KARACHI: Pakistan Stock Exchange (PSX) has proposed tax exemption on transactions of immovable properties to Real Estate Investment Trusts (REITs) in order to promote documentation.
The PSX in its proposals for budget 2022/2023 submitted to the Federal Board of Revenue (FBR), said REITS are an ideal instrument to document and help develop the real estate sector, a priority for the government.
They also allow smaller investors to gain exposure to the real estate sector, an important step to reduce wealth inequality in Pakistan.
The PSX proposed exemption from advance tax on property transfer to/from a REIT Scheme u/s 236C and 236K of Income Tax Ordinance, 2001. It also suggested to remove sunset clause i.e. June 2023 for all categories of REIT. Besides, it is also suggested to reduce minimum tax rate applicable to REIT Management Companies (RMCs) u/s 153 in line with Asset Management Companies i.e. 3 per cent.
The PSX said that it will promote documented real-estate will attract more investments particularly by companies with disclosure of actual prices and income. Revenue impact will be positive as it will generate indirect and additional revenues from allied businesses.
Appropriate amendment to be made in the Income Tax Ordinance, 2001.
For proposal relating to sun-set clause, remove “June 30, 2023” from clause 99A of Part I of Second Schedule of the Income Tax Ordinance, 2001.
For proposal relating to Minimum Tax on RMCs, Clause (2)(i) of Division III of Part III of First Schedule of the Income Tax Ordinance, 2001 shall include “service rendered by RMCs.”
KARACHI: Pakistan Stock Exchange (PSX) has urged the tax authorities to allow tax credit to Small and Medium Enterprises (SMEs) to encourage listed on the stock exchange.
The PSX in its proposals for budget 2022/2023 submitted to the Federal Board of Revenue (FBR), said SMEs contribute immensely to Pakistan’s employment, export and GDP growth, and provide 80 per cent of all employment in the country.
A well-functioning SME segment at the Stock Exchange offers a range of benefits including greater access to growth capital for innovative SMEs, documentation, good governance, new jobs through entrepreneurship, more investment opportunity for domestic investors and local venture capitalists.
PSX has launched an SME board to attract smaller companies to get listed on the exchange. The aim is to facilitate SMEs with an alternative to bank financing for their expansion growth and projects.
In order to encourage small and medium enterprises to get listed on the SME Board, it is proposed that the rate of tax for such listed SME companies be permanently lowered by giving tax credit of 50 per cent of tax payable for 3 to 4 years of listings and then onwards 20 per cent of the tax payable.
The PSX said that the share of the manufacturing sector in the job market is only 14 per cent. This is very low because 80 per cent of the manufacturing investments in large scale industries provide less than 20 per cent of the manufacturing jobs. Over 80 per cent jobs are provided by SMEs.
There are significant fiscal tax credit benefits in Spain, Kenya, Brazil, Argentina and other parts of the world for SMEs.
The PSX proposed: In clause (iii), Division II, Part I of the First Schedule to the Income Tax Ordinance, 2001 after a colon the following proviso shall be added, namely:
“Provided that where a tax payer is a small or medium sized company as defined under the Third Schedule of the Companies Act, 2017 and is also listed on the registered Stock Exchange in Pakistan, the tax credit @ 50% of the tax payable on the taxable income of such company, other than a banking company, shall be allowed for the tax year 2021 and onwards.”
KARACHI: The Federal Board of Revenue (FBR) has been urged to eliminate minimum tax regime for listed companies in order to encourage documentation of economy.
The PSX in its proposals for budget 2022/2023, submitted to the FBR stated that through the concept of minimum tax is prevalent in a few other countries, however, in other countries, as a principle, it is levied only in cases where high-income taxpayers don’t pay any tax due to different tax exemptions available to them.
It suggested that minimum tax regime should be eliminated from listed companies as such companies are strongly compliant towards specific documentation requirements of various statues.
The application of minimum tax on listed companies has resulted in discouraging documentation of the economy. Listed companies have significant documentation and regulatory requirements and need to engage external auditors to audit their business affairs.
