05/07/2025
Finance Act 2025 – Highlights of Changes to Income Tax
The National Assembly has officially passed the Finance Act 2025, marking a pivotal shift in Pakistan’s income tax regime with wide-ranging amendments that will reshape fiscal compliance and broaden the tax base.
The Act, which incorporates numerous changes to the Finance Bill 2025, introduces a refined legislative framework aimed at boosting revenue, tightening enforcement, and providing clarity on exemptions and rates
Here are the major highlights:
1. Pension Fund Exemption Retained: One significant relief for retirees is the withdrawal of the proposed amendment to eliminate the tax exemption on withdrawals from Approved Pension Funds. This means that income from such funds remains tax-free.
2. Tax on Pensions and Annuities Introduced: In contrast, income in the form of pensions and annuities from former employers has now become taxable from July 1, 2025. This income will fall under a final tax regime, albeit at a concessional rate. However, commuted pensions remain exempt.
3. Expanded Authority to Issue Exemption Certificates: The Finance Act empowers tax Commissioners to grant full exemption certificates to public limited companies, moving beyond the previous cap of 50% reduced withholding rates.
4. Ineligible Person Provisions Enacted: The Act upholds the concept of ineligible persons, restricting their participation in key economic activities. However, the controversial ban on maintaining bank accounts has been rolled back. A newly inserted Fifteenth Schedule sets thresholds and conditions, to be enforced on dates notified via the official gazette.
5. Time Limit for Amendment Orders Extended: The time limit to issue an amended assessment order post-show cause notice has been extended from 180 days to one year, providing both the tax authority and taxpayers more time for due process.
6. Property Sale Exemption: Sellers of immovable property held for at least 15 years, declared in wealth statements, and used personally are now eligible for withholding tax exemption—available once every 15 years. These transactions are also excluded from Super Tax under Section 4C.
7. Tax on Mutual Fund Dividends: Corporate entities receiving dividends from income earned by mutual funds through debt instruments will now be taxed at the standard corporate rate of 29%.
8. Digital Transaction Tax Rates Revised: Withholding tax on digital income from e-commerce platforms is now differentiated—1% for banking channels and 2% for Cash on Delivery transactions, aligning taxation with digital growth trends.
9. Exemptions for Select NPOs Restored: Certain Non-Profit Organizations have had their unconditional exemptions restored by placing them under Clause (57), reversing the Finance Bill’s proposal to subject all such NPOs to Section 100C conditions.
10. Minimum Rent Proposal Dropped: A proposed minimum fair market rent requirement for commercial properties has been scrapped, avoiding added complications for landlords and businesses.
11. Disallowance on Agricultural Purchases Clarified: The Finance Bill’s broader disallowance of 10% of expenditure from unregistered sellers has been narrowed. Now, disallowance only applies when agricultural produce is bought from middlemen, not directly from farmers.
12. Tax Recovery Provisions Rationalised: Provisions introduced via the Tax Laws (Amendments) Ordinance 2025, enabling immediate tax recovery, have been softened. Now, such recovery can only proceed if a matter is upheld by at least three appellate forums including a High Court, and if the tax exceeds Rs200 million.
13. Capital Gains Tax on Non-Residents Tightened: The higher CGT rate of 20% on non-resident investors dealing in debt and government securities will now apply to investments held for less than six months, down from the earlier proposal of 12 months.
14. Tax Deduction on Profit Enhanced: The tax deduction rate on profit/yield from bank accounts and financial institutions has been increased from 15% to 20%. This now also covers income from government securities (excluding National Savings), becoming final tax for AOPs earning up to Rs5 million.
15. Property Tax Adjustments for Non-Filers: Withholding tax on the purchase of immovable property by non-filers has been reduced to encourage formal documentation. However, the tax on sale by such persons has been increased to counterbalance revenue loss.
16. Online Marketplace Penalty Withdrawn: A proposal to penalize online platforms for hosting unregistered vendors has been shelved, easing compliance pressure on e-commerce businesses.
The Finance Act 2025 represents a comprehensive move to enhance the income tax regime’s efficiency, enforceability, and fairness. From digital commerce to property transactions and corporate income streams, the changes are set to impact nearly every taxpayer segment. With a clear push to boost documentation and revenue, the Finance Act positions Pakistan to meet its fiscal goals while navigating domestic and global economic pressures.
