KARACHI: Tax practitioners have demanded the Federal Board of Revenue (FBR) to allow capital gain tax (CGT) exemption to private companies in order to encourage corporatization in the country.
(more…)Category: Budget
This is parent category of budgets presented by Pakistan government. Here you will find year-wise federal and provincial budgets.
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Tax on property income should be made final
KARACHI: The Federal Board of Revenue (FBR) has been urged to rationalize rental income from property and individuals or Association of Persons (AOPs) should be taxes as full and final discharge of tax liability.
Karachi Tax Bar Association (KTBA) in its proposals for budget 2021/2022 said that the rental income from property, AOP or individual and company (taxable as separate block of income) should be taxed at a uniform rate of 15 percent of the gross rent as full and final discharge of tax liability.
The tax bar said that at present for every person except companies the income from property is chargeable to tax at the rate specified in Division (VIA) of Part-I of the First Schedule, which is considered to be their final tax liability and they are not allowed any expenditure against gross rent, except option provided under sub-section (7) of section 15A of the Income Tax Ordinance, 2001.
The companies are required to pay normal tax (current at 29 percent) on such income after adjustment of admissible expenditure out of gross rent.
The tax rate on rental income has been gradually increased from 20 percent to 35 percent for individuals and AOPs vide the Finance Act, 2019.
Apart from that the lessor is also required to pay Sindh Sales Tax at 3 percent to SRB. It makes the total tax impact very unfair and exorbitant.
The current taxation framework makes the total tax impact on property income very unfair and exorbitant.
The KTBA further suggested that rental income taxable under normal tax regime should be allowed to be adjusted against business loss. The restriction imposed through Finance Act, 2013 needs to be reconsidered.
The impact of taxes (direct and indirect) on rental income will be rationalized. Investors will be encouraged to declare their genuine rental income.
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KTBA presents tax proposals for salary income
KARACHI: The Karachi Tax Bar Association (KTBA) has presented income tax proposals for salary income for incorporating in the Finance Bill 2021.
In its proposals for budget 2021/2022, the tax bar highlighted the issue related to taxation of notional income.
It said that the difference between the benchmark rate and the actual rate of interest is charged where actual rate of interest is charged at less than the benchmark rate by the employers on concessionary loans provided to the employees or otherwise it is treated as perquisite chargeable to tax
The tax bar said the taxation of this notional income is highly unjust since it taxes the notional income of the salaried person, which is against the basic principle of taxation since this notional income will never ever be received by the taxpayer.
The KTBA proposed that the taxation of marginal income on loans obtained from the employer below benchmark rate should be exempted for lower threshold amounts. The minimum threshold of the loan amount on which the provisions of Section 13(7) of Income Tax Ordinance, 2001 may not apply should be raised to at least Rs.2,500,000/- from the existing limit of Rs.1,000,000/-.
It is further suggested that benchmark rate currently fixed at ten percent be based on Kibor rate.
Giving rationale to the proposal, the KTBA said that the change would result in facilitation and easement of salaried taxpayers.
The tax bar highlighted the issue of withholding tax on salary income.
It said as per section 149 of the Income Tax Ordinance, 2001, every person paying salary to employee shall deduct tax from the amount paid at specified rate after making tax adjustment of tax credit U/s. 61, 62 ,63 and 64 of the Ordinance and other adjustments.
Complete tax credits though legally available are not adjusted in payroll run.
The KTBA proposed that this section should include all tax credit under Part X Chapter III as are admissible against salary income.
Giving rationale to the proposal, the KTBA said that the current scheme has apparently missed tax credit under section 62A of the Income Tax Ordinance, 2001. The proposed amendment would cater all the current credits and those to be introduced from time to time.
The KTBA also highlighted the issue of employer contribution to Provident Fund.
It said Under Clause (3), Part I, Sixth Schedule of the Ordinance, the employer’s contribution in the recognized provident fund in excess of Rs.150,000 (increased from Rs.100,000 by Finance Act, 2016) is deemed to be income of the employee.
This provision is invalid as the accumulated balance (it includes employer’s contribution) due and becoming payable to an employee participating in a recognized provident fund is totally exempt from tax under Clause (23), Part I, Second Schedule.
