Finance Act, 2022


A Finance Act (FA) is an exercise that rethinks the tax policy, tax legislation, and administration on an annual basis. Domestic, regional, and global factors tend to influence it. In financial terms, a budget is an estimate of the expected income of the government in the coming fiscal year against the estimate of expected expenditure likely to be spent to meet the needs of welfare, and development, both in infrastructure as well as human resources.

In a nutshell, the budget/finance act 2022 for the fiscal year 2022 is a cut & paste exercise. I do not see any fresh & innovative policy changes to boost either the economy or revenue. Continued reliance on indirect taxes (taxing the poor man) and continued patronage of the FBR’s inefficient working (delay in decision-making & lack of empathy for the taxpayers’ community) taints the FA. Small taxpayers i.e. micro, small & medium enterprises/manufacturers are completely ignored.

In particular; the denial of a bundle of benefits of the normal tax regime to the small/ cottage industries, the globally recognized engines of growth and employment, is an unfortunate but persistent policy defect of the proposed measures under review.

My analysis of the FA (Income Tax and Sales Tax measures) would be comprised of two parts i.e. substantive law and procedural law. The substantive law portion of my talk would bring home the changes proposed with respect to new concepts (definition clauses), new liabilities (charging provisions), and new rights (Income reducing and tax-reducing provisions) introduced in the FA.

My talk on procedural law would be dealing with the proposed changes in the FA with respect to the style, manner, and extent of powers of the tax machinery in granting the proposed rights and enforcing the proposed obligations. You may already appreciate that, in essence, the direct taxes are extracted on the principle of my hand my pocket; and the indirect taxes on the principle of my hand your pocket.


In the Income Tax law, the FA has introduced four new concepts and three new approaches to changeability. It has proposed changes in income-enhancing provisions (inadmissibility regime of S.21), income-reducing provisions (S.23(5), 28(1)(b)); and tax-reducing provisions (tax credit under S. 62, 62(A), 63, 65(F), 100 (C)(4)).

Minor adjustments have been proposed in the method of computation of tax under S.37 with respect to income under the head of capital gain. Anti-tax avoidance regime under S. 109 has also been reinforced retrospectively from the tax year 2018 by empowering the Commissioner to re-characterize the place of business of a permanent establishment (PE) of a non-resident person operating in Pakistan.

Significant changes have also been proposed in the procedural law. The Commissioner has been granted more enforcement and penalizing powers in terms of amendment of assessment, imposition of heavy penalties, disconnection of utilities, and stoppage of cellphones where tax returns are not filed in time. In short, the significant changes proposed in the substantive law and procedural law are enumerated below to facilitate today’s talk:

A. Substantive law

  1. New concepts
  • Beneficial Owners – Company/AOP. A comparative concept in tax treaty to the avoidance of double taxation, company law & Anti-money laundering law – Anti-tax avoidance measure to expose the real owners behind Falouda account & Maqsood Chaparsi account. It is introduced to comply with the FATF recommendations.
  • Distributors – The scope of the definition is distinct from the concept of distributor under S. 2(7) of the Sales Tax Act, 1990.
  • SWAPS (Synchronized Withholding Administration, and Payment System agent)
  • Expansion of the concept of a tax-resident person under S.82 (d) by mixing the concept of foreign tax domicile, Pakistani tax domicile, and Pakistani political domicile i.e. “being a citizen of Pakistan is not a tax resident of any other country”. It has harsh implications. It also conflicts with the provisions of S. 11(5).

2. New Charging provisions Tax on a high-earning person for poverty alleviation under S.4C, Tax on deemed income under S. 7E, and fixed tax on retailers under S. 99 (A). All the approaches are constitutionally valid under the principle of legislative novelty.

Section 7E denotes, the notion of taxation of unutilized and unoccupied properties having a fair market value exceeding Rs. 25 million. This concept of notional taxation of unutilized properties is borrowed from Indian tax law.

3. Income-enhancing provisions Expansion of the inadmissibility regime of particularized expenses under S. 21 by the introduction of three new sets of facts and circumstances in three new clauses:

  • Clause (ea) – Disallows the contribution paid by an employer to an approved gratuity fund, approved pension fund, and an approved superannuation fund by 50%. It is an anti-tax avoidance provision.
  • Clause (ia) – Disallows any expenditure paid under the single head that in the aggregate exceeds Rs 1,000,000 if not made through digital means from a business bank account notified to Commissioner. It is a provision that tends to promote E-commerce.
  • Clause (r) – Any expenditure attributable to sales claimed by any person who is required to integrate with an FBR’s approved fiscal electronic device but fails to integrate. However total disallowance of expenditure under this clause shall not exceed 10% of the allowable deduction. It is a provision to promote E-documentation on an online-real time basis (OLRT). This provision is not practicable given the poor level of computer literacy required for setting up an E-Commerce platform.

