Pkrevenue.com

Category: Budget 2020-2021

  • FBR proposed revamping withholding tax regime, reducing to five rates

    FBR proposed revamping withholding tax regime, reducing to five rates

    KARACHI: Federal Board of Revenue (FBR) has been proposed to revamped withholding tax regime and reduced the number of withholding tax rates to maximum five.

    Overseas Investors Chamber of Commerce and Industry (OICCI) in its proposals for fiscal year 2020/2021 highlighted withholding tax as one of the key irritant for compliant tax payer.

    It said that the fact that the ‘collection and deduction of income tax at source (Withholding Agents Perspective) (Taxpayer’s Facilitation Guide)’ on the FBR website is of 51 pages highlights the complexity of the withholding tax regime which has more than 30 tax provisions that need to be followed and 50 different tax rates, applicable on nearly all heads of receipts/payments.

    The rate of withholding/advance tax also varies depending upon the nature of transaction, legal/tax status of the parties i.e. company or individual and active or in-active filer.

    Moreover, FBR system does not auto populate taxes withheld in the portal to the credit of the beneficiary.

    Furthermore, at present FBR has prescribed following categories of withholding tax (WHT) rates under the ITO 2001, for various types of payments and it has become extremely difficult for the person processing payments to be precise and accurate in applying WHT rates and ensure compliance.

    The, complexity for the withholding agent has been further compounded after the introduction of active taxpayers list and different rates for an active and non-active filers, the OICCI said.

    It recommended that withholding tax regime should be revamped by reducing it to a maximum of five rates for all withholding taxes and the differentiation should be on the basis of active and inactive taxpayers only.

    FBR system should be upgraded and all taxes withheld should be auto populated in the portal to the credit of the beneficiary.

    Final Taxation Regime should be done away with and all withholding taxes should be available for adjustment and the operations wing of FBR should ensure that all persons whose taxes have been deducted file their tax returns.

    Withholding agents should be given incentive in the form of 2 percent tax credit of the amount collected for facilitating the Government.

    In addition to the above administrative/streamlining issues, withholding/ advance tax rates on below transactions should be reconsidered.

    Withholding tax rate be reduced to 1 percent for all FMCG distributors in line with the withholding taxes applicable on the distributors of cigarette and pharmaceutical products.

    Withholding tax rates applicable on services is 8 percent minimum tax regardless of the actual taxable income of the service provider.

    The nature of this tax effectively becomes indirect tax and increases the cost of doing business for service providers, hence, tax on services should be made adjustable.

    Withholding taxes deducted from payments should be deposited in the Govt. treasury on monthly rather than current requirement of weekly basis.

    In case of payments to non-residents, the law requires to deposit corresponding withholding tax amount, seven days before the actual remittance to the non-resident person. The deposit of withholding tax should be aligned to the payment to non-resident due to exchange rate implications.

    Withholding tax deduction u/s 153 (1)(a) which is currently considered as minimum tax for all the suppliers (except manufacturers and listed companies) should be made adjustable at least for corporates appearing in active taxpayers’ list

    i. Withholding tax under section 153 (1b) be reduced to 3% for all the taxpayers providing

    ii. services in line with 18 service sectors as mentioned in sub-clause 2 clause 1 of Division III of Part III of Schedule I. not clear

    iii. Withholding agent should be given authority to adjust from subsequent payments, in case of reversal of excess deduction of withholding or where underlying transactions are cancelled, reversed or cases where tax status is updated subject to filing of proper adjustment form/return.

  • General rate of minimum tax proposed at 0.5 percent

    General rate of minimum tax proposed at 0.5 percent

    KARACHI: Federal Board of Revenue (FBR) has been proposed to reduce the general rate of minimum tax to 0.5 percent in the upcoming budget 2020/2021.

    In its proposals for budget 2020/2021, the Overseas Investors Chamber of Commerce and Industry (OICCI) has recommended to review minimum tax regime.

    It said that standard rate of minimum tax under section 113 of Income Tax Ordinance, 2001 (ITO 2001) was enhanced from 1.25 percent to 1.50 percent through Finance Act 2019, whereas, reduced rate of minimum tax also prevails for specified sectors.

