce income disparity by supporting low-income households. Special allocations for rural development, housing, and micro-financing programs indicate a shift toward inclusive growth.
The success of these poverty reduction strategies will depend not only on budgetary allocation but also on effective distribution channels. Enhancing the role of local governance and improving data transparency in beneficiary identification is essential to ensure that assistance reaches those in need.
Federal-Provincial Fiscal Coordination
The budget continues to operate within the framework of the National Finance Commission (NFC) Award. However, calls for revisiting this arrangement have grown louder due to disparities in resource allocation and development gaps across provinces. The budget does not introduce structural changes to the NFC but does provide additional grants and development funds to provinces with higher fiscal needs.
Greater fiscal decentralization is necessary for provinces to design localized development strategies. However, this requires a well-established mechanism for accountability and performance monitoring to ensure that funds are used efficiently at the provincial level.
Expanding the Social Safety Net
The 2023–2024 budget makes modest progress toward expanding the social safety net. In addition to traditional cash transfers, there is renewed emphasis on health insurance schemes, educational stipends, and nutrition support. These are critical given Pakistan’s low human development indicators.
Allocations for healthcare services under the Sehat Sahulat Program aim to increase access to medical facilities, especially in rural and underdeveloped areas. However, implementation bottlenecks such as bureaucratic delays, poor hospital infrastructure, and limited outreach remain significant challenges.
Encouraging Long-Term Economic Planning
One of the more forward-looking aspects of the budget is its push for structural reforms to enhance long-term economic resilience. This includes promoting digital financial inclusion, increasing the tax-to-GDP ratio through progressive taxation, and encouraging industrial diversification.
The budget supports investment in sectors such as agriculture technology, renewable energy, and digital innovation. These sectors are expected to create jobs and increase export competitiveness. Moreover, initiatives like tax credits for new technology startups and streamlined business registration processes are designed to stimulate entrepreneurship.
External Financing and Debt Management
Pakistan’s reliance on external financing remains a significant issue. The budget acknowledges the challenge of managing external debt while meeting development targets. It outlines plans to renegotiate payment terms with international creditors and attract foreign direct investment through fiscal incentives.
However, excessive dependence on multilateral loans and bonds creates long-term vulnerabilities. The government must strike a balance between short-term fiscal needs and long-term sustainability, especially in light of rising global interest rates.
Public Sector Reforms and Efficiency
To reduce the fiscal deficit, the government has also proposed reforms in the public sector. These include efforts to curb losses in state-owned enterprises (SOEs) through privatization or performance-based restructuring. The budget proposes setting up an oversight authority to monitor SOEs and ensure that their operations align with national priorities.
This move is expected to enhance productivity, reduce reliance on government bailouts, and improve service delivery. However, implementation risks remain high due to potential resistance from vested interests and bureaucratic inertia.
Infrastructure and Connectivity Development
The Public Sector Development Programme (PSDP) continues to receive a significant portion of the budget. Funds are earmarked for road networks, railways, energy infrastructure, and water management projects. Special attention has been given to underdeveloped regions, particularly Balochistan and South Punjab.
By improving connectivity and infrastructure, the government aims to attract investment, boost tourism, and enhance supply chain efficiency. Timely completion of projects and elimination of corruption in procurement are critical to realizing these goals.
Education and Skills Development
Despite fiscal constraints, the government has increased allocations for higher education and vocational training. The aim is to prepare the workforce for modern industry demands and reduce unemployment through skill-based education.
Partnerships with the private sector and international donors are expected to support capacity building initiatives. Online education platforms, especially for remote regions, are being considered for scaling up to reduce educational disparities.
Agriculture Sector Support
Recognizing the importance of agriculture in the national economy, the budget offers targeted subsidies on fertilizers, seeds, and machinery. Special credit facilities have been introduced to support smallholder farmers.
The government also aims to introduce digital platforms for crop monitoring, price forecasting, and input distribution. These initiatives, if properly implemented, can enhance productivity and reduce rural poverty.
Environmental Sustainability
Environmental sustainability features more prominently in this year’s budget, particularly in areas related to water conservation and afforestation. Dedicated funds for clean energy transition, climate resilience, and sustainable urban development reflect a broader acknowledgment of climate challenges.
Initiatives like the Green Pakistan Program have received enhanced funding. However, environmental goals must be mainstreamed into all development projects to ensure long-term ecological balance.
Women and Youth Empowerment
Several initiatives have been introduced to empower women and youth, including skill development programs, startup financing, and employment quotas. These are essential for improving gender parity and harnessing the demographic dividend.
However, there is still room for more comprehensive gender budgeting and targeted measures to address systemic discrimination and underrepresentation in the workforce.
Challenges to Budget Execution
Despite ambitious targets, the real test lies in execution. Historically, budget implementation has been marred by inefficiencies, revenue shortfalls, and poor inter-agency coordination. The current budget includes mechanisms such as quarterly performance audits and enhanced monitoring tools to improve accountability.
Greater transparency in fiscal reporting, citizen participation in development planning, and feedback loops for continuous improvement are necessary to ensure the success of the proposed measures.
As Pakistan grapples with multiple economic and social challenges, the federal budget for 2023–2024 presents a roadmap filled with both opportunities and risks. Whether it delivers meaningful change will depend not only on financial allocations but also on institutional efficiency, governance reforms, and the ability to adapt to global economic shifts.
Conclusion
The Pakistan Federal Budget 2023–2024 reflects a critical balancing act amid economic pressure, political instability, and the need for structural reforms. Through targeted amendments in income tax, sales tax, and customs and excise duties, the government aims to widen the tax base, enhance compliance, and address fiscal imbalances. Key measures such as progressive taxation, rationalization of exemptions, and digitization of the tax infrastructure underscore an attempt to create a fairer and more efficient tax system.
While the budget introduces revenue-raising strategies, it also imposes increased burdens on certain sectors and income groups. These changes are expected to improve documentation and enforcement, but their real impact will depend on transparent execution, institutional capacity, and macroeconomic stability. Stakeholders, including individuals, small businesses, exporters, and large industries, must reassess their strategies to remain compliant and financially viable under the new policy framework.
As Pakistan continues to engage with international financial institutions and navigates domestic challenges, this budget sets the stage for longer-term fiscal reforms. Sustained efforts in enforcement, policy continuity, and inclusive dialogue will be essential to realize the intended outcomes of growth, equity, and stability.