Category: Budget 2020-2021

Withholding tax rate should be increased for immovable property purchase by non-filer

KARACHI: The withholding tax rate should be enhanced to 10 percent for non-filer purchaser of immovable property in the budget 2020/2021.

Pakistan Business Council (PBC) in its budget proposals 2020/2021 recommended to increase the rate of withholding tax for unregistered and non-filers of income tax returns.

The PBC recommended that advance income tax is collected on sales of immovable property under section 236C, which is 1 percent for both filers and non-filers, should be increased for non-filers to 10 percent for properties of 900 square yards or more.

The PBC said that the concept of separate withholding tax rates for filers & non-filers was introduced as a measure for increasing documentation of the economy.

Though large amounts are being collected from non-filers, no effort has been made to increase the tax base.

The non-filers for the most part have built the cost of this government levy into pricing and passed it on to their customers.

In order to broaden the tax base and to achieve increase in overall tax collection without burdening existing tax payers, the policy to increase tax on non-filers / unregistered persons should be implemented specifically in the following cases:

a) unregistered industrial / commercial entities (not having STRN) having bill amount in excess of Rs. 20,000 per month, extra sales tax should be increased from 5 percent to 20 percent.

b) After collection of extra tax as referred above for a continuous period of 6 months, all these connections should be provisionally converted into NTN and STRNs and return filings from these connections should be enforced.

c) In case of provisional registration as above, utility companies be directed to issue show cause notices where annual billing amount exceeds Rs.2.4 million and directing provisionally registered persons to obtain permanent registration. In case of non-compliance, utility companies be directed to disconnect utility connections.

d) Moreover, in order to bring all commercial / industrial users in the tax net and to verify filer status, Electric distribution companies should provide one year to all such consumers to get their NTN registered with electricity distribution companies. In case of failure to provide NTN, electricity connection should be disconnected. Considering the fact that all industrial / commercial connections will be linked with NTN, the tax department will then be in a better position to assess the electricity consumed by commercial / industrial users and corroborate the same with amount of sales / production etc. reported in sales tax / income tax return

e) in order to bring all commercial / industrial users in the tax net and to verify filer status, electric distribution companies should provide one year to all such consumers to get their NTN registered with them. Thereafter, such commercial/industrial consumers without NTN should be charged advance income tax @ 30 percent (from existing 12 percent) on their utility bills. Those with NTN but non-filer status be charged at 20 percent WHT.

f) Residential consumers be made liable to provide NTN in case electricity bill amount exceeds Rs.1.2 million per year or levy advance income tax withholding of 20 percent.

g) All exemptions (like exemption on agricultural income) under the Income Tax Law should only be made available to filers so that exempt income is also reported and wealth is reconciled.

h) Withholding tax on International business class tickets under section 236L is same Rs. 16,000 for filer and non-filer, it should be increased to Rs. 50,000 for non-filers.

i) Withholding tax @ 5 percent or Rs. 20,000, whichever is higher, is applicable under section 236D on all functions organized by filers as well as nonfilers. Rate of withholding be increased for non-filers to Rs. 100,000 as minimum and no WHT from filer.

j) Function halls withholding tax on electric bills should be 30 percent which can be adjusted against tax liability by providing proof of tax deducted from their customers.

k) Withholding income tax on interest income u/s 151 is 15 percent for filer and 30 percent for non-filer. Rate should be increased to 50 percent for non-filers in case interest income is more than Rs.2,000,000/-

l) Annual private motor vehicle tax u/s 234 for non-filers is Rs. 9,000 for 1600cc-1999cc and Rs. 20,000 for 2000 cc and above. Rate for non-filers should be increased to Rs. 50,000 for 1600cc-1999cc and Rs. 200,000 for 2000 cc and above

m) Advance income tax is collected on sales of immovable property under section 236C, which is 1 percent for both filers and non-filers, should be increased for non-filers to 10 percent for properties of 900 square yards or more

n) Holding of land by non-filers should be made more expensive by asking those authorities collecting property tax (cantonment boards / societies/ registrar) to collect adjustable advance income tax, from non-Filers, on behalf of the Federal Government as follows:

o) Rs. 500,000 per year for 800 yards or more but less than 1800 yards

p) Rs. 1 million per year for 1800 yards and above.