    The application of MTR is resulting in an effective tax rate which is even higher than the standard rate for nearly all companies of specialized sectors with high turnover and low margins or regulated prices.

    Further, Alternate Corporate Tax is a discriminatory regime, which hurts industries with major capital investment.

    The OICCI recommended the following:

    i. The general rate of Minimum Tax under section 113 of ITO 2001 should be reduced to 0.5 percent.

    ii. Minimum Tax rate should be reduced to 0.2 percent for Oil Marketing/ Refineries/ LNG Terminal Operators, large chemical companies, authorized dealers of local vehicle manufacturers and traders, including large trading houses, dealing in sectors with high turnover and low margins.

    Minimum tax should be adjustable against future tax liabilities for next 6 years.

    iii. Minimum tax liability should be computed in comparison with normal tax liability without taking into account any initial depreciation allowance.

    iv. Alternate Corporate Tax under section 113C should be abolished in presence of Minimum Tax under section 113.

  • Reducing corporate tax to 25 percent recommended

    Reducing corporate tax to 25 percent recommended

    KARACHI: Federal Board of Revenue (FBR) has been urged to gradually reduce the corporate tax rate to 25 percent by tax year 2023.

    Overseas Investors Chamber of Commerce and Industry (OICCI) in its tax proposals for budget 2020/2021 recommended consolidation of all federal taxes in one lump sum.

    The government previously announced a policy for gradual decrease in corporate tax rate to bring it down to 25 percent by Tax Year 2023. However in the 2019 Finance Act the rate was frozen at 29 percent.

    The tax system has become cumbersome and inefficient due to a number of parallel taxes. In addition to direct corporate taxes, companies also pay other levies like the Workers Profit Participation Fund (WPPF) at 5 percent, Workers Welfare Fund (WWF) at 2 percent on their profits, thus the effective tax rate goes up significantly.

    If other taxes like the provincial infrastructure taxes in Sindh and Punjab, stamp duty on Purchase Orders and contracts, together with many other local levies are added, overall tax burden goes up to about 40 percent of profits, which is a significant tax burden with consequential increase in cost of doing business.

    The OICCI recommended to consolidate all federal taxes – Income Tax, and levies like WWF, WPPF in one lump sum so as to make the system more efficient and business friendly.

    Further, continue the previously announced policy to annually revise the tax rate to eventually align with the average Regional Corporate rate of 25 percent by FY 2023.

  • Export tariffs, tax slabs may not change in budget: Razak Dawood

    Export tariffs, tax slabs may not change in budget: Razak Dawood

    ISLAMABAD: The government is likely to maintain the current export tariffs and tax slabs in the forthcoming budget, according to Abdul Razak Dawood, Advisor to the Prime Minister on Commerce and Investment.

    (more…)
  • PSX proposes tax relief for exchange traded fund

    PSX proposes tax relief for exchange traded fund

    KARACHI: Pakistan Stock Exchange (PSX) has proposed Exchange Traded Funds, transfer of Portfolio (basket of securities) from Authorized Participant (AP) to ETF’s Account should not be treated as disposal.

    In its proposal for budget 2020/2021, the PSX suggested that in order to facilitate the market for Exchange Traded Funds, transfer of Portfolio (basket of securities) from Authorized Participant (AP) to ETF’s Account should not be treated as disposal and therefore holding period of ETF constituents be carried forward to the ETF, upon conversation of Portfolio Deposit to ETF units, for the purpose of CGT calculation.

    Tax relief for ETF instrument will play a significant role in not only the benefit to existing ETFs recently launched but also in the successful launch of further ETFs in Pakistan, as the current structure would trigger capital gains in the creation of ETFs units. Moreover, a rationalization rate of tax on ETF investments, at par with the tax on other asset classes, would attract more investors towards ETFs.

    An Exchange Traded Fund (ETF) is a pooled investment vehicle, with shares which can be traded throughout the day on a stock exchange, at a price determined by the market. Similar to a traditional mutual fund, an ETF provides investors a proportionate share in a pool of underlying securities.

    ETFs are one the fastest growing category of passive fund investments. Globally ETFs are an integral part of product offerings in the capital markets. It is a product with significant presence in over 47 countries.

