ByExplore the shift from the final tax regime to the normal tax regime for exporters, covering advance tax, super tax, and compliance essentials.
Shift to Normal Tax Regime
The recent transition of exporters from the final tax regime to the normal tax regime has introduced a series of changes that require careful consideration. For over three decades, exporters enjoyed the final tax regime, where the tax paid at the realization of export proceeds was treated as the final liability. However, as per the 2025 fiscal amendments by the Government of Pakistan and the Federal Board of Revenue (FBR), exporters are now subject to the normal tax regime. This shift has raised numerous questions and challenges, particularly regarding the calculation of taxes, advance tax notices, and super tax obligations.
Under the normal tax regime, two significant changes have been implemented. Firstly, the 1% deduction previously treated as a final tax is now considered a minimum tax. Secondly, a 1% advance tax has been introduced under Section 147, altering how exporters manage their tax payments. Section 147 governs advance tax collection, and its amendment means that exporters are now required to make quarterly tax payments based on their estimated annual profits. This adjustment has caused concern, especially for those accustomed to the simplicity of the final tax regime.
Understanding the Advance Tax Process
The advance tax under Section 147 is calculated based on the taxpayer’s last year’s income, adjusted by an increase of 20%. This means that profits shown during the final tax regime years, including 2023, are used as a benchmark. If exporters reported higher profits under the final tax regime, their advance tax liability for 2025 could significantly increase. The calculated tax is divided into four quarterly installments, with each due at the end of the respective quarter.
Many exporters have expressed concern over receiving notices under Section 147, particularly as they are unfamiliar with this process. These notices are system-generated by the FBR headquarters and serve as an intimation. Subsequent reminders and recovery proceedings are handled by the relevant Regional Tax Office (RTO) or tax zone. It is crucial to respond promptly to these notices, as failure to comply may result in penalties, including the attachment of bank accounts for recovery.
Challenges with Reduced Exports and Tax Calculations
Exporters facing reduced export volumes are experiencing added difficulties. With lower export proceeds, their profits may not align with the calculated tax liability based on the 2023 benchmark. This has led to a perceived double taxation effect, as the advance tax payable may exceed the amounts deducted against export proceeds.
For exporters whose businesses have grown, managing these changes is somewhat easier, as their increased revenues provide a buffer. However, they too must navigate the complexities of the new tax regime, ensuring accurate tax payments while avoiding penalties.
Super Tax Implications
Another critical element is the super tax, introduced under Section 4C, which applies to individuals and entities with significant profits. Exporters earning profits ranging from Pak Rs. 150 million to Pak Rs. 300 million or more are subject to this tax. The super tax is also payable quarterly under Section 147, following the same calculation and distribution principles as the advance tax. Accurate profit declarations and careful financial management are essential to ensure compliance and avoid penalties.
Filing the 2024 Tax Return
The 2024 tax returns and their profit declarations, balance sheets, and profit-and-loss statements will determine their tax liabilities for the remaining quarters of 2025. Accurate reporting is critical to avoid discrepancies that could lead to higher tax assessments or penalties.
Exporters should also note that reducing profits drastically in their financial statements to minimize tax liabilities may invite scrutiny from tax authorities. It is vital to maintain realistic and justifiable profit figures to ensure smooth compliance with the new tax regime.
Looking Forward
The transition from the final tax regime to the normal tax regime marks a significant shift in the tax landscape for exporters. While the changes may initially seem challenging, understanding the new requirements, responding promptly to notices, and managing tax calculations effectively can help exporters navigate this transition smoothly.
The most important takeaway is to treat Section 147 notices with seriousness and ensure timely compliance. By adopting proactive measures, exporters can mitigate potential issues, manage their tax liabilities effectively, and focus on sustaining and growing their businesses in the evolving regulatory environment.
