Finance Act 2023


A Finance Act is an exercise undertaken by the treasury of a country on an annual basis to rethink the issues of tax policy, tax legislation, and tax administration in the public interest. Domestic, regional, and global factors invariably tend to influence it.

The Finance Act. 2023 (FA, 2023) is no exception. 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, security, health and other sectors of infrastructure and human resources development.

Taxpayers in general and tax authorities, CEO’s, CFO’s, accountants, tax managers, tax petitioners and tax lawyers in particular are the major stakeholders with respect to the changes that are introduced by the FA, 2023 to adjust their respective tasks to enforce compliance or suggest a legally correct position in an advisory role. The analysis to follow takes into consideration the above stakes embedded in or flowing out of the new changes in the tax laws.

INCOME TAX ORDINANCE, 2001 (The Ordinance)

Scope of 3 basic concepts:

On the test of criticality and practicality, the FA, 2023 has expanded the scope and reach of the Ordinance dealing with the technical subjects of income, ‘permanent establishment’ (PE) and ‘associates’. The concept of income chargeable to tax has four attributes.

Firstly, any income chargeable to tax under the Ordinance. Secondly, any amount which is subject to advance collection or deduction of tax at source. This attribute contemplates nine prescribed transactions or events which are subject to collection or deduction. This year a new transaction has been added whereby the amount subject to advance collection of tax as represented by the issuance of bonus shares would be subject to collection of tax at the rate of 10% under S. 236Z. It may be appreciated that this expansion of the concept of income u/s 2(29) is an act of synchronizing it with the provision of section 236Z

The concept of an “associate” has four major attributes. The key attribute has been that a person who is reasonably expected to act in accordance with the intention of another person. The amended law has added two more tests to the above primary attribute. These are existence of (I) sufficient economic and financial dependence upon each other for achieving a common goal and ii) entering into transaction by one person with other person who is resident of a jurisdiction with zero-transaction regime.

These changes are in my humble view meant to defeat the tax avoidance ventures as and when attempted by the multinational companies for avoidance of incidence of Pakistan income tax. Drastic change has been made in the third technical concept of permanent Establishment (PE) by deleting the decades old attribute of a “fixed” place of business and inserting the expression of ‘virtual business presence in Pakistan’.

These changes have vastly expanded the scope and reach of PE and thereby paved the way to tax the enterprises engaged in e-commerce in global perspective. Now even the giants like Google and Facebook and Amazon would be brought into tax net. This change has, though lately, followed the trends of changes in the global tax policies.

13 New Liabilities:

It has also introduced thirteen new liabilities. Of these, nine pertain to the substantive provisions under Ss. 4C, 7E, 21, 37A, 39, 44A, 99D, 100B and 113. Section 4C has stipulated advance liability of four quarterly payments against the last tax year admitted liability of the super-rich community’s income ranging from 15 crores to 30 crores or above.

The privilege of exclusion of income on capital asset u/s 7E has been conditioned with the existence of the claimant on the Active Tax Payer List (ATP) maintained by the FBR. The other four liabilities of procedural character have been ranging within the scope of Ss. 147, 231AB. 231C and 236Z.

On the test of criticality, the terms of section 99D represent a new approach to the chargeability of tax on windfall income. Taxation of windfall income, in my humble view, is not new in substance. Yes, it might be new in degree and range. Under the salary regime of the Ordinance, any amount or bench-mark or loans/remitted by an employer is, in substance, a windfall income of an employee and is taxed.

The same is true to some degree with respect to the benefit derived by a business person during the course of past, present and future business relationships under the business taxation regime. But this policy change is a long-awaited decision made in the public interest and is in line with the existing trends of global tax policies.

Is windfall tax a Robin Hood taxation?

But a jurisprudential question is embedded in section 99D. Is it a mere Robin Hood taxation or something more? We can benefit in our understanding from the contents of an introduction to an article published in a leading law journal in the USA on the subject of “windfalls” as under:

“In common usage, a windfall is a “casual or unexpected acquisition or advantage,” or an unexpectedly large or unforeseen profit. A rare discussion in the legal literature did not stray far from the dictionary, defining a windfall as “value which is received by a person unexpectedly as a result of good fortune rather than as a result of effort, intelligence, or the venturing of capital. This definition, however, adds critical economic content to the term. It distinguishes gains due to luck from those due to effort or enterprise. —-an economic gain, independent of work, planning, or other productive activities that society wishes to reward.