May 3, 2020
Massive under-invoicing by commercial importers destroying domestic industry: PBC

KARACHI: Pakistan Business Council (PBC) has said that massive under-invoicing especially by commercial Importers is destroying domestic industry.

In its budget proposals for fiscal year 2020/2021, the PBC said that across the board massive under invoicing and dumping of imported products has been increasing.

Information regarding values at which various custom check posts clear import consignments is not publicly available.

“This encourages unscrupulous importers to under-declare the value of consignments to evade government revenues.”

There are massive leakages in the Afghan Transit Trade (ATT) and smuggled goods are being openly sold in all major shopping centers of the country.

“Customs however is not willing to act against smuggled products citing lack of cooperation from local authorities.”

In order to resolve the problems, the PBC proposed following:

a) Values at which import shipments are cleared through PRAL or CARE need to be publicly available.

b) The Government of Pakistan must insist of Electronic Data Interchange (EDI), for both FTA and non-FTA imports from China. In future the requirement of EDI should be made compulsory for imports from FTA / PTA partner countries.

c) Depending on industry, the Import Trade Price (ITP) be fixed e.g. on the basis of country of origin, weight, volume etc. after discussion with stakeholders. ITP’s may be fixed for most items prone to mis-declaration such as consumer goods and margins of commercial importers be monitored to assess the value of subsequent supply of imported goods. A certificate to this effect should be issued by auditors of commercial importers.

d) For items, prone to under invoicing and mis-declaration, FBR should designate one or two ports (including the dry ports) for clearing of import consignments. This will allow better monitoring of the import consignments where chances of mis-declaration are on a higher side.

e) Additionally, the old Customs General Order 25 needs to be revived with a provision that local manufacturers be given the option to buy at a 15 percent premium, any consignment which appears undervalued.

f) Taxes and duties deposited by local manufacturers and commercial importers should be published.

g) The rate of tax collected from commercial importers be increased by at least by 2 percent. Presently, tax collected from commercial importers is treated as an advance tax. Final Tax.

h) In order to allow commercial importers to claim adjustment of taxes deducted at import stage, commercial importers should be asked to present certificate from auditors that at least 70 percent of imported items have been exported or sold to registered manufacturers. This will also help increase the overall tax base.

i) Monthly sales declared by commercial importers should be matched with sales declared in annual income tax return as well as the credit entries in all business bank accounts. In case of any discrepancy, a reconciliation with justifiable reasons should be submitted by the commercial importers

j) Online CREST system must be amended in a way to trace sales along with value addition thereon of person to whom supplies were made by Commercial importers.

Transparency in collection of taxes will discourage mis-declaration, measures to discourage evasion of taxes and duties will help industry to fairly compete with unscrupulous imports and also Government stands to benefit from the increased indirect taxes revenues.

It will also help in accountability of the customs staff and will reduce the incidence of Customs Duty & Sales Tax evasion and increase government revenues.

The proposed change will help in boosting the manufacturing base of Pakistan, the PBC added.

May 3, 2020
One percent sales tax proposed on every stage of supply chain

KARACHI: Business community has proposed imposing one percent sales tax on every stage of supply chain of five export oriented sector without input adjustment.

Federation of Pakistan Chambers of Commerce and Industry (FPCCI) in its budget proposals for fiscal year 2020/2021 said that Finance Act, 2019 abolished zero rating regime extended to five major export sectors i.e. textile, leather, carpets, sport goods and surgical goods by rescinding SRO 1125(I)/2011.

Sudden removal of zero rating for export oriented sectors has proved fatal for already struggling export oriented sector as the same has resulted accumulation of huge refunds, which in turn has forced genuine taxpayers to knock the doors of tax officers for issuance of their RPOs, which has further promoted harassment and opened up a new window of bribery.

Withdrawal of zero rating has caused liquidity issues even for large exporters.

The removal of zero rating has made it almost impossible for exporters to stand anywhere near global competitors.