Without prejudice to foregoing, since employer’s contribution does not constitute an actual receipt as the same is not at the disposal of an employee and therefore tax incidence should not be levied at the time of contribution.
The tax bar proposed that Clause (3) Part 1, Sixth Schedule be amended to exempt employer contribution to bring it at par with clause (23) Part 1, Second Schedule.
Alternatively, the threshold be based as Rs 150,000 or 1/10th of the salary whichever is higher.
Giving rationale to the proposal, the KTBA said that since employer’s contribution does not constitute an actual receipt as the same is not at the disposal of an employee and therefore tax incidence should not be levied at the time of contribution.
To another proposal, the KTBA said that as per clause (13)(iv) of part – I, there is existing limit of Rs.75,000/-.
Gratuity exemption not indexed for inflation, it added.
It should be increased to Rs.300,000/-, the KTBA proposed.
Considering the inflationary effect since the current limit as set at the promulgation of Ordinance has remained unchanged.
Similarly, the KTBA highlighted that as per clause (23A), withdrawal of 50 percent of balance is exempted subject to fulfillment of conditions.
It said that it was an inadequate exemption.
It is proposed to increase the exemption to the extent of withdrawal of actual amount invested in the pension fund and additional amount to be taxed at the rate of tax applicable on salaries.
To exempt the portion of investment made in pension funds.
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PSX recommends reduction in withholding tax on margin financing transactions
KARACHI: Pakistan Stock Exchange (PSX) has recommended to reduce the rate of withholding tax on the gross income earned on margin financing (MF) transactions from 10 percent to 2.5 percent.
The PSX in its proposals for budget 2021/2022 said that MF facility is available to all Trading Rights Entitlement Certificate (TREC) holders against net ready market purchases of their clients and proprietary positions.
NCCPL provides a system to MF participants for recording and settlement of ME transactions, with financing terms and conditions pre-determined by the Margin Financee and Margin Financier.
Margin financing facility is made available only in Eligible Securities notified by the SECP. Presently, the rate of tax on gross income of the Financier is 10 percent without deduction of any expenditure to earn such income. Whereas, in most cases the funds are borrowed from financial institutions for such ME transactions.
The cost involved in Margin Financing includes financing cost payable to financial institution, trading, clearing and depository charges and other administrative cost which means that the amount deducted as advance tax will not be fully adjusted against the tax liability of most brokers, resulting in claims for tax refunds that are not time bound.
The PSX proposed to reduce the rate of withholding tax on the gross income earned on MF transactions from 10 percent to 2.5 percent.
Alternatively, it is proposed to charge 10 percent on the net income (spread) earned on such financing.
Giving rationale to the proposals, the stock exchange said that reduction in the rate of tax on MF transactions will help develop the market and increase tax collection by Federal Board of Revenue (FBR) because ten years back, the size of similar market for margin transactions was several times higher.
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Under-invoicing by commercial importers destroying industry: PBC
KARACHI: The Pakistan Business Council (PBC) has informed the higher authorities that the massive under-invoicing, especially by commercial importers, is destroying domestic industry.
In its proposals for budget 2021/2022 the PBC pointed out 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.
Values at which import shipments are cleared through PRAL or CARE need to be publicly available.
The Government of Pakistan must insist of Electronic Data Interchange (EDI), for both Free Trade Agreement (FTA) and non-FTA imports from China & other major trading partners China & other major trading partners.
In future the requirement of EDI should be made compulsory for imports from FTA / PTA & major trading partner countries.
The rate of withholding tax on imports for commercial importers should be at least 2 percent higher than what it currently is and the Withholding tax should be considered as an adjustable advance tax.
Valuation Ruling should be issued in consultation with Brand owners, i.e., who have valid registration of the brands under relevant intellectual property laws.
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FBR urged to restore group tax laws in actual form
KARACHI: Pakistan Business Council (PBC) has urged the Federal Board of Revenue (FBR) to restore laws related to group taxation in the initial form as introduced via Finance Act 2007 and Finance Act 2008.
In its proposals for budget 2021/2022, the business council said that most recently, via Income Tax Laws (Second Amendment) Ordinance, 2021, exemption from the levy of tax on intercorporate dividend between companies eligible under section 59B of Income Tax Ordinance, 2001 (Group Relief) has been revoked.
