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KARACHI: Overseas Investors Chamber of Commerce and Industry (OICCI) has identified mismatch in General Sales Tax (GST) rates between supply and sales resulting in excessive sales tax refundable build up.

The OICCI in its proposals for budget 2022/2023 submitted to the Federal Board of Revenue (FBR), said that Independent Power Producers (IPPs) revenue mainly comprises of two components “Capacity Price Payment” (CPP) and “Energy Price Payment” (EPP).

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As per the current sales tax law output sales tax is only applicable on EPP as a result IPPs are not able to fully adjust the input sales tax charged leading to build up of sales tax refund.

It is recommended that the IPP sector is already facing circular debt issues and in addition to that huge amount of Sales Tax Refunds are further worsening the working capital conditions of the industry. It is proposed that supply of fuel to IPPs (Coal/ Gas / HSD, etc.) should be exempted from Input Sales Tax.

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The OICCI said since 1994 the dividend income paid by Independent Power Producers (IPP’s) was subject to tax @ 7.5 per cent under the repealed Income Tax Ordinance, 1979 (ITO, 79). This was also the full and final tax in the hands of recipients and IPPs’ shareholders did not have to pay any additional tax when filing their tax returns, which have been revised as follows vide Finance Act 2019:

i. In clause (a), the reduced tax rate of dividend of 7.5 per cent for power generation industry (covering power purchaser, producer, and supplier of coal to power producer) has been restricted to power producers only where such dividend is pass through under CPPA, and

ii. Higher rate of tax of 25 per cent has been introduced under clause (c) of the said section for the Companies that have nil tax liability due to carry forward of losses, tax exemption or tax credits.

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Hence, in case of power producers (having non-pass-through agreements with CPPA) and coal suppliers, that previously enjoyed reduced rate under clause (a), the tax rate has been drastically increased from 7.5 per cent to 25 per cent due to exclusion from revised clause (a) and applicability of the new clause (c) as these entities are currently in tax holiday.

It is recommended:

i. Clause (a) of Division III of Part I of First Schedule as applicable before Finance Act 2019, should be reinstated, to include power producer companies (having non-pass-through agreements) and coal suppliers.

ii. Similarly, amendment be made for the withholding tax rates specified in clause (a) of Division I of Part III of the First Schedule, by reinstating the position prior to Finance Act 2019.

iii. The new clause (c) of Division III of Part I of First Schedule, inserted by Finance Act, 2019 be removed being against the fundamental principles of ITO, 2001.

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The chamber further informed that as a result of the passing of the Finance (Supplementary) Act, 2022 (“FSA”), the exemption provided to the power sector (“IPPs”) from payment of Sales Tax on the import of machinery and equipment provided under Table-3 of the Sixth Schedule to the Sales Tax Act, 1990 has now been withdrawn.

Under various power policies, the GOP has guaranteed the exemption of sales tax on the import of plant and machinery till the Commercial Operations Date of the IPPs.

It is recommended either the exemptions are restored or a proviso similar to the proviso inserted by the FSA in clause 132 Part I of the Second Schedule to the Income Tax Ordinance, 2001 be inserted.

(Provided further that the exemption under Serial 4, 5 & 6 Table 3 of the Sixth Schedule to the Sales Tax Act, 19s90 shall be available to persons who entered into the agreement or letter of intent is issued by the Federal or Provincial Government for setting up an electric power generation project in Pakistan on or before the thirtieth day of June 2021 and who obtains a letter of support on or before the thirtieth day of June 2023.

KARACHI: Federal Board of Revenue (FBR) has been urged to bring corporate tax rate for banking companies at par with the other sectors.

Overseas Investors Chamber of Commerce and Industry (OICCI) in its proposals for budget 2022/2023 pointed out towards higher effective tax of banking sector.

It recommended that corporate tax rates for the banking sector should be aligned with other sectors. Super Tax relief, as granted to other industries, should be given to banking sector as well.

The OICCI also pointed out enhanced rate of tax on income from investment in Federal Government Securities (Rule 6C of Seventh Schedule). It recommended that the banking sector is already burden with higher tax rates as compared to other service sectors. Incremental tax applied under Rule 6C (6A) of seventh schedule of Income Tax Ordinance, 2001 should be deleted, whereby enhanced rate is applied on banks total income ratio (ADR).

Alternatively, enhanced tax shall be reverted to the previous condition, i.e. incremental tax shall be applicable on Additional income from additional investment in government securities rather than total income.

The overseas chamber further recommended the original provisions of the Seventh Schedule should be restored where provision for bad debts as per the Prudential Regulations of SBP and supported by an Auditors certificate was allowable as a tax deduction to the banks.

Alternatively, threshold for allowing provision for bad debts should be increased to 2 per cent of gross advances to corporate customers without the categorization of loss, doubtful or substandard and delete the Explanation inserted through Finance Act, 2019 along with the Clauses 1(d), (e) and (f).

Overriding Provision in Seventh Schedule to Income Tax Ordinance, 2001. The rule 9 of the Seventh Schedule of ITO 2001 should be deleted as it is being misused and leading to unnecessary litigation.

Regarding Islamic banks, the OICCI said Rule 3 (1) & (2) of Seventh Schedule of Income Tax Ordinance, 2001 should be replaced with the following text under Rule 3(1):

“The audited financial statements of Islamic Banks and Disclosure related to Islamic window operations of the conventional banks as contained in the audited financial statements submitted to the State Bank of Pakistan shall form the basis for the calculation of income tax liability as provided in this Schedule.”

The OICCI pointed out withholding tax on all modes of Islamic financing and recommended that tTo provide tax neutrality for assets financed by Islamic banks and Islamic windows of conventional vis- a vis conventional banks. Following clarification be inserted after clause 153(7)(iii):

“For the removal of doubt, it is clarified that any goods delivered under an Islamic modes of financing by a bank or financial institution approved by the State Bank of Pakistan or the Securities Exchange Commission of Pakistan, shall not be considered as sale of goods for the purpose of this section.”