Moreover, in order to get maximum possible input tax adjustment, suppliers who are able to supply locally as well as in international markets are preferring local sales at the cost of exports to get maximum possible input tax adjustment.

This has resulted in visible decline in quantitative exports of these sectors, damaging foreign exchange reserves and worsening current account deficit.

The FPCCI proposed that Sales Tax at one percent on total value of supply may be charged at every stage in supply chain of these sectors without any input adjustment.

An example of finished garment chain is given as follows:

i. import or local purchase of fiber – 1 percent

ii. ginning – 1 percent

iii. spinning – 1 percent

iv. knitting/weaving – 1 percent

v. dying – 1 percent

vi. cloth – 1 percent

vii. garment stage – 1 percent

In this way, say in case of a finished garment product, exchequer will collect 7 percent sales tax.

All the raw materials including chemicals and dyes which were included in the erstwhile SRO 1125(I)/2011 dated 31-12-2011 be also subject to 1 percent Sales Tax without adjustment as it will incur no loss to the government exchequer.

The above sales tax in the value chain without input tax adjustment will provide the required revenue to exchequer on one hand, while on the other, the same will relieve the taxpayers of liquidity issues being faced by them in form of huge refunds.

This will also save administrative costs and time of the Board, enabling the force field force to focus on broadening tax base and real revenue collections.

May 3, 2020
FPCCI suggests introducing taxpayers’ bill of rights

KARACHI: Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has recommended introducing taxpayers’ bill of rights in the forthcoming budget.

The apex trade body in its proposals for budget 2020/2021, said that the present situation of antagonism between the tax collection agencies and taxpayers needs to be reconciled through a democratic process and implementation of Taxpayers’ Bill of Rights.

The goals fixed under Pakistan Raises Revenue (PRR) Project, estimated at US $1.6 billion, of which financing by World Bank is $400 million, cannot be achieved through handpicked experts (mostly coming on donors’ dictates) who are completely oblivious to the mundane realities of Pakistan.

The bad faith, antagonism and mistrust prevailing between the government and taxpayers can only be removed through a process ensuring a just and fair tax system in Pakistan for which the blueprint and roadmap is available, and we need no foreign funding.

The only thing lacking is political will to debate, promote research on the various challenges and find out workable solutions. This process will certainly require some time.

Meanwhile, PTI Government in order to restore the confidence of the taxpayers should immediately start the process of enactment of Taxpayers’ Bill of Rights.

The draft of Taxpayers’ Bill of Rights was prepared for the first time in 2014 by a sub-committee, constituted by the Federal Tax Ombudsman (FTO), in which Dr. Ikram Ul Haq had put in his best skill to suggest the balance between the rights of taxpayers and authority of tax collectors.

Thereafter, the Tax Reforms Commission (TRC), after 18 months of its establishment, also presented the same in its final report submitted in February 2016. However, until today no practical step has been taken to implement it.

It is high time that the incumbent Government should introduce the Taxpayer Bill of Rights in the finance bill 2020-21

The FPCCI further said that it is a time that we should focus on macroeconomic management issues including budgetary consideration which can have positive effect on long term business efforts towards capital formations and investment of trust and justice in the tax policies and obligations of tax statutes.

Independent Tax Adjudication System, which was promised two decades back during the period of General Parvez Musharraf be included in the ensuing Finance Bill, 2020. Some of the actions were taken but un-sustainability and cascaded developments remain absent. The prosecutors continue to remain adjudicators in the system.

May 3, 2020
Immunity from audit against CNIC condition demanded

KARACHI: The business community has demanded the Federal Board of Revenue (FBR) to give immunity from audit against CNIC condition for tax year 2020.

In its budget proposals for fiscal year 2020/2021, the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) demanded amnesty from audit against Computerized National Identity Card (CNIC) condition for tax year 2020.

The FPCCI said that the condition of CNIC on unregistered sales was introduced in the Finance Act 2019 but it was not implemented in its true spirit because of various reasons.

The FPCCI highlighted that in July 2019 was initially exempted of CNIC condition through legislation.