The PBC proposed group taxation laws should be restored in its initial form as introduced via Finance Act 2007 and Finance Act 2008.
Specifically, the following is being proposed:
Clause 103C of Part I of Second Schedule of ITO, providing exemption from Intercorporate Dividends to group companies eligible under section 59B of the ITO, should be reinstated.
Amendments made in Clause 11B of Part IV of Second Schedule via Finance Act 2015 and Finance Act 2016, should be revoked to ensure exemption from withholding tax is provided on intercorporate dividends exempt under clause 103A and clause 103C of Part I of Second Schedule of ITO.
Through Finance Act 2016, a restriction was introduced by insertion of sub-section 1A in section 59B of ITO such that the surrender of losses is now restricted to the percentage of shareholding. This amendment is against the intent of the legislation and it is recommended that sub-section 1A and its references in section 59B should be removed.
Condition of Group Return Filing introduced in Clause 103A Part I of Second Schedule of ITO Via Finance Act 2015 to claim exemption on Intercorporate Dividend between wholly owned entities (eligible under section 59AA), should be removed.
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Business Council identifies anomalies in minimum tax regime
KARACHI: Pakistan Business Council (PBC) has identified anomalies in minimum tax rates and demanded the levy should be abolished.
In its budget proposals for 2021/2022 submitted to the Federal Board of Revenue (FBR) the council said that the rate of minimum tax of 1.5 percent is extremely high and unrealistic.
It identified that as per the judgment of the Sindh High Court in case of Kassim Textile, carry forward and adjustment of Minimum turnover tax is not allowed in cases where the taxpayer reports loss. On the other hand, Lahore High Court, in case reported as 2019 PTD 1994, minimum tax, even in case of loss year, is allowed to be carried forward for adjustment.
Income Tax Law prescribes that ‘income’ of the Zone Enterprise (located in Notified SEZ) is exempt from tax for 10 years. However, no explicit exemption is provided from Minimum Tax (payable under section 113 of the Income Tax Ordinance, 2001) to Zone Enterprises. SEZ Act, 2012 is a special law governing SEZs and Zone Enterprises granting exemption from all income taxes (which include Minimum Tax also), however, due to ambiguity, tax department does not allow exemption from minimum tax to entities operating in SEZ.
Section 65D/65E of the Income Tax Ordinance, 2001 provides exemption for 5 years from all income taxes [including minimum tax and final tax] to company formed for operating a new industrial undertaking. On the other hand, no such benefit has been provided to an existing company investing for Expansion or extension to achieve benefits of large-scale manufacturing
Therefore, the PBC proposed that in order to promote industrialization, Minimum tax should be abolished for all listed companies as these companies are subject to stringent regulations and audit. For other companies, rate of minimum tax be reduced gradually by 0.2% on an annual basis so that by Tax Year 2025 the rate is 0.5%.
Moreover, in order to streamline the mechanism of carry forward and adjustment of Minimum tax, minimum tax should also be allowed to be carried forward for adjustment in subsequent years even in case of losses.
Exemption from minimum tax to all companies operating in SEZ In line with the tax credits under sections 65D/65E, in order to achieve economies of scale to compete with international suppliers, allow exemption for 5 years from all income taxes [including minimum tax and final tax] on income generated from expansion / extension / BMR projects by an existing industrial undertaking subject to the condition that the minimum investment in such extension / expansion project should not be less than $15 million
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PBC suggests rationalizing sales tax regime
KARACHI: Pakistan Business Council (PBC) has suggested rationalizing sales tax regime as higher standard rate of 17 percent is discouraging documentation.
In its proposals for budget 2021/2022, the PBC said that the high standard tax rate of 17 percent has led to low registration of less than 200,000 while income tax filers are about 2. 8 million.
Moreover, Tier 1 retailers engaged in the business of finished fabric, and locally manufactured finished articles of textile, textile made-ups, leather and artificial leather are allowed reduced sales tax rate of 12 percent, if their sales transactions are integrated with the FBR system.
Unfortunately, several income taxpayers are not willing to register owing to high rate and even retailers are not interested in implementing the POS integration as high rate of 12 percent is not attractive, in addition to other issues.
The Standard rate and POS rate be gradually reduced by 1 percent per year to attract to encourage the unregistered taxpayers to become registered and avail benefits of input adjustment.
