Author: Faisal Shahnawaz

KARACHI: Federal Board of Revenue (FBR) has been suggested to remove restriction of exemption certificates for import of plant and machinery for new projects in order to promote industrial growth in the country.

Pakistan Tax Bar Association (PTBA) in its tax proposals for budget 2019/2020 said that existing procedures and rules for obtaining exemption certificates for import of plant & machinery and raw material by taxpayers has serious restrictions which causes hardship and increases cost of doing business.

The PTBA highlighted following issues related to exemption certificates:

Current income tax rules do not support issuance of exemption certificate for import of raw material by manufacturers starting new business or in the process of expanding the current product or launched a new product etc. These restrictions are hindering industrial growth in the country;

For qualifying for exemption, maximum import of raw material is restricted to the extent of 125 percent of the material previously imported and consumed;

In order to qualify for exemption, the law requires minimum tax (equal to higher of last two years tax liability) to be paid before qualifying for exemption. This means that in the case of lower taxable profits due to expansion or operational reasons, the taxpayer will inevitably have a tax refundable in the current year;

In case of newly established undertakings, tax credit under section 65D of Income Tax Ordinance, 2001 is not being allowed by the department while working out tax liability of the last two years;

Coupled with a high rate of withholding at 5.5% these restrictions badly affect working capital of the manufacturers; and

Currently, certificate of exemption from withholding tax on imports under Section 148 of Income Tax Ordinance, 2001 is not allowed to persons who are importing raw material, plant, machinery, equipment and parts for its own use unless they qualify as industrial undertaking.

The tax paid at import stage on such imports by persons other than the industrial undertaking is treated as a final tax.

The tax bar recommended that in order to address the issues faced in respect of claim of exemption under section 148 of the ITO, following amendments are proposed:-

Restrictions in respect of issuance of exemption certificate for new projects / capacity expansions / formula and process changes may be removed which will allow industrial growth in the country;

Maximum volume restriction be at least enhanced to 150 percent of last year’s raw material imported;

Requirement to meet the tax payment equal to previous two tax years be abolished and may be linked with payment of advance tax liability for the respective period (as in the case of exemption under section 153);

Amendments may be made to allow tax credit under section 65D while working out previous year’s tax liability for newly established undertakings already under immense cash-flow burden. This would help eliminate piling up of unnecessary refunds for newly established undertakings; and

The rate of tax on import of raw material and plant & machinery may be gradually reduced to 1 percent.

Clause (a) of sub-section (7) of Section 148 should be amended as under:-

“Raw material, plant, machinery, equipment, parts or any other goods by any person for its own use”.

In present situation, high rate of withholding at 5.5% coupled with these restrictions badly affect the working capital of the manufacturers. Removal of these hardships would provide incentive to industries and reduction of piling of huge refunds, it said.