From August 2019 to January 2020, the condition was relaxed through agreement between shopkeepers and FBR.

Thereafter, from late February 2020 till unforeseen future, there has been tremendous pressure on the markets due to complete lockdown of the whole country because of the ongoing COVID-19 pandemic.

The FPCCI said that CNIC condition has been causing cashflow issues since its implementation which will further intensify during the current pandemic of COVID-19, especially for registered taxpayers.

Therefore, in order to facilitate the registered Taxpayer, a general amnesty through legislation is requested in the next budget regarding CNIC condition for the whole tax year 2020 starting from August 2019 to June 2020.

May 2, 2020
FBR proposed to review regulatory duty regime to promote domestic industry

KARACHI: Business community has urged the Federal Board of Revenue (FBR) to review existing regulatory duty regime in order to promote domestic industry.

Pakistan Business Council (PBC) in its budget proposals 2020/2021 advised the FBR to review of the regulatory duty where domestic industry can expand and market its capacity to the export markets.

The PBC supports the government’s resolve to simplify, reduce and introduce cascading tariffs to promote industry.

However, at a time of global recession when many overseas producers will be looking to find markets, we urge the government to factor this into its tariff review to protect jobs in Pakistan.

Unless there is very strong anomaly, we recommend that present tariffs be maintained in order to preserve scale and competitiveness of domestic industry.

Moreover, the DTRE scheme should be simplified for SMEs to avail.

The PBC strongly advocates that the Finance Bill 2020 has a bias in favor of the manufacturing sector as a recovery in the manufacturing sector will have a multiplier effect of the economy.

The PBC continues to advocate that taxation needs to be based on the principle of “all income irrespective of source should be taxed & all taxpayers must file tax returns”.

The PBC and its members also firmly believe that the fiscal space that the government is looking for to implement its ambitious socio-economic agenda will not, and cannot be provided by continuing to increase taxation on the already taxed sectors of the economy.

The taxation base needs to be widened through better documentation by bringing the under taxed, and the currently exempt sectors in the tax net.

The current tax policies are leading to a reduction in investable surpluses for the corporate sector. The short-term revenue enhancement measures pursued by FBR in the recent past have acted as a disincentive to not only re-investments by existing units but have also acted as a deterrent to fresh investments in industry and the formal sector.

Last year, the PBC welcomed the government’s policy announcement to separate tax policy and tax administration, it is however disappointed with the pace of implementation of this decision and urges the government to move on this front to create taxpayer confidence in the tax machinery.

The laws on Group Taxation & Group Relief and the Alternate Corporate Tax (ACT) need to be addressed to create an investor friendly environment in the country.

The arbitrary & non-transparent implementation of tax laws by FBR functionaries in their zeal to achieve unrealistic revenue targets is severely impacting the viability of the formal sector.

The continued failure of the FBR to use data-mining to identify those who are either not paying or underpaying their dues is also an area of concern for the formal sector.

There is blatant misuse of the Afghan Transit Trade continues, wholesale and retail markets all over Pakistan are flooded with smuggled products, however despite having the jurisdiction to act against the open sale of smuggled products, the FBR continues to hide behind such flimsy excuses like “lack of support from local administration.”

The revenue leakages in the Customs department need to be plugged, Electronic Data Interchange (EDI) with China needs to be fully implemented.

The Afghan Transit Trade needs to be better monitored, one measure could be the collection of all dues which are payable by importers in Pakistan and refunding the same once the shipment has conclusively entered Afghanistan.

The PBC appreciates that the government managing the economy under an IMF program and at the same time managing the expectations of a nation reeling under the impact of the COVID-19 pandemic does not have the fiscal space to provide major incentives, however, it also believes that it is the government itself which through its policies can create the space that it requires to implement its social agenda.

May 2, 2020
Revival of sales tax zero rating suggested to ease liquidity problem

KARACHI: Business community has recommended revival of zero rated sales tax for the export sector in the wake of difficulties faced following COVID-19.

Pakistan Business Council (PBC) has suggested sales tax proposals for budget 2020/2021 to ease the pressure on the industry.