Windfalls, William & Marry Law School Scholarship Repository, Faculty Publication, 1999 (1491)

America, Australia, the UK, India and Italy have already won the judicial battle when it was initiated in these jurisdictions many decades ago. Lately, on November 16, 2022, Reuters reported that an Italian administrative court rejected an appeal by the energy companies (ERG-MI and ENI) against a government-imposed windfall tax, saying the court had no jurisdiction over the matter.

In our jurisdiction, the novel chargeability of windfall income u/s 99D is conditioned upon a notification to be issued in future by the federal government whereby it is empowered to determine the basis and the incidence of windfall taxation. I am afraid that abdication of the above-stated two essential legislative powers would attract a lot of litigation on the point of the constitutional validity of this new tax measure.

With respect to the set of liabilities emanating from the procedural side, the new tax measures intend to tighten their tax grip around the economic sector of developers and builders of real estate. To document the economy the new tax measures have reintroduced 6 paisa withholding taxes on every 100 rupees of cash withdrawal from your bank account if you are not borne on the FBRS active tax payers list on the material date of transaction. All the registration authorities are now under obligation to ensure that the seller of an immovable property (capital asset) has paid the tax due on it under section 7E.

The readers may recall that in its character and effect, section 7E stipulates to discourage huge unproductive investment in the real estate sector. The advance taxation regime u/s 147 has also been expanded by obligating the super-rich community to pay their admitted tax liability u/s 4C in four installments. Newly introduced S. 231C contemplates that every foreign domestic worker employed in Pakistan would be himself liable to pay a lump sum annual tax (adjustable) of Rs. 200,000. In the alternative such tax can be paid by the agency or the sponsor through whom the worker was licensed to serve in Pakistan.

3 New Rights:

It has also introduced three new privileges, rights and exemptions to relax the rigor of tax burden. A landmark tax exemption right has been granted to the investors in the Reko Diq project of Pakistan within the scope of newly introduced investments seducing the enactment of the Foreign Investment (Promotion & Protection) Act, 2022 (FIPPA). In my view, the Reko Diq exemption (Section 44A) can be a flagship tax policy novation to attract foreign investment in the mining sector.

The alternate dispute resolution regime has also been completely revamped to benefit the taxpayers having tax disputes exceeding Rupees hundred million. Matters of refunds in dispute can also be agitated through the scheme of section 134A without any bottom line.

The privilege of seeking an exemption certificate from withholding taxes in the event of payment to a non-resident has always been a pain in the neck. The new tax measure contemplates that from 1st July 2023 onwards any application for such exemption would now be automatically granted by the IRIS system on the expiry of 30 days from the date of filing the application.

Power of tax administration:

It has also enhanced the powers of tax administration on two accounts. Firstly, it intends to setup an international center for tax excellence U/S 230 J. Secondly, through introduction of S146D it elevates the role of the Commissioner, as a universal recovery officer of the federal government whereby any outstanding liability in or under any statute or law for the time being enacted by the parliament can be recovered as an income tax arrears.

Sales Tax Act, 1990 (The Act):

Keeping the pattern of changes made in the Finance Act 2022, the FA, 2023 continues to introduce short, crisp but far-reaching changes in the basic concepts of the sales tax law. It has introduced three changes in the scheme of concepts, one change in the scheme of liabilities, three changes in the scheme of exemptions and privileges and one change in the scheme of administrative machinery.

Diluting the scope of 3 technical concepts:

It has introduced three landmark changes (taxpayer friendly) in its basic concepts of ‘goods’, ‘supply’ and ‘Tier-1 retailer’. We all know that up till now, electricity was treated as goods as its supply was subject to sales tax. In the new measure, the concept of goods, as contemplated under section 2 (12), has been drastically truncated by deleting the expression “production, transmission and distribution of electricity”.

It means that the burden of sales tax on three stages of production, transmission and supply of electricity has become zero with effect from the first of July 2023. It also means that with effect from 1st July 2023, industrial, commercial, and domestic power bills would be cheaper to the extent of sales tax exempted. All of us must watch for this change and agitate against the unjust enrichment of the power companies if the pinch and pain of the power bills remain the same.