The stringent regulations keep the listed companies strongly complaint towards filing of income tax / sales tax returns, paying quarterly advance taxes, adjustment of withholding taxes on sales and purchases and consequently filing withholding statements, statements on final taxation and fulfilling various other requirements which resultantly align their books of accounts with the statutory requirements and provide a comfort zone to the authorities and stakeholders over the reported numbers.
KARACHI: Pakistan Stock Exchange (PSX) has proposed rationalizing tax rates for listed companies through incentives and credits, in order to encourage documentation of economy.
The PSX in its proposals for budget 2022/2023 submitted to the Federal Board of Revenue (FBR) 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 CGT. Hence it is important to encourage companies to get listed on PSX.
However, tax credit on enlistment under section 65C has been omitted by the Finance Act, 2021. This tax incentive was a very small carrot with no significant revenue impact. Had this section not been omitted, only 8 listed companies would have availed this tax credit which we estimate, based on their latest audited financial statements, the tax revenue impact would have been Rs. 342 million per annum.
Further, the CGT collected on these 8 symbols for the 6 months period from July 2021 to December 2021 is Rs. 237 million, and, extrapolating based on this 6 months average collection of CGT, the tax collection for the 12 months period could be Rs. 474 million, compared to the total estimated tax credits of Rs. 342 million that would have been availed by these 8 companies.
The average rate of tax in the Asian region is 19.62%; whereas, currently in Pakistan the corporate tax rate is 29%. 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.
To encourage documentation of the economy, the corporate tax rate should be permanently lowered for listed companies, by giving tax credit of 20% of tax payable for those companies that meet the prescribed requirements including a minimum free float of 25% throughout. This will be long term positive for tax revenue.
The table below outlines the five-year summary of listings and de-listings on the Pakistan Stock Exchange:
Particulars
Number of Companies
Capital (Rs.)*
New Listings
24**
57,381 Million
De-listings
38
7, 241 Million
Delisted due to Merger
9
120, 525 Million
*As of December 31, 2021
**It includes listings of preference shares of already listed companies.
Rationale
i) It is generally observed that publically-listed companies are able to improve profitability due to effective corporate governance, better corporate disclosure and availability of additional funds.
ii) The incremental benefits arising from the preferential tax structure for listed companies will foster a business environment that encourages new listings on the stock exchange, resulting in higher trading volumes and lead to:
a) Higher tax revenue from listed companies’ income as a result of higher corporate profits.
b) Higher revenues from tax on brokers activity on new listings.
c) Higher revenue from Capital Gains Tax on disposal of newly listed securities
iii) Furthermore, with the government’s increased pace of privatization of its entities, the stock market will attract local and foreign investors and increase the market size. The average rate of tax in the Asian region is 19.62%; whereas, currently in Pakistan the corporate tax rate is 29%. As such it is imperative that the corporate tax rate after above tax credit is brought down reasonably to compete with the other regional and global countries. Following are the average worldwide corporate tax rates:
LOCATION
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Africa
29.0
28.3
27.9
27.9
27.5
28.73
28.81
28.45
28.50
27.97
Asia
22.9
22.1
21.9
22.6
21.9
20.05
20.65
21.32
20.06
19.62
Europe
20.4
20.6
19.7
20.1
20.5
18.35
18.38
20.27
19.99
19.84
Oceania
28.6
27.0
27.0
27.0
26.0
23.67
22.00
23.75
23.75
23.75
North America
33.0
33.0
33.3
33.3
33.3
23.08
23.01
25.85
26.06
26.37
OECD
25.2
25.3
24.1
24.9
24.8
24.18
23.93
23.59
23.51
23.04
Global
24.4
23.7
23.6
23.9
23.6
22.96
23.03
24.18
23.85
23.54
Proposed Amendment
Reinstate section 65C of Income Tax Ordinance, 2001 to be read as under:
“Where a taxpayer being a company opts for enlistment in any registered stock exchange in Pakistan, a tax credit equal to twenty percent of the tax payable shall be allowed for the tax year in which the said company is enlisted and for the following years for those companies that meet the prescribed requirements including a minimum free float of 25% throughout and”.