It said that the proposal for bringing the five export sectors under the ambit of normal sales tax regime has clearly not worked.

Sales tax refund claims continue to accumulate with the FBR while export industries have faced massive liquidity in the past nine months on account of this move.

Exporters liquidity as well as net operating results / losses have taken a strong negative hit from the two-edged sword; once after withdrawal of zero rating regime resulting in piling of sales tax refunds and thereafter, due to cancellation of existing orders post the COVID-19 pandemic.

Restoration of Zero rating will allow some relief on the liquidity front for the major export sectors

It further said that at present, local sales to DTRE license holder has been provided the benefit of sales tax zero rating, however, local supplies to EOUs / manufacturing bond is chargeable to sales tax at 17 percent, which is an apparent anomaly between the DTRE, EOUs and Manufacturing bond rules.

In order to remove anomaly and considering the fact that material / goods being purchased by DTRE / EOU / Manufacturing Bond are used for the purposes of exports and are subject to strict scrutiny, it is proposed to allow zero rating on local purchase of goods by EOUs / Manufacturing Bond in line with the benefit given to DTRE.

Under the Sales Tax Act, Section 8 – B, a company is not allowed to adjust input tax in excess of 90 percent of the output tax for that period. Further, commercial importers paying 3 percent minimum Value Addition sales tax at import stage are totally exempt from the applicability of minimum tax under section 8B.

All manufacturers be allowed 100 percent adjustment of input tax instead of the current restriction of 90 percent

May 2, 2020
Minimum tax collection should be suspended for two years

KARACHI: Pakistan Business Council (PBC) has recommended suspending minimum tax under Section 113 of Income Tax Ordinance, 2001 considering the pandemic of COVID-19 and its impact on businesses.

The PBC in its budget proposals 2020/2021, said that a turnover based minimum tax is fundamentally flawed in that it fails to take account of the industry specific margins and acts as a barrier to entry of new players.

A minimum tax at 1.5 percent of sales for manufacturers (and higher rates for the services industry), under the present depressed business conditions will put an unbearable burden on businesses.

“Pending a review of the continued justification of minimum tax, under the current business circumstances, we recommend that its collection be suspended for at least the next two financial years.”

The PBC further said that as per Section 61 of the Income Tax Ordinance, 2001, persons falling under the Minimum Tax Regime / Alternative Corporate Tax are not able to claim any sort of tax credit on donations.

Considering the situation of last quarter ending June 2020 due to COVID, many companies would fall under the minimum tax regime due to reduced product demand and margin issues.

Section 61 of the Income Tax Ordinance, 2001 be amended to allow direct deduction of donations paid by any person to the Prime Minister’s COVID-19 Pandemic Relief Fund-2020 or any other Fund established by any Provincial Government or to any other approved Non-Profit Organization subject to the condition that the said donation should be made through crossed cheque.

Moreover, in case of donation in kind, deduction against minimum turnover tax be allowed on the basis of valuation prescribed under Rule 228(4) of the Income Tax Rules, 2002.

At present, rate of tax deduction on export proceeds is 1.0 percent.

In order to promote sustainability of industries engaged in exports, rate of tax on export proceeds should be reduced to 0.5 percent from 1.0 percent for the next two financial years.

In order to get exemption certificate against tax deduction under sections 153 [supply of goods] and 148 [import on goods], taxpayers are required to pay advance tax

Taxpayers should be allowed unconditional exemption from tax deduction on import and supply stage without heavy upfront payment of advance tax liability. In order to ensure regular inflows to the Government, taxpayers be made liable to discharge at least 70 percent [as against present 90 percent condition] of total estimated annual tax liability in 4 quarterly instalments.

May 2, 2020
Introduction of registered savings, investment accounts proposed

KARACHI: Pakistan Stock Exchange (PSX) has proposed introduction of registered savings and investment accounts (RSIAs) in the upcoming budget 2020/2021.

In its budget proposals for the fiscal year 2020/2021, the PSX said that saving and investment are crucial for playing an important role in the process of socio-economic development through capital accumulations.

