Dr. Ikramul Haq & Abdul Rauf Shakoori
The National Assembly of Pakistan on June 27, 2025 approved the Rs.17.6 trillion worth budget for the fiscal year 2025-26, along with Rs. 463 billion new taxes, emphasizing to bring the digital economy under the ambit of taxation, both direct and indirect, but almost nullified the single largest enforcement measure to ban economic transactions by “ineligible persons”. There is also no change in policy to drastically cut the wasteful expenditure by right sizing the monstrous and inefficient state machinery and withdraw the enormous tax exemptions available to the powerful segments and entities.
The National Assembly approved the second budget of the government of Prime Minister Shehbaz Sharif with a comfortable majority. During a voting on one clause, the coalition government mustered the support of 201 members of the National Assembly against 57 votes of the opposition parties. It was also the second budget presented by Minister for Finance Muhammad Aurangzeb in the National Assembly. With the approval of the assembly and assent by President Asif Ali Zardari, the Finance Act, 2025 will come into effect from July 1, 2025.
The Finance Act 2025, in its comprehensive scope, attempts to establish tax impartiality and fiscal consolidation in extremely challenging times. It is a fact that Pakistani economy, already reeling from balance-of-payments challenges and structural fiscal weaknesses, faces a further strain. At a time when Pakistan had just de-escalated a brief but intense border standoff with India, its economy is left exposed to shocks from both the eastern and western fronts.
Though Pakistan diplomatically maintained neutrality in the Israel-Iran conflict, it actively advocated for peace in the United Nations General Assembly and Organization of Islamic Cooperation, calling for an end to the hostilities and immediate humanitarian access. Economically, the country had to recalibrate its fiscal policy in response to rising import costs, energy insecurity, and investor nervousness.
The government’s handling of this multidimensional crisis required significant internal economic reordering. Though pursuing peace with India and improving border cooperation, Pakistan had to simultaneously reassure international financial institutions and foreign investors that it was on a credible path to economic stability. The Finance Act 2025, in this context, emerges not merely as a fiscal document but as a strategic roadmap seeking resilience and reform.
The budget allocates Rs. 8.2 trillion towards debt servicing, the largest component, underscoring Pakistan’s unsustainable debt burden. Defense standing at Rs. 2.55 trillion, reflecting ongoing security pressures, while Rs. 1.1 trillion is allocated for subsidies, followed by rupees one trillion each for pensions and development spending, and Rs. 917 billion for civil administration. This composition suggests limited fiscal space for human development, infrastructure, or industrial revitalization.
The Finance Act, 2025 includes key tax policy measures that will reshape Pakistan’s economic structure and future trajectory. A key inclusion is the introduction of a new law, ‘Digital Presence Proceeds Tax Act, 2025’, which aims at bringing digitally delivered services, e-commerce, online marketplaces, and foreign digital vendors under the tax net.
It is, however, debatable whether this law will prevail over bilateral tax treaties signed by Pakistan, as in substance it is a tax on “income”. The Federation has legislative power under the Constitution to tax “income”, other than “agricultural income” or levy tax in lieu of “income” [Entry 47 and 52 of Part I of Federal Legislative List].
Digital Presence Proceeds Tax Act, 2025 represents a long overdue modernization of Pakistan’s tax base, aligning with international best practices and OECD multilateral treaty—though Pakistan has signed this treaty, but yet not endorsed Pillar One & Two initiatives under its framework.
As per this Act, digital platforms without physical presence in Pakistan but deriving income from local users will now be liable to tax. This enactment attempts to ensure revenue from global players such as streaming services, e-learning platforms, and online consultancies operating virtually in Pakistan.
Since this tax is imposed as percentage of gross receipt, to the extent of services, it violates legislative power of provinces to levy any kind of indirect tax on services [Entry 49 of Part I of Federal Legislative List]. And if it is a tax in lieu of “income” of foreign tech giants, the tax treaties signed by Pakistan, wherever applicable, will override the provision of this new law.
The Federal Board of Revenue (FBR) now has the mandate to regulate payment intermediaries, couriers, and online marketplaces under expanded definitions. Under new provisions inserted in the Sales Tax Act, 1990, the entities offering digitally ordered goods must hold National Tax Number (NTN) and sales tax registration.
These provisions try to formalize the rapidly growing digital economy and ensure taxability by shifting burden on digital platforms, rather than enforcing tax compliance by individual vendors. The owners of digital platforms will have to ensure that those utilizing their facility as sellers must get registration! Sections 14(1A) and 14(1B) of the Sales Tax Act, 1990 require registration of all sellers operating digitally and impose liability on couriers and payment gateways to confirm compliance before facilitating transactions. However, the gateways just facilitate the transaction but make no payment!
The Finance Act, 2025 amends section 3 of the Federal Excise Act, 2005, to allow tax imposition on persons or intermediaries engaged in supply chains, including ride-hailing services and logistics companies. Section 3(7A) of this Act declares that tax withheld by couriers or payment intermediaries shall be treated as final discharge in case of cottage industries and small retailers. This will reduce compliance costs for small e-commerce sellers per se, while ensuring tax collection from facilitators. It does not absolve them from obligation to get registered and file periodic statutory statements.