    Internationally, there are over 8,000 ETFs with aggregate Assets Under Management of about USD 6.5 trillion by the end of 2019 and estimated to grow to around USD 7.6 trillion by the end of 2020.

    ETFs typically track an underlying index; they can also be based on sectors and strategies. They hold immense potential for investors to gain exposure to various market themes, without paying excessive management fees for getting a diversified exposure or developing a portfolio.

    PSX proudly announced on March 24, 2020, the successful listing and commencement of trading in Pakistan’s first ever Exchange Traded Funds (ETF).

    Two ETFs, namely NIT Pakistan Gateway ETF and UBL Pakistan Enterprise ETF, were launched on March 24, 2020 by the National Investment Trust Limited and UBL Fund Managers Limited, respectively.

    Given the current circumstances and in the interest of safety, a first of its kind virtual launch was organized by PSX for the landmark launch of the ETFs.

    This virtual launch is a step taken to make sure that the message of availability of ETFs in the Pakistani Capital Market goes across to all investors and market participants while ensuring their safety in the wake of the current threat of the potential spread of the Covid-19 virus.

    Therefore, as PSX is working actively with all market participants and regulators, the tax structure for ETFs needs to be rationalized to incentive prospective Aps to deal in ETF’s Account (both maintained with Trustee), would trigger Capital Gains Tax (CGT).

    Internationally, the growth and attraction of ETFs has been driven by the essential requirement that creation of ETF units by authorized participants are not subject to capital gains.

    A fundamental feature of ETFs is that the creation of their units are made in-kind, and not in cash as in the case of a mutual fund, so it does not trigger capital gains tax.

    In almost every market where ETFs are traded, regulators have allowed the practice of in-kind transfer portfolio securities. Examples include Saudi Arabia, Canada, UK, and USA.

    The following proviso should be inserted after sub- section 3 of section 37A to the Income Tax Ordinance, 2001;

    “Transfer of Portfolio (basket of securities) from Authorized Participant (AP) to ETF’s Account should not be treated as disposal and therefore holding period of ETF constituents be carried forward to the ETF, upon conversion of Portfolio Deposit to ETF unit, for the purpose of CGT calculation.”

    Appropriate amendment to be made in the Income Tax Rules, 2002.

  • FPCCI suggests measures to broaden tax base, improving tax to GDP ratio

    FPCCI suggests measures to broaden tax base, improving tax to GDP ratio

    KARACHI: Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has suggested measures to broaden tax base and improving tax to GDP ratio.

    (more…)
  • Exemption from withholding tax at import stage suggested

    Exemption from withholding tax at import stage suggested

    KARACHI: Pakistan Business Council (PBC) has suggested the tax authorities to exempt withholding tax at import stage for avoiding generation of tax refunds and expansion of industry.

    In its proposals for budget 2020/2021, the PBC recommended exemption from collection of withholding tax under section 148 at import stage and exemption for manufacturing concerns under Section 153.

    It said that procedures and rules for obtaining exemption certificates for import of plant and machinery and raw material by tax payers have serious restrictions, which causes hardship.

    Corporate manufacturing sector should be excluded from the purview of income tax withholding at import stage under section 148 as well as from tax deduction on local supply under section 153.

    Similar exemption is already given to the greenfield industries through the Finance Supplementary Second Amendment Act 2019 announced in March 2019.

    The same exemption, however, is not available, for the brownfield expansion.

    Moreover, all the companies engaged in manufacturing should be exempt from withholding of tax under section 153.

    Similar exemption is available for Sales Tax in the Sales Tax Special Procedure (Withholding) Rules, 2007 via SRO 586 dated July 1, 2017.

    Alternatively, issuance of exemption certificate from withholding under sections 148 and 153 should automatically trigger on the FBR portal based on payment of quarterly advance tax under section 147 to avoid harassment of genuine taxpayers.

    This will enable taxpayers to avoid creating huge tax refunds and focus on more expansion.

    This would increase the investments for brownfield capacity expansion as well and would provide a meaningful relief (similar to greenfield expansion) with regard to BMR and extension / expansion. Further, it will also attract foreign direct investment in the form of new expansion ventures as well as partnerships and hence will also result in export growth.