KARACHI: Pakistan Stock Exchange (PSX) has suggested the tax authorities to introduce grandfather provisions for tax treatment of listed companies.
In its proposals for budget 2022/2023 submitted to the Federal Board of Revenue (FBR), the stock exchange recommended grandfather provision for tax treatment of companies, which list on the PSX.
The stock exchange said in view of strong structural reforms in the capital market, companies in Pakistan have immense potential to raise funds from the capital market. This will result in greater documentation of the economy and increased tax revenue. At the same time this will help to grow the capital markets, provide attractive investment opportunities and hence improve the savings and investment rates in Pakistan. Listed companies become part of the documented, regulated and formal corporate sector. Hence, PSX is continuously endeavoring to encourage listings.
It is proposed that in order to encourage companies to list, their tax status should be grandfathered at the time of listing application i.e. no new cases for past tax returns should be opened, except for such pending cases on which proceedings have already been initiated under the Ordinance, before the date of listing application, will continue as per the provisions of law.
It is well known that a large part of Pakistan’s economy is undocumented and a significant number of companies operate in the informal sector. This will encourage such companies, particularly SMEs, to become documented and start paying taxes, without the fear that past tax returns or lack of them will be questioned. Moving forward they will be documented and paying full tax. Hence, this will be a significant revenue positive measure.
“The provision of section 122, section 176 and section 177 shall not be applicable to those taxpayers being companies which opt for enlistment on the Main or GEM Board of Pakistan Stock Exchange, except such pending cases on which the proceedings have already been initiated under the Ordinance, before the date of listing application, will continue as per the provisions of law.”
KARACHI: Karachi Chamber of Commerce and Industry (KCCI) has suggested the authorities to conduct income tax audit once in three years.
The KCCI in its proposals for budget 2022/2023 submitted to the Federal Board of Revenue (FBR) stated that through Finance Act 2019 powers of Commissioners Inland Revenue and the FBR have been restored to select cases for audit every year which further creates difficulties for registered persons, whereas prior to FY2019-20 audit could be conducted once in 3 years.
The commissioners already have various powers to carry out amendments of the income tax returns filed for any tax year by the taxpayer under Section 122 (5A).
Therefore, additional audit powers outside the standard audit parameters are often misused by the tax authorities.
Multiple and overlapping discretionary powers are precisely the hurdle in broadening of tax base, and corruption. Rather than focusing on broadening the tax base, FBR is coming up with novel ways to perpetuate a regime of extortion and harassment. Consequently the country is going nowhere in expanding the tax base and revenue collection.
The KCCI proposed that the audits under Section 177 and 214C should be carried out once in every three years as was introduced through Finance Act 2018, through restoration of clause 105 omitted in Finance Act, 2019.
Despite of this restriction the Commissioner can carry out assessment under section 122(1)/(5) or 122(5A) of the Income Tax Ordinance, 2001 on the definite information or where declaration of tax payer is erroneous and prejudicial to the interest of revenue.
Giving rationale to the proposal, the chamber said it would alleviate fears of compliant tax-payers. Further, it will help in removal of harassment and extortion through uncalled for and unnecessary audits.
KARACHI: The Federal Board of Revenue (FBR) has been suggested a drastic cut in duty and taxes on import of black to stop smuggling and increase revenue.
The Karachi Chamber of Commerce and Industry (KCCI) in its proposals for budget 2022/2023 submitted to the FBR said that consumption of black tea in Pakistan is 240,000 metric tons, but the imports through legal channels is hardly 100,000 metric tons due to very high rates of customs duty, sales tax, regularity duty and withholding tax.
Remaining requirement is fulfilled by smuggling, Afghan Transit Trade (ATT), and imports under various exemptions/concessions granted to PATA and Azad Kashmir which conduct 90 per cent of official imports and sold all over Pakistan in tariff areas.
The KCCI said that legitimate importers have been driven out of the market due to distortions in tax and duty regime, while also the government is losing a substantial amount of revenues.
The black tea imported in bulk and wholesale packing is treated as finished product in 12th Schedule (Table 3) whereas it should be treated as raw material because black tea goes through a process of blending and packaging while also the taxes are charged on maximum retail price.