Section 114C of the Income Tax Ordinance, 2001 introduces transaction thresholds beyond which ineligible persons (those outside the tax net) are barred from executing high-value transactions. These include purchase of vehicles above Rs. 7 million, property above Rs. 100 million (commercial) or Rs. 50 million (residential), and stock market investments beyond Rs. 50 million.
However, the original proposal for a blanket ban on economic transactions by non-filers is diluted under political pressure and lack of technical capacity with the FBR. As passed, the thresholds allow considerable leeway, undermining the effectiveness of enforcement and risking erosion of the projected Rs. 389 billion in revenue from the proposed deterrent.
Despite this, several compliance measures strengthen tax administration. Arrest powers under section 37A of the Sales Tax Act, 1990 remain, albeit with enhanced procedural safeguards. Arrests now require judicial warrants and fulfillment of conditions such as non-cooperation or risk of evidence tampering. Tax fraud is redefined under section 2(37) to include fake input tax claims, document tampering, and routing payments for sham compliance. These measures seek to build deterrence and restore credibility to tax enforcement.
In the realm of income taxation, the Finance Act, 2025 revises multiple sections. Under section 113(2)(c), the minimum turnover tax for companies is restructured, reducing applicability from three years to two. Section 114B now empowers the FBR to block CNICs, passports, and utility connections of persons persistently failing to file returns, although these measures are subject to judicial review. A special clause in section 165C mandates online marketplaces and intermediaries to furnish seller data, including transaction value, to FBR each quarter, improving traceability.
A significant change is the tax treatment of pensioners, where only those receiving more than Rs.10 million annually are taxed at 5% of amount exceeding the threshold. Additionally, the budget introduces Rs. 2.5/litre climate levy on petrol and diesel and a 1%–3% levy on fuel-based vehicles to subsidize electric vehicles. Another notable insertion is Rs.10 federal excise duty per day-old chick sold, a controversial measure likely to inflate food costs.
The government has extended tax exemptions to entities like Beaconhouse National University and Army Officers Benevolent Fund, indicating preferential treatment. Meanwhile, National Logistics Cell (NLC) contracts are subjected to a minimum tax rate of 3% or 29% if liability exceeds collected tax. This hybrid structure seeks to plug collection gaps while maintaining institutional equity.
On customs side, generous exemptions continue for key sectors. Zero-rated or concessional duties are extended to Reko Diq Mining Company imports, power generation machinery, and mineral exploration equipment under strict terms. These concessions, though necessary to promote investment, reflect the dilemma of narrowing the tax base while incentivizing industrial growth.
The budget also includes amendments to section 8B of the Sales Tax Act, 1990 enabling the FBR to limit input tax allowance through automated risk systems. Though modern in concept, it risks arbitrary curtailment without adequate appellate safeguards. New clauses in section 11E authorize FBR to recover underpaid taxes based on audit findings, expanding administrative discretion.
A forward-looking measure in section 75A promotes digital payments, inserting the phrase “or through digital means” to encourage e-banking. Tax credit adjustments in section 61 now exclude overlapping claims, streamlining personal deductions. Section 100C of the Income Tax Ordinance, 2001 omits Table II references, simplifying exemptions for charitable organizations.
The Finance Act, 2025 also rationalizes super tax under section 4C, retaining zero tax for income below Rs. 150 million and scaling up to 6% for income exceeding Rs. 400 million. A one-time exemption for capital gains on disposal of personally used residential property after 15 years is added under section 104A, encouraging real estate transparency.
In terms of procedural law, the Finance Act, 2025 inserts new provisions regarding bail, arrest, detention, and inquiry in line with the Civil Procedure Code, 1898, ensuring legal safeguards. These ensure that tax enforcement powers do not translate into abuse of authority.
The Finance Act 2025, while ambitious in its goals, leaves critical gaps. The dilution of enforcement provisions, extensive exemptions, and political concessions limit its fiscal impact. The aggressive push toward taxing the digital economy and tightening enforcement is commendable, yet implementation challenges remain.
The way forward for Pakistan must focus on a pragmatic growth strategy. The government must prioritize institutional reform, revamp the FBR into an autonomous and fully automated revenue authority insulated from political interference, and digitize its systems. A sustained crackdown on undocumented wealth must accompany taxpayer education and facilitation.
Regional peace, particularly stable ties with India and Iran, is essential to redirect defense savings toward development. Trade diplomacy must enhance connectivity with Central Asia and China. Public spending must shift from consumption to infrastructure, health, and education. Export diversification and SME empowerment are key to inclusive growth. Only through a coherent fiscal policy, regional stability, and robust institutional capacity can Pakistan transition from crisis management to economic resilience and prosperity.
_______________________________________________________________
Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He holds LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law. He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).
He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.
X (formerly Twitter): DrIkramulHaq
_______________________________________________________________
Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).
Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to insure knowledge transfer.
His notable publications are: Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.
His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .
X (formerly Twitter): Adbul Rauf Shakoori
The recent publication, coauthored by these writes is
Pakistan Tackling FATF: Challenges & Solutions, available at:
https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35