Pakistan, besides facing problems such as unemployment, rapid growth of population, slow economic growth in the country, has a saving rate that is meager and undesirable for sustainable national economic development. Low level of saving rates in any economy have been cited as one of the most serious constraints to sustainable economic growth.

Higher savings and the related increase in capital formation can be result in a permanent increase in economic growth rates.

Registered savings and investments accounts (RSIAs) are personal accounts that allow investors to accumulate savings (e.g., Individual Retirement Accounts and Roth IRAs in the US, Registered Retirement Savings Plans and Tax Free Savings Accounts in Canada).

Other variations on the theme promote saving toward other goals like children’s education (Registered Retirement Saving Plans in Canada) or funding future needs of a disable individual (Registered Disability Savings Plan in Canada).

Although their design varies according to the schemes objective, they all have 2 features in common:

— Capital accumulates free of tax (on interest, dividend or capital gains) as long as it stays in the account;

— Eligible investments in the account are listed stocks and ETFs, tradable bonds and mutual funds

In the United States, Roth Individual Retirement Arrangement (Roth IRA) is similar to TFSA. The Roth IRA was established by the Taxpayer Relief Act of 1997.

The total contribution allowed per year to all IRAs is the lesser of one’s taxable compensation. The Packwood-Roth plan would have allowed individuals to invest up to $2,000 in an account with no immediate tax deductions, but the earnings could later be withdrawn tax-free at retirement.

Therefore, it is proposed that the Government of Pakistan introduce a mechanism and regulatory structure for the launch of registered savings and investment accounts (RSIAs) to help channel savings towards productive investments.

RSIAs will help bring capital from the large undocumented sector into the formal economy. Further, it is also crucial that firm guarantees be offered that contributions be subject to full amnesty-aside from AML and Terrorist Financing issues due diligence.

Where they have been introduced, registered savings and investment account (RSIAs) have been very successful in channeling savings to productive investments through capital markets and often constitute the main source of income in retirement. In Pakistan, they will bring the added benefit of driving the government’s goal to document the informal sector.

RSIAs could become one of the driving forces in the transformation of Pakistan’s economy. By some estimates, 40 million middle-class Pakistanis have an average accumulated wealth of over USD 10,000, for a total of over Rs. 50 trillion. Much of that wealth is currently invested in real estate, gold and other asset classes in Pakistan offshore. If RSIAs can capture 10% o that wealth, It would be equivalent to more than half the current market capitalization of PSX listed companies or more than the outstanding amount of PIBs and Sukuks.

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

May 2, 2020
PSX proposes abolishing capital gains tax for two years

KARACHI: Pakistan Stock Exchange (PSX) has demanded eliminating Capital Gains Tax (CGT) for up to next two years in order to attract more foreign investment.

The PSX in its tax proposals for budget 2020/2021 suggested the Federal Board of Revenue (FBR) to eliminate / reduce CGT for next 24 months or at a minimum align rates of capital gains tax on disposal of securities with other regional exchanges and OECD countries of the world.

The PSX said that currently, carry forward of losses is only allowed up to a period of three years and that last year CGT collection was merely Rs1.3 billion. Moreover, with the falling market, tax collection will not be worthwhile at all.

“Therefore, it is suggested that CGT should be eliminated for next 12-24 months.”

This will be a big headline change, with no revenue impact, and will encourage new domestic and international investors to come into the market.

The PSX made following proposals related to CGT:

i. To eliminate CGT for next 12-24 months, if that is not possible then;

ii. Since the current rate of 15 percent is very high and that too is without any benefit of holding period, therefore it is proposed to reduce this rate in line with other regional and OECD countries such as Bahrain, Hong Kong, India, Malaysia, Mauritius, Qatar, UAE, New Zealand, Hungary, Norway etc. where there is no or very low capital gain tax as compared to Pakistan.

iii. when CGT was first introduced in the year 2011, to encourage and attract long term investment, the tax rate was:

Less than six months: 10 percent

More than six months but less than 12 months: 7.5 percent

More than one year: zero percent.

The PSX proposed rates at:

Holding period up to twelve months: 10 percent

Holding period more than twelve months: zero percent.

April 30, 2020