The KCCI said that black tea is an essential food item used in every household and common man. Such high tariffs while exemptions to select areas are only supporting misuse of concessions and smuggling. The tariff structure may therefore be rationalized as proposed while exemptions to PATA and Azad Kashmir be withdrawn as these are sources of revenue leakages:
Karachi Chamber of Commerce and Industry (KCCI) has proposed restoration of sales tax exemption on supply of solar panels and inverters.
The KCCI in its proposals for budget 2022/2023 submitted to the Federal Board of Revenue (FBR), stated that solar panels and inverters were earlier granted zero rated of sales tax.
The exemption from sales tax on supply of solar panels and inverters were withdrawn through supplementary finance bill 2021 thus imposing 17 per cent sales tax.
The chamber said that imposition of 17 per cent sales tax increased the cost for consumer and discourage use of alternative sources of energy.
Every household, commercial establishments and industries are opting for alternate sources of energy to reduce their expenditure and cost of doing business. Solar energy is now widely being used in Pakistan and helping to reduce dependence on costly thermal power.
Giving rationale, the chamber said that the proposal would reduce prices for consumers for saving the electricity and gas for local industries and oil imports. It is Import substantial for the country. Expansion of an industry which has good potential for growth.
The Karachi Chamber highlighted the issued on indenting agents stating that such agents have to pay 5 per cent withholding tax on inward remittances of commission while the indenting agents based in Sindh also have to pay Sindh Sales Tax on Services at 13 per cent.
To avoid such rates of taxation, indenters now mostly retain the commission outside Pakistan and book import orders on Proforma Invoices or Contracts from suppliers. This results in loss of foreign exchange to the country.
In the online meeting with KCCI on June03, 2021, the Minister for Finance and Revenue agreed to the proposal that indenting commission should be treated as export proceeds and taken out of the purview of provincial service taxes. Indenting agents serve all of Pakistan and should therefore remain in Export regime just as IT and other service providers. The proposal may therefore be incorporated in budget.
Encourage remittance of foreign exchange and documentation.
The chamber in another issue stated that large amounts of refund of Drawback of Local Taxes and Levies (DLTL) pertaining to exporters are delayed and remain unpaid for months.
Exporters face liquidity crunch due to blocked funds and blocked refunds have a negative impact on exports.
In the meeting with KCCI delegation in Islamabad on September 20, Minister for Finance and Revenue had assured the KCCI delegation that DLTL will continue and pending refunds will be expedited.
KCCI therefore submits that payments of DLTL should be released and backlog be cleared.
Improve liquidity for exporters and help to enhance exports.
KARACHI: The Federal Board of Revenue (FBR) has been urged to allow automatic extension for filing Goods Declaration (GDs) where traders unable to file due to system glitches.
Karachi Chamber of Commerce and Industry (KCCI) in its proposals for budget 2022/2023 informed the FBR that due to malfunctioning of the online filing system, Importers are unable to file GDs in time.
Consequently clearance of cargo is delayed and importers have to bear heavy demurrage and detention charges.
Similarly the filing of sales tax return is also delayed frequently due to software errors or disruption of the system resulting in expiry of deadline.
Due to these reasons, taxpayers are often penalized for delay in filing the sales tax returns within due date due to malfunction of the portal. Registered persons are held responsible for failure of the system which is not their fault.
The chamber recommended adequate provisions shall be inserted in Customs Act 1969 and Sales Tax Act 1990, and necessary modification in the software be made which automatically condone any delay in Filing of GDs and filing of Sales Tax returns. System should allow waiver of demurrage and detention charges for the number of days during which system was down.
It further recommended that delays in filing of Sales Tax Returns which occur due to failure/malfunction in the system should be automatically condoned without recourse to tax authorities and no penalty should be imposed for the delay in filing.
Giving rationale to the proposal, the KCCI said it would alleviate the hardships faced by importers and sales tax registered persons. It will also enhance confidence of tax-payers in the system and encourage compliance. Save the importers and registered persons from unjust charges and cost of doing business.
