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Streamlined Taxation:
FBR's New Withholding Tax
Regime for Motor Vehicles Explained
The Federal Board of Revenue (FBR) has
introduced a revamped withholding tax system for motor vehicles, with the aim
of simplifying taxation processes and increasing government revenue.
In Circular No. 2 of Income Tax issued on July
26, 2023, the FBR outlined the recent amendments made to the Income Tax
Ordinance, 2001 through the Finance Act, 2023.
Previously, a fixed withholding tax was imposed
under section 231B of the Income Tax Ordinance, 2001 on the purchase or
registration of motor vehicles with an engine capacity of 2001 cc and above.
However, under the Finance Act, 2023,
significant changes have been made to this tax structure. Instead of a fixed
amount, the FBR will now levy taxes based on a percentage of the vehicle's
value, categorized according to engine capacity as follows:
- Motor vehicles with engine capacity between
2001cc to 2500cc will be taxed at a rate of 6% of the vehicle's value.
- Motor vehicles with engine capacity between
2501cc to 3000cc will be taxed at a rate of 8% of the vehicle's value.
- Motor vehicles with engine capacity above
3000cc will be taxed at a rate of 10% of the vehicle's value.
It's important to note that these tax rates
apply to individuals listed on the Active Taxpayer List (ATL). Non-ATL
individuals will face higher rates of withholding tax, with an increase of two
hundred percent. The revised rates for non-ATL persons are 18%, 24%, and 30%
respectively, according to the second proviso to rule 1 of the Tenth Schedule
to the Income Tax Ordinance, 2001.
To determine the vehicle's value for tax
collection purposes, the following criteria will be used:
- Imported vehicles: The value assessed by
Customs authorities at the time of import, increased by customs duty, federal
excise duty, and sales tax payable during the import stage.
- Locally manufactured or assembled vehicles in
Pakistan: The invoice value, including all applicable duties and taxes.
- Auctioned vehicles: The auction value,
inclusive of all duties and taxes.
Furthermore, in cases where the engine capacity
is not applicable, and the vehicle's value exceeds Rupees five million, the
applicable tax rate will be 3% of the import value (including customs duty,
sales tax, and federal excise duty for imported vehicles) or the invoice value
(for locally manufactured or assembled vehicles).
This new withholding tax system aims to
facilitate tax collection, promote transparency, and establish a fair taxation
system for motor vehicles in Pakistan. The FBR's implementation of these
changes through the Finance Act, 2023, is expected to enhance government
revenues and support the country's economic growth.
