Businesses carry Brunt Tax Reforms

Islamabad:

Pakistan’s taxpayers began to feel the transfers of the Funding Act 2025, which came into force on July 1, 2025. This marks a major leap compared to the revised target of RS11.9 trillion for the financial year 2024-25.

The government claims to focus more on direct taxation, backed by the increased target of RS6.9 trillion for direct taxes, compared to the RS5,826 trillion last year. However, the reality is that a large part of direct tax revenue is still indirectly collected through preliminary taxes and mechanisms of withholding.

The government also claims that it has taken steps to expand the tax base and digitization through the 2025 funding law. However, it is vital to assess the impact of these measures in various sectors, especially in the business community.

One of the most discussed amendments was introduced in accordance with Article 21 of the Income Tax Decree, 2001 [the Ordinance]. According to this provision, if a person receives a payment exceeding the RS200,000 against a single invoice, which includes one or multiple transactions, in addition to the bank channels or digital media, then 50% of the costs associated with this sale will be prohibited as astonishing expenditure. This effectively increases taxable income and, consequently, the taxpayer.

This amendment has caused concern and confusion among taxpayers about its practical application. It remains unclear whether the prohibited expenses would be limited to the costs directly linked to the sale or whether it will be applied proportionally to all required expenses for the offer of goods or services.

In addition, registered taxpayers are frustrated about how they can force customers to pay digitally in a market where alternatives that are not meters are still widely accepted. Although the measure is oriented to promoting documentation, such a significant shift should have been preceded by a transitional period that allows businesses to adapt.

Another modification based on the same section excludes 10% of costs for purchases made by people who do not have a national tax number (NTN), with the exception of the exception of direct markets of agricultural products by farmers. While the stated objective is to expand the tax base, it is widely believed that this move shifts the burden of the imposition on compliant taxpayers. Instead of utilizing the available data and digital infrastructure to detect non -lips, the tax administration seems to assign its work to the official sector. The effectiveness of this provision will largely depend on how strongly and steadily it is imposed during the post -return evaluation process.

The service sector, in particular, finds the government’s narrative offering a “different budget” to be misleading. The tax rates for service providers has increased significantly, with the standard interest rate now to 15% for all persons, from previous 9% for companies and 11% for individuals or associations (AOPS). For specific areas excluding technological services, the withholding tax has also increased from 4% to 6% of the gross amount payable. These changes continue the tendency to incorporate indirect taxation under direct tax laws, causing long -term concerns about cash flow restrictions and sustainability, especially for SMEs operating in the official sector.

The Funding Law 2025 also introduces new tax liabilities to online markets, digital platforms and courier services. A new tax, in accordance with Article 6a read by Article 153 of the Decree, is now valid to any person who receives payments for digitally ordered goods or services delivered to Pakistan through online platforms or websites. According to these provisions, payment intermediaries must deduct 1% of the income tax, while courier services involved in cash delivery transactions must withhold 2% on behalf of the seller. Flat Tax on Sales 2% is also valid and in accordance with sales tax law, 1990 [the Act].

However, more concerns the amendment of Article 181 of the Decree and Article 14 of the Law, which puts the burden on online markets and courier services to ensure that sellers using their platforms are registered for income tax and sales tax. This requirement is cruel, especially as it has not been allowed to have a transition period.

It is also in danger of pushing small sellers from the digital economy, which was otherwise a growing and promising sector. Inequality becomes evident when these requirements are compared to those applicable to natural markets and shopping malls, where there is no such responsibility for enforcing registration. The sudden imposition of this provision can stifle the digital economy before it matures.

In addition to these policy shifts, the Funding Act 2025 has also reversed some previous structural reforms. Last year, responding to concerns about the lack of independence of the Commissioner (appeals), the government had introduced limits of monetary jurisdiction to transfer significant appeals directly to the inland revenue court. It was also announced that mixed questions and law could be committed to the Supreme Court. Both of these changes have now been moved back.

Either due to administrative difficulties or unintentional consequences, such reversals harm the cohesion of tax policy and the confidence of taxpayers. The concern about the independence of the Commissioner (appeals) remains unresolved and the number of pending cases has only increased.

Although there is no doubt that the Funding Act 2025 contains measures aimed at promoting digitization, documentation and expansion of the tax base, does the crucial question remain: Why is taxation in Pakistan not based on the principle of justice? Large parts of the economy, especially retail, real estate and agriculture, continue to enjoy preferential or minimal tax treatment. This creates dissatisfaction between the compliant taxpayers who are already in a disproportionate share of the tax burden. Tax reform must be comprehensive and fair, or is in danger of undermining the very goals it seeks to achieve.

The author is a tax expert and a member of the Pakistani Institute of Organized Accountants