In a significant proposal aimed at broadening Pakistan’s tax base and enhancing equity within the tax system, prominent taxonomist Ashfaq Yousuf Tola has suggested the introduction of a Minimum Asset Tax (MAT) via Capital Value Tax (CVT). Alongside this, he has recommended a modernization of the definition of “Resident Individual” for tax purposes.
Tola’s core objective is to ensure that high-net-worth individuals contribute a fair share to national revenue. To achieve this, he has proposed implementing MAT by expanding the existing scope of Capital Value Tax (CVT). Under his proposal, the MAT would apply to resident individuals whose domestic assets exceed PKR 100 million. The tax would be charged at a rate of 1% of the fair market value of the assets exceeding this threshold.
Crucially, Tola emphasized that this MAT would be adjustable against the individual’s income tax liability. This means it would serve as a minimum threshold for direct taxation, ensuring a baseline contribution, rather than imposing an additional tax burden on top of existing liabilities.
Modernizing the Definition of “Resident Individual”
Tola also addressed the need to modernize the definition of “Resident Individual” for tax purposes. He pointed out that the current residency definition under Section 82 of the Income Tax Ordinance, 2001, which classifies a resident as someone spending 183 days or more in Pakistan, is outdated. He argued that it lacks alignment with the more nuanced residency rules observed in other international jurisdictions.
To rectify this, Tola has proposed a revised framework for classifying residency:
- Resident Status: An individual would be classified as a “resident” if they stay in Pakistan for 182 days or more during a financial year. This slightly adjusts the existing rule.
- Resident but Not Ordinarily Resident (RNOR): For individuals who stay between 120 and 181 days, their residency status would become conditional. Specifically, a Pakistani citizen (as defined under the Pakistan Citizenship Act, 1951) or a person holding a Pakistan Origin Card (POC) who earns income exceeding a prescribed threshold (excluding foreign-sourced income) and has no tax liability in any other country, should be treated as a Resident but Not Ordinarily Resident (RNOR). Those who do not meet these specific criteria would be classified as non-residents.
- Non-Residents: Individuals who spend less than 120 days in Pakistan during the financial year would be treated as Non-Residents, regardless of their income or nationality.
These proposals from Ashfaq Yousuf Tola reflect a growing debate within Pakistan’s tax policy circles regarding how to effectively broaden the tax base, enhance revenue collection, and ensure a more equitable and modern tax system.
