The government has introduced significant changes to its income tax system through the Finance Act 2024. These measures aim to encourage timely tax filing, increase revenue collection, and potentially shift investment patterns.

New Late Filer Category in Pakistan:

Previously, taxpayers were classified as either “Filers” or “Non-Filers.” The new Late Filer” category introduces a penalty for individuals and associations of persons (AOPs) who fail to submit their tax returns by the deadline (typically September 30th). Late filers will face higher tax rates compared to regular filers.

After implementation of Finance Act 2024 FBR added the Late Filer Category. Any taxpayer filing tax return after its due date will now be marked as Late Filer. Late Filer will have same tax rate as of Filer for now except for property buying/selling transactions. The concept of immediate Active Tax Filer is no more.

Initially rates are increased on Property Purchase and Sale for Late Filers but may be implemented on other incomes in future as well.

Late Filer Status Challenged in Lahore High Court:

The Late Filer status and its taxation thereof has been challenged in Lahore High Court. Stating that the petitioner is an active taxpayer but is being compelled to pay advance tax at an enhanced rate of 6% instead of the prescribed rate of 3% under Section 236K of the Income Tax Ordinance, 2001. The petitioner argues that the impugned actions of the respondents are contrary to the applicable law and unsustainable.

The Lahore High Court’s decision on this case is eagerly awaited by numerous taxpayers who have been subjected to heightened tax rates with retroactive effect. As tax returns for the year 2023 cannot be amended, the court’s ruling will determine whether these taxpayers can seek relief from the increased tax burden.

Who are Filers and Non-Filers in Pakistan?

• Filers: Individuals or AOPs who register with the Federal Board of Revenue (FBR) and submit their annual income tax returns within due dates.
• Non-Filers: Individuals or AOPs who haven’t registered with the FBR or haven’t filed their tax returns.

How to Become a Filer in Pakistan:

Benefits of being a Filer include potentially lower tax rates, easier access to loans and financial services, and avoidance of the “Late Filer” penalty. Here’s how to become a filer:

• Register online on the FBR website.
• File your income tax return annually by the deadline.

Withholding Tax Slabs for Property Transactions:

The new budget introduces tiered withholding tax rates for property transactions based on the property value and filer status. This means Active filers will pay a lower withholding tax compared to late filers or Non Filers.

Impact on Investment:

The flat 15% tax rate on capital gains from property sales (regardless of holding period) for acquisitions after July 1, 2024, might discourage investment in real estate. This could potentially shift surplus funds towards bank schemes or the stock market, which could benefit other sectors of the economy.

Overall, the Finance Act 2024 aims to:

• Encourage timely filing of tax returns by penalizing late filers.
• Increase tax revenue through stricter enforcement and revised tax rates.
• Potentially influence investment patterns by making real estate less attractive compared to other options.