4. Income-reducing provisions – These changes are qualifying the provisions under S. 23(5) and S. 28 (1)(b) which are tax-reducing provisions by permitting partial deduction of capital expenditure.

5. Income from capital gains Expanding the scope of taxation under the head of income from capital gains by substituting S. 37(1A) whereby the capital gain on the disposal of immovable property situated outside Pakistan will be taxed at the applicable rate irrespective of the holding period.

This proposition read with the expanded definition of a resident person (under S. 82(d)) would have serious tax consequences on the disposal of foreign property with respect to a person having dual citizen status.

6. Expanding the scope of re-characterization under S. 109 Up till now, the anti-tax avoidance regime under S. 109 empowered the Commissioner to re-characterize a transaction of income or deduction under prescribed conditions. A new power of re-characterizing the place of business of a non-resident person operating in Pakistan by treating such place as a permanent residence where it is found to have the attributes of a permanent establishment (PE) as particularized in sub-clause (g) of Clause 41 of S. 2. It is a red-flag provision when it comes to advising to a non-resident taxpayer on its tax matters.

7. Pro-revenue and pro-taxpayer changes have been introduced in S.111 while dealing with the subject of explaining the nature and sources of income in case of an allegation of tax evasion. The Supreme Court in its latest judgment reported as 20201SCMR 1290 (Commissioner Inland Revenue Zone Bahawalpur, Regional Tax Office, Bahawalpur Versus Messrs Bashir Ahmed (Deceased)) has ruled that for an adverse conclusion under section 111, a specific notice within the scope of S.111 has to be issued.

In order to undo the impact of this ruling, the FA 2022 tends to redo the explanation to Sub-section (5) of S. 111 to the effect that where a notice under S.122(9) has already been issued no separate notice under S. 111 is warranted.

Pro taxpayer amendment has also been introduced by adding an explanation to subsection (4) of S.111 whereby the scope of normal banking channels has been expanded to include foreign remittance through money service bureaus, exchange companies, or money transfer operators.

In my view, the proposed amendment would invite further litigation on the subject because the question as to whether the proceedings under S. 177, 122, & 111 are sequential or stand-alone provisions have become more confounding by merging the civil law consequences under S.122 (9) and criminal law consequences under S.111. Despite distinct language and different purposes, the unholy alliance between S. 111 and S. 122 (9) crafted by the proposed amendment is bound to fail in the future battle of tax rights emanating therefrom.

8. Penalty Regime – Five new penalties have been proposed at Serial no 30, 31,32, 33 & 34 cater to the contraventions of the provisions of a new provision under S. 181 E, (Beneficial Owner), SWAPS agents, monitoring & tracking provisions; integration to the monitoring, tracking, reporting, and recording system with the Boards’ computerized system. These penalties are harsh and amount to strangulating the taxpayer under the garb of regulating the tax system.

9. Substantive law / Scheduler changes:

  • First Schedule – It proposes to increase the taxable income threshold from the business of every Individual/AOP from 4 lacs to 6 lacs. It also proposes to increase the taxable income threshold from the salary of every Individual/AOP from 6 lacs to 12 lacs.
  • Second Schedule – Proposed changes in the second schedule have rationalized some existing incentives by way of tax exemptions including but not limited to zone enterprises as defined in the Special Technology Zone Authority Act, 2021.
  • Tenth Schedule – Tenth Schedule deals with the subject of the Active Taxpayer List (ATL). The new enforcement concept of enlistment as an active taxpayer tends to strictly regulate the tax return filing obligations and tax deduction/collection obligations. The changes proposed that buyers of new motor cars not appearing on the active taxpayer list (ATL) would be obliged to pay 200% of the rate of advance tax as specified in the Frist Schedule. Likewise, the buyers of the immovable properties not appearing on the active taxpayer list (ATL) would be obliged to pay 250% of the rate of advance tax as specified in the Frist Schedule.

