New category for families to reduce tax filing burden

• Overseas Pakistanis can remain on Active Taxpayers List without filing returns
• Individuals earning below Rs600,000 per year won’t be required to file returns
• Non-filers will face restrictions on opening current accounts, making large transactions

ISLAMABAD: The government is set to introduce a raft of measures to address the concerns of individuals not required to file tax returns, such as housewives, people with an annual income below Rs600,000, and overseas Pakistanis.

A new “family” category will exempt dependents from filing, while those earning below the threshold or living abroad will avoid penalties like SIM blocking or travel bans. The measures aim to prevent these citizens from being unjustly penalised as the government moves to abolish the “non-filer” category.

The initiative comes in response to the rising number of nil-return filings, which have surpassed 2.5 million, making up nearly 70 per cent of all returns filed in the tax year 2023.

Under the proposed system, a new definition of family will be introduced into income tax law. A wife, a son under the age of 25 and an unmarried daughter will be allowed to benefit from the filing status of a husband or father.

This provision will enable family members to carry out financial transactions, such as investing in property and financial instruments, using the tax filer status of the husband or father.

The measure is designed to relieve many housewives from the obligation of filing tax returns, particularly when their primary source of income is their spouse. However, the transactions made under this arrangement will be limited to the income declared by the filer in previous tax returns.

Curtailing nil-return filings

The Federal Board of Revenue (FBR) aims to set reference values for families eligible to purchase real estate, vehicles and other assets. The reference values will be based on the income declared in the husband or father’s previous tax filings. In cases where a woman earns income and her husband is financially dependent on her, the same rules will apply, allowing the husband to invest within the income limits disclosed by his wife.

Former finance minister Ishaq Dar introduced higher tax rates on non-filers to encourage tax compliance, but this has led to an increase in nil-return filings as individuals sought to avoid paying higher tax rates on key transactions. Under the current system, non-filers pay higher tax rates on 15 types of transactions, including property and vehicle purchases.

FBR Chairman Rashid Mahmood Langrial said the notion of “non-filers” is a unique Pakistani innovation and that the government plans to abolish the concept by amending the law.

The proposed reforms aim to differentiate between genuine filers and those who file returns solely to avoid penalties such as higher tax rates or the suspension of services like mobile phone SIMs.

Bank account restrictions

Under the proposed measures, the FBR will shift its focus from penalising non-filers through SIM blocking to restricting the opening of current accounts. Non-filers will be prohibited from opening current accounts but will be allowed to operate a simplified “Asaan Account” for basic transactions, excluding business-related activities.

Overseas Pakistanis, particularly holders of Pakistani Origin Cards (POCs), will be permitted to remain on the Active Taxpayers List (ATL) without filing tax returns. This facility will be worked out in coordination with Nadra to prevent potential misuse.

Similarly, the government plans to introduce travel restrictions for non-filers, particularly to Europe, North America and other developed countries. However, exemptions will be made for religious pilgrimages such as Hajj and Umrah, as well as visits to religious sites.

For individuals refusing to join the tax roll, financial transactions tied to their Computerised National Identity Cards (CNICs) may be scrutinised, and those with undeclared incomes could face a ban on international travel. Individuals earning less than Rs600,000 per year will continue to be exempt from filing tax returns under the proposed system.

FBR to set transaction ceilings

With the elimination of the non-filer category, the FBR plans to generate reference values for individual taxpayers to ensure that property, vehicle and financial transactions match declared incomes. These values will be accessible online and used to verify the eligibility of purchases. The initiative aims to encourage people to disclose their true incomes, which will serve as a benchmark for financial transactions.

Restrictions will also be placed on the declaration of loans and gifts in tax returns, with cross-cheques and other safeguards introduced to prevent misuse. Individuals over 65 years of age will be allowed to declare the real market value of their assets, which will serve as a benchmark for future transactions.

In consultation with banks, the FBR will establish a risk ceiling for taxpayers based on their declared incomes. Banks will be required to report any transactions exceeding the set limit, helping the FBR in identifying individuals who conduct large transactions but fail to declare adequate income on their tax returns. Cash withdrawals will also be capped at Rs30 million per year to reduce cash circulation and promote digital transactions.

The government also plans two more deterrent tactics to force people to declare their true earnings. The government may reserve the right to purchase properties declared below market value, thus discouraging the under-declaration of assets. The investment will be linked with data shared with banks.

Non-filers will face further restrictions, including being barred from purchasing vehicles and property and making investments in financial instruments.

Published in Dawn, September 26th, 2024

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