This will increase the documentation of the economy and create a level playing field for the registered taxpayers.
It is proposed that Section 3(1A) should be rationalized and further tax should not be applicable if:
a) Buyer in not required to be registered under Sales Sax Act 1990;
b) Buyer holds FTN; Buyer, being service provider, is registered under respective provincial authority
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Stock exchange recommends 20 percent tax credit for listed companies
KARACHI: Pakistan Stock Exchange (PSX) has recommended a 20 percent tax credit should be granted to listed companies in order to encourage documentation of the economy.
In its proposals for budget 2021/2022, the PSX said that it is generally observed that when companies opt for a listing on a stock exchange, their profits grow substantially due to effective corporate governance, better disclosures, and ability to raise capital from the market.
Increased number of listed companies and higher profitability leads to higher tax revenue for the government, including incremental revenues from capital gain tax (CGT).
Hence it is important to encourage companies to get listed on PSX.
However, tax credit on enlistment under section 65C has been withdrawn through Second Amendment Act, 2021.
This tax incentive was a very small carrot with no significant revenue impact.
Presently, only 10 listed companies are availing this tax credit which we estimate, based on their latest audited financial statements, has a tax revenue impact of Rs. 175 million per annum. Out of these 10 companies, 4 companies are in their 4th or last year of this benefit and 4 companies have recently listed in the current financial year, the PSX said.
In fact, the tax revenue benefit in the medium term is very large as the documentation of the corporate sector increases and hence tax revenue of Pakistan.
Further, the CGT collected on these 10 symbols for the 8 months period from July 2020 to February 2021 is Rs.176 million, and, extrapolating based on this 8 months average collection of CGT, the tax collection for the 12 months period could be Rs.264 million, compared to the total estimated tax credits of Rs.175 million availed by these 10 companies.
The average rate of tax in the Asian region is 21.32 percent; whereas, currently in Pakistan the corporate tax rate is 29 percent.
As such it is imperative that the corporate tax rate after the tax credit is brought down reasonably to compete with the other regional and global countries.
Therefore, in order to encourage documentation and create a long term positive impact on tax revenue, there should be reduced rates of tax for listed companies compared to unlisted companies.
The PSX proposed that to encourage documentation of the economy, the corporate tax rate should be permanently lowered for listed companies, by giving tax credit of 20 percent of tax payable for those companies that meet the prescribed requirements including a minimum free float of 25 percent throughout.
This will be long term positive for tax revenue.
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KTBA recommends abolishing alternative corporate tax
KARACHI: Tax practitioners have recommended to abolish alternative corporate tax (ACT) in the budget 2021/2022 as the levy is increasing cost of doing business.
The tax bar in its proposals for the upcoming budget 2021/2022 recommended to abolish the ACT.
As per section 113C of the Income Tax Ordinance, 2001, tax payable by company subject to tax under Division-II Part-I of 1st Schedule or minimum tax shall be higher of corporate tax or ACT.
The tax bar said that it was increasing cost of doing business and regressive taxation.
Therefore, the KTBA proposed that ACT Should be abolished.
There is already a minimum tax regime which imposes tax on the gross turnover U/s. 113, alongside minimum tax regime for supplies, services, under various section of the Ordinance and hence ACT is only increasing the complexity of the computations.
Besides, the KTBA has also recommended to reduce the minimum tax rate.
Currently rate of minimum tax is 1.5% of the turnover. The threshold for turnover in case of individuals and AOPs was decrease from Rs50 million to Rs10 million by the Finance Act, 2016.
It resulted in increased cost of doing business and regressive taxation.
The KTBA proposed that minimum tax on listed companies should be abolished and in case of other cases the rate of minimum tax should be gradually reduced by 0.2 percent annually so that by tax year 2025 the rate shall be reduced up to 0.5 percent. The threshold of turnover should be increase to Rs50 million.
Moreover, minimum tax should also be allowed to be carried forward for adjustment in subsequent year even in case of losses.
The receipts now brought under Minimum Tax (from Final Tax Regime) should be exempted from this minimum tax.
Removal of minimum tax will promote industrialization. Decrease in turnover threshold will result the true declaration of turnover and created hardship for taxpayers, the tax bar added.