B. Procedural Law:

The changes proposed to articulate an express tendency to arbitrary tax governance matching the words of Justice Johan Marshall that “Power to tax is the power to destroy” (McCulloch v. Maryland, 17 U.S. 4 Wheat. 316 316 (1819))

  • Under S.114B – Active taxpayer list The punitive regime of discontinuance of electricity and gas connection and disabling of mobile phones or mobile phone SIMs expressly conflicts with the fundamental rights granted by Article 4, 10A, 18 of our Constitution.  It is bound to have dramatic consequences. I am afraid the FBR has no muscle to enforce this provision in the cultural context because the rich, the influential, and the powerful (RIP) taxpayers are found to stand in the front line of defaulters in their annual tax returns.
  • Under S. 122 – 120 to 180 & 270 days – Powers – premium on inefficiency – performing duty beyond the prescribed timeline by a statutory license.
  • Alternate Dispute Resolution (ADR) under S.134A For taxes in disputes amounting to Rs. 10 core & above – Pro-Rich – Anti-poor provision.
  • Collection under S. 148(7) – Tax collected at import stage by acknowledging it as an adjustable tax reducers act under normal tax regime (NTR)
  • New deduction regime under S. 152 (1DC) & (1DD) – Contemplates creating withholding tax obligations upon exchange companies and banking companies where payments are made through new modes of banking transaction driven by information technology with respect to international money transfers or cross-border remittances or inter-bank financial telecommunication services through card network, payment gateway. But such withheld taxes would fall under the final tax regime (FTR).
  • S. 174(3) – Second Proviso to be added in subsection 3. It is a very formidable proposition. The existing limits of 6 years for keeping books of accounts would not be applicable in potential cases of tax evasion covered under S. 111(2)(ii) which deals with issues of tax evasion situated or incurred outside Pakistan or concealment of a foreign source of income.
  • Under S. 175B NADRA it is a collaborative provision whereby the data bank of NADRA would be used for tax purposes in the prescribed manner.
  • Under S. 177(6) – Previously issuance of audit reports within the provision of subsection 6 was mandatory.   The judicial forums have given relief to the taxpayer in a lot of cases for want of issuance of audit reports. Instead of reprimanding the delinquent audit authorities, the FAR has given another premium on their inefficiency by proposing the omission of the statutory obligation of an audit report. Instead, a new expression ‘completion of audit” shall be substituted in subsection (6A) of S. 177. Such short-circuiting would not help the FBR because the expression ‘the completion of audit’ is an equally potent check on the power of the tax authorities for the purpose of amendment of assessment through an audit. It may also be noted that the new expression revives the provision to the same position as it existed prior to the tax year 2019. The only difference is that prior to the tax year 2019, the concept of completion of the audit was recorded in subsection (6) but now it is proposed to be recorded in subsection (6A).
  • Under S. 182 Expansion of Penalty Regime Five new penalties are proposed to be created to punish contraventions to five new enforcement obligations i.e. recorded of beneficial owner (S. 181E), failure to perform the function by the notified SWAPS agents under S. 262 (B), issuance of tax invoices without QR codes failure to integrate business for monitoring, tracking, reporting, or recording of sales with the Boards’ computerized system and failure to issue prescribed fiscal invoices in case of enterprises integrated with the Board’s computerized system within the scope of a new provision of subsection (3) of S. 237A.


  1. Short, crisp but far-reaching changes have been proposed in the basic concepts of goods, supply, and Tier 1 retailers.
  2. Further tax changeability regime has been expanded by linking it with the factum of non-enlistment of a registered person in the active taxpayer list (ATL). A growing battery of ligations already exists in the field to contest the conflicts, confusion, & abusive application of the law/procedure governing the ATL in the context of the true construction of S. 2, 21, Rule 12A and 12B read with the SROs – (777(I)/2021 dated 25.08.2020 Chapter XVII-B- Rules 158-I, J & R) and SRO-1222(I)/2021 dated 17.09.2021 issued in suppression of earlier SRO-509(I)/2011 dated 12.06.2013.s
  3. The scope of the withholding tax regime has also been expanded by dully registering the internet-based emerging economic activities of selling goods on online market place i.e. Amazon or Alibaba.
  4. With respect to the person registered as a retailer, the FA has proposed a fixed tax regime with three slabs of tax liabilities ranging from Rs. 3,000 (the lowest tax burden) through Rs. 5,000 to Rs. 10,000 (the highest tax burden).
  5. The FA has also proposed to empower the Board to direct any person or class of persons to the integration of its invoice issuance machine with the Board’s computerized system on a real-time basis.
  6. Listed public companies have been granted the relief of adjustment of input tax against the compulsory payment of 10% of output tax under S. 8B.
  7. The FA also proposes to empower the Board to direct the utility companies to discontinue the supply of gas and electricity to the delinquent Tier-1 retailers.