From day one Tier-1 retailer scheme was unfavorable to small retailers. The FA, 2023, has come to their rescue and its rigor has been relaxed. Now jeweler’s shops operating in a 300 sq. ft. area and other shops operating in one thousand sq. ft. or two thousand sq. ft. or more areas have been jettisoned from the concept of Tier 1 retailer.

It means that all those Tier-1 retailers registered as jewelers and square feet area basis would be dealt with as ordinary retailers, and their tax liabilities and rights and privileges would now be determined within the scheme of section 2(28) of the Act.

1 New Liability:

It has introduced only one liability by expanding the penalty regime under section 33 (23), whereby the FBR would be able to exercise power of electronic monitoring and tracking of all types of goods produced by manufacturers. Up to June 22, this power was limited to monitoring and tracking of production in sale of cigarette packs only.

3 New Rights and Exemptions and cheap yogurt:

Interestingly the FA, 2023 has further expanded the scope of exemptions and privileges contemplated under zero rated regime of section 4. The exemption regime on imports and domestic supplies under section 13 and the concessionary tax regime under section 3(2) (aa) of the Act has also been expanded. Blanket zero taxation has been granted to the Reko Diq project.

To facilitate students, professors, universities, and office administration in general, the Fifth Schedule has been liberalized by introduction of serial number 12, through which the mathematical and calculating instrument and other drawing and marking instrument have been exempted from sales tax on the imports. The fifth schedule of the Act has also exempted from sales tax the local supplies of a large variety of commodities.

Likewise, the scheme of exemption under section 13 has been expanded by exempting the supply of red chili, turmeric, rice, wheat flour, blood transfusion set at the import-cum- supply stage. Seven new items have also been introduced to enjoy exemption at import- cum-supply stage.

These are contraceptive accessories, bovine semen, saplings, combine harvester and thrasher, dryer of agricultural products, direct seeder planter and any specified goods as enumerated in the fifth schedule of the Customs Act 1969.

Of special interest and immediate benefit to you and me is the exemption granted to the branded yogurts with effect from 1st July 2023. Now watch out, please, while making groceries, whether a pack of branded yogurt sold by Nestle or Adams has become cheaper to you as a consumer. If not, you must agitate. For the promotion of the dairy industry, likewise, an exemption has been granted to the local supply of butter deal, ghee etc.

The manufacture of drugs on import of substances used in the manufacturing of basic raw materials has also been rationalized under the concessionary tax regime. Pharma industry, with minor changes in the mix of pre-conditions would continue to pay one percent of tax at the manufacturing/import stage and such liability would be final tax for the purpose of subsequent supply chain. A wholesaler and a retailer in the pharma industry need not to pay any sales tax.

Administrative Powers:

The sales tax administrative machinery has been further expanded through introduction of section 30CA which intends to setup a new office of Director General of Digital Initiative the powers and functions of this new administrative setup are yet to be known. We have to wait for the FBR’s notification to this effect.


In the nutshell we note that so far as direct taxes are concerned the introduction of windfall taxation is a positive move to prevent excessive wealth accumulation and to generate additional revenue for public welfare. Exemption of electricity from the charge of sales tax is also a welcome change to ease the financial burden upon the common man as he would now be getting power supplies on cheaper rate. Be happy that new measures would get us cheap yogurt.

We also note that the FA, 2023 has not addressed two major concerns of tax policy and administration. Firstly, the basic scheme of direct and as well as indirect taxes continues to ignore the interest of the small tax payers i.e. micro, small, and medium enterprises/manufacturers.

In particular; 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 measures under review. Secondly, a taxpayer, on an average, has his story to tell you of his bad to worse consumer experience while interacting with the FBR and its field formations.

It’s continued inefficient working with respect to delay in making the decision beyond the statutory framework and lack of empathy even to the just causes of taxpayers continues to taint its image and erode the trust in the government and state.

We are of the view that performance of public duties by the tax functionaries in the prescribed timeline given in the income tax and sales tax and the customs law would substantially increase the voluntary compliance and public trust in the FBR, which for all practical purposes is a premier bread winning institution of the state.

The article is general in its approach and is not intended to provide any solution to any particular individual or entity. The accuracy and efficiency of this article is subject to appropriate professional advice on case to case basis.