  • PSX proposes funded pension scheme

    PSX proposes funded pension scheme

    KARACHI: Pakistan Stock Exchange (PSX) has proposed funded pension scheme that should offer old age benefits to retired employees at public sector enterprises and government workers, without putting burden on the annual budget.

    At present, Pakistan’s pension scheme for government employees is an un-funded, pay-as-you-go scheme. Government of Pakistan exclusively finances the pension expenditure by obtaining a provision in the annual budget for this purpose.

    This has all the making of an impending pension crisis in future, and places unfair burden on future generations. In case of public sector enterprises too, much of the pension liability remains unfunded.

    The future monetary obligations are taken to be met from taxation, which places undue fiscal burden and responsibility on future generations. Age analysis of population suggests growing state pension expenses given the expected increase in the older age group.

    These conditions have led to increasingly stressed pension arrangement.

    Pension’s system reforms are focused on extending coverage to funded pension systems, which are professionally managed, extend to the informal sector, and facilitate switching from the existing employer schemes.

    While in the public sector, funds have been created at the provincial level to pre-fund the future liability.

    The PSX said that government of various countries have actively worked to provide financial security for their aging populations by maintaining adequately funded pension funds.

    These pension funds invest in a diversified range of global assets including equities, bonds, mutual funds, ETFs, and even real estate, infrastructure, and alternative assets.

    In Canada, the CPPIB (Canada Pension Plan Investment Board) is the government’s primary pension scheme, and has grown to become one the largest pension funds in the world.

    The CPPIB invests in the full stack of assets outlined above and returns are used to finance government’s pension liabilities every year. This takes the burden of pensions away from the annual budget.

    The CPP fund now manages over $409.5 billion in asset, up from $128 billion in 2010.

    An actively managed government pension fund in Pakistan will also help channel investment towards capital markets, since equities feature heavily at global pension funds.

    In Pakistan, the federal government could set up such an investment holding as a single-purpose asset management company with 100 percent control, and run by professional investment managers.

    The government should start funding its pension liabilities to avert a future pension crisis and encourage capital formation in Pakistan. An adequately funded pension scheme would offer old age benefits to retired employees at public sector enterprises and government workers, without putting burden on the annual budget. Further, it is recommended that a certain percentage of the funded pension scheme be invested in the capital markets.

    With Pakistan facing very high levels of poverty and the Government of Pakistan facing a rise in the old age population and having a scarcity of resources and funds to provide any old age benefits. An adequately funded pension scheme is one of the resources which the Government of Pakistan could offer to facilitate retired public sector employees.

    This would result in improvement in liability management of Federal Government Employees Pension Scheme.

    Appropriate amendment to be made in the Income Tax Ordinance, 2001.

  • Misuse of Afghan transit trade should be checked

    Misuse of Afghan transit trade should be checked

    KARACHI: Smuggling through Afghan Transit Trade has always been the biggest threat for economic growth and hardly any sector has been left untouched by this menace.

    Pakistan Business Council (PBC) in its proposals for budget 2020/2021 said that smuggled goods through the borders of Afghanistan, Iran China, India and the Afghan Transit Trade form a chunk of the informal economy, volume of which ranges between 50 to 60 percent of the formal economy.

    It is costing the national exchequer in billions. Markets across the country are flooded with smuggled goods and local industries are struggling for survival as smuggled goods are not only easily available everywhere but are also attracting the buyers who prefer foreign merchandise Goods moving under ATT from Pakistan to Afghanistan should be charged with duties and taxes under the Pakistani laws and the same should be transferred to Afghan Government.

    Secondly, the duties/taxes so paid should be deposited with State Bank in USD.

    A quantitative restriction should be applied on goods moving under ATT on the basis of consumption.

    Allow industry to fairly compete with unscrupulous imports, Government to benefit from increased revenue.

  • Curtailing powers of tax officers in recovery, entering premises suggested

    Curtailing powers of tax officers in recovery, entering premises suggested

    KARACHI: Business community has suggested curtailing powers of tax officers while invoking provisions of sales tax laws.

    (more…)