The federal government’s budget for fiscal year 2025-26 proposes a sweeping overhaul of the tax classification system under Section 115 of the Income Tax Ordinance, effectively eliminating the long-standing distinction between filers and non-filers. This significant change aims to tighten the tax net, potentially making over 100 million Pakistanis ineligible to purchase a car, among other restrictions.
Under the proposed new rules, individuals who fail to submit their income tax returns and wealth statements will face severe limitations on acquiring high-value assets or making certain types of investments.
New Rules Target Non-Compliant Individuals
As per the proposed changes, only those who have duly filed their income tax returns and submitted their wealth statements will be permitted to engage in a range of financial activities, including:
- Purchasing cars or immovable property.
- Investing in stocks, mutual funds, or government securities.
- Opening specific types of bank accounts that require compliance.
The plan further mandates that individuals seeking to access bank loans, credit, or financing must prove their income and repayment capacity through formally declared financial channels. Those with undocumented sources of income will be restricted from availing these financial facilities unless they opt to submit a formal tax return.
Declaration Option for Previously Unregistered Individuals
To facilitate the integration of undocumented individuals into the formal tax net, the government will introduce an “Option B.” This mechanism will allow such persons to file a one-time return to declare assets, pay applicable taxes, and thereby gain eligibility for financial participation in the formal economy.
Small-Engine Cars to Face Higher Sales Tax
In a separate but related move, the federal budget for 2025-26 proposes raising the standard sales tax (GST) on locally assembled small-engine cars, such as the popular Suzuki Alto, from 12.5% to 18%. This change, if approved, will notably impact the purchase cost of these widely used vehicles.
The Federal Board of Revenue (FBR) is expected to implement this by removing the reduced GST rate, effectively deleting the relevant entry in the Eighth Schedule of the Sales Tax Act. As a direct result, small cars with engine capacities up to 850 cc will become subject to the standard 18% GST rate.
Price Impact and Market Implications
Using ex-factory price data from early 2025, the price of small cars like the Suzuki Alto is estimated to significantly increase, potentially by anywhere between Rs. 120,000 to close to Rs. 180,000 for the higher-end variants.
This tax revision carries several implications:
- Out-of-Pocket Increases: Consumers will face a much higher out-of-pocket price for these vehicles, depending on the variant.
- Reason Behind Change: The government aims to eliminate existing tax privileges and boost revenue by harmonizing GST rates across various sectors.
- Market Ripple Effects: The higher upfront cost for new locally produced small cars may diminish their competitiveness, potentially driving consumer demand towards imported used vehicles. Authorities are reportedly considering easing import rules to offset this potential shift in market dynamics.
These dual measures in the budget underscore the government’s aggressive approach to both expand the tax base and increase revenue, albeit with anticipated impacts on consumer purchasing power and market behavior.
