The abbreviation FTR in Pakistan stands for either of the two very different things – one related to fiscal policy and the other – to a region. Depending on the context, FTR in Pakistan means either the Final Tax Regime or the Frontier Regions of the former Federally Administered Tribal Areas FATA. Both the FTRs affect Pakistan’s economy, society and politics in various ways.
I. FTR (Final Tax Regime) in Pakistan’s Economy
The Final Tax Regime is one of the two tax regimes in Pakistan, introduced by the Federal Board of Revenue FBR. Unlike the Normal Tax Regime (NTR) which taxes the net profit (income minus expenses), the FTR is a final withholding tax which makes the amount withheld at the source of payment of the income the taxpayer’s only tax obligation.
Why the FTR Was Introduced
The FTR was introduced to expand the tax base, simplify tax calculations and procedures, and promote compliance from those who are required to pay it.
The FTR’s Key Characteristics
- Finality of Withheld Tax: The amount withheld by the payer at the moment of payment or export reimbursement is the taxpayer’s only tax obligation.
- No Deductions Allowed: The FTR applies to the gross income and does not allow any deductions for expenses or allowances.
The FTR applies to:
- Income from services rendered outside Pakistan
- Dividends
- Prizes and Winnings
- Income from exports
The income of small and medium-sized enterprises (SMEs) under this regime is also considered – subject to certain conditions.
The Difference between the FTR and the NTR
The difference between the FTR and the NTR is that the latter allows taxpayers to calculate their tax obligations based on taxable income (income minus allowable deductions) and to apply progressive tax rates – not the gross income and a flat tax rate.
For businesses and SMEs, the FTR has traditionally been a convenient option due to its flexibility and relative protection from the scrutiny of tax authorities. In particular, the FTR has made it possible for many SMEs in Pakistan to formally enter the tax system and therefore to operate legitimately. Sialkot’s export industry is traditionally under the FTR regime.
However, a number of changes to the FTR have been made in recent years, imposing stricter requirements on SMEs and exporters. Particularly controversial is the introduction of a minimum tax for exporters – the tax withheld from them at the source of payment is no longer considered a final tax, so they must calculate their tax liabilities under the NTR and pay additional taxes. Thus, the FTR remains one of the most hotly debated issues in Pakistan’s tax policy – it is a tool for raising state revenues through formal taxation while at the same time trying to avoid the burdensome NTR for businesses that are willing to be registered in the tax system. The FTR continues to be a subject of legislative changes.
Receiving dividend income under the Final Tax Regime? Use our free Dividend Tax Calculator to check withholding tax under Section 150.
II. FTR: the Former Frontier Regions of FATA
The other meaning of the FTR is the Frontier Regions, which were administrative divisions within the Federally Administered Tribal Areas FATA. The FATA consisted of seven Tribal Agencies and six Frontier Regions, which were under the direct administrative control of the federal government.
The FTRs were administered by the Political Agent of the settled district (Khyber Pakhtunkhwa, formerly NWFP) to which they were affiliated.
The FATA, including the FTRs, were governed by the notorious Frontier Crimes Regulation FCR of 1901, which granted wide powers to the authorities and jirgas (tribal councils) of the FATA over the local population and tribes. The FCR denied the people of FATA most of the rights guaranteed by the Constitution of Pakistan and was widely regarded as the “Black Law”.
The Abolition of the FCR and the Merger of the FTRs with Khyber Pakhtunkhwa
In 2018, Pakistan adopted the 25th Amendment to the Constitution, abolishing the FATA and merging its agencies and frontier regions with Khyber Pakhtunkhwa. The merger process officially began in mid-2018 and ended in mid-2022. Some of the most significant results of the merger include:
- The FCR’s repeal (substituted by the Khyber Pakhtunkhwa Local Government Regulation) and the extension of the jurisdiction of the Supreme Court and High Courts of Pakistan to the merged districts.
- The newly merged districts (NMDs) became ordinary administrative divisions of the KP province.
- The residents of the NMDs gained the right to vote in the elections to the KP Assembly.
Challenges of the Merger
The merger was primarily welcomed by the people of FATA, who have long felt marginalized. However, the process of transitioning to the KP administrative system has proven to be complex and fraught. The KP government has faced criticism for the slow pace of implementation and the lack of funding for the development of the NMDs. Although the federal government has allocated significant resources to the development of the NMDs, they remain in dire need of investment.
Meanwhile, the long-awaited merger has failed to immediately improve the material well-being of the residents of NMD. The full development of a new administrative system in the NMDs, capable of withstanding the pressures of local traditional-princely relations and the challenges of security, remains a complex and time-consuming task. The main challenge for the KP government and the new authorities of the NMDs will be the implementation of the announced social, economic and administrative reforms.
Whether it is the economy or politics, the FTR remains one of Pakistan’s most pressing issues. For more information about the FBR’s tax collection efforts, you can view the FBR In Action | Income Tax Return Update | Breaking News video.
For all Taxation services, approach as at (https://taxaccountant.pk/)
FTR (Final Tax Regime) – General Questions and Answers
Q: Is FTR income completely exempt from taxation?
A: In most cases, this is not the case – the term “final tax” means that the amount withheld is the only tax due to the state, not that no tax is due. In addition, income subject to FTR must still be declared in the taxpayer’s income statement.
Q: How do I know if my income falls under FTR or the NTR?
A: This depends on the type of income and the section under which it falls in the Income Tax Ordinance, 2001. In most cases, regular income is subject to NTR, while income from certain activities (such as dividends, prizes and winnings) is subject to FTR.
Q: Do I have to report FTR income on my tax return?
A: Yes – this type of income must be marked as such in the taxpayer’s income statement for record-keeping purposes, since the amount actually accrued must be reconciled with the amount withheld.
