The Large Taxpayers Office (LTO) Karachi has reported a significant achievement in revenue collection, successfully accumulating Rs 3.60 billion as Capital Value Tax (CVT) on motor vehicles and foreign assets during the first eight months of the current fiscal year 2024-25 (July 2024 to February 2025). This figure represents a notable increase of 17.23% compared to the Rs 3.07 billion collected during the same period in the preceding fiscal year. Sources within LTO Karachi have confirmed this substantial growth, highlighting the effectiveness of recent tax measures and improved enforcement. Officials at LTO Karachi attribute this positive trend to enhanced compliance from taxpayers and the rigorous implementation of existing tax regulations. The Capital Value Tax was initially introduced through the Finance Act, 2022, specifically targeting high-value assets such as motor vehicles and foreign assets held by resident individuals.1
Imposition of Capital Value Tax (CVT) 2022
The imposition of the Capital Value Tax (CVT) was formalized under Section 8 of the Finance Act, 2022, and its provisions became applicable from the tax year 2022 onwards. This legislation outlines specific categories of assets that are subject to CVT:
1. Motor Vehicles Held in Pakistan:
- A CVT of 1% of the vehicle’s value is levied on motor vehicles with an engine capacity exceeding 1300cc.
- For electric vehicles, the same 1% CVT applies if their battery power capacity exceeds 50 kWh.
2. Foreign Assets of Resident Individuals:
- A CVT of 1% is applicable if the aggregate value of foreign assets held by a resident individual surpasses Rs 100 million on the last day of the tax year.
3. Other Assets Specified by the Federal Government:
- The Federal Government retains the authority to impose CVT on other specific assets through official notification. The rate for such assets can be up to 5% of their value.
Collection of CVT on Motor Vehicles
The methodology for valuing motor vehicles for CVT collection varies depending on their origin and mode of acquisition:
- Imported Vehicles: The valuation is based on the import value assessed by Customs authorities, which includes all applicable duties and taxes. The Collector of Customs is responsible for collecting the CVT at the time of import.
- Locally Manufactured or Assembled Vehicles: The CVT is calculated on the ex-factory price, inclusive of all duties and taxes. The local manufacturer or assembler is tasked with collecting the CVT.
- Auctioned Vehicles: The auction value, inclusive of all duties and taxes, forms the basis for CVT calculation, and the auctioneer is responsible for its collection.
To account for depreciation, the assessed value of a vehicle is reduced by 10% each year. Importantly, no CVT is charged after five years from the initial purchase or import date of the vehicle.
Furthermore, every motor vehicle registering authority under the Excise and Taxation Department holds the responsibility of collecting CVT at the time of vehicle registration, provided it has not been collected at an earlier stage (e.g., during import or at the factory). Additionally, CVT must be collected upon every subsequent transfer of vehicle ownership within the initial five-year period.
CVT on Foreign Assets
The scope of foreign assets subject to CVT is broad and includes assets under direct and indirect ownership, as well as those that are beneficially owned by resident individuals. The valuation of these assets is determined based on their total cost in the foreign currency, which is then converted into Pakistani rupees using the State Bank of Pakistan’s exchange rate prevailing on the last day of the tax year. If the original cost cannot be accurately ascertained, the fair market value of the asset is used for CVT calculation.
LTO Karachi ensures that resident individuals fulfill their CVT obligations on foreign assets at the time of filing their annual income tax returns. Inland Revenue officers are empowered to recover any unpaid CVT, along with an applicable default surcharge, making individuals personally liable for non-payment. The processes for collection, payment, recovery, and refund of CVT are governed by the provisions outlined in the Income Tax Ordinance, 2001, and the Income Tax Rules, 2002.
The significant increase in CVT collection by LTO Karachi during the first eight months of fiscal year 2024-25 underscores the effectiveness of the Capital Value Tax as a revenue-generating measure. The improved compliance and robust enforcement mechanisms implemented by LTO Karachi are playing a crucial role in ensuring that contributions from CVT on both motor vehicles and foreign assets make a substantial impact on the national revenue. This success highlights the ongoing efforts to strengthen the tax collection infrastructure and promote tax compliance within the country.
