In a bid to offset the costs of imported goods, Pakistan is contemplating an increase in tax rates for commercial importers. A high-powered commission, led by Finance Minister Muhammad Ishaq Dar, has recommended raising the tax rates under section 148 of the Income Tax Ordinance, 2001.
The proposed increase would raise the tax rate from 5.5% to 8% for commercial imports, and from 3.5% to 5.5% for commercial importers in the upcoming budget for the fiscal year 2023-2024.
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Additionally, the country is considering the withdrawal of specific taxes on retail transactions to facilitate the sector. The Reforms & Revenue Mobilization Commission (RRMC) has suggested to the Ministry of Finance the abolishment of multiple tax rates under sections 236G, 236H, 153, and 113 of the Income Tax Ordinance 2001, which currently apply to the wholesale and retail sector.
Under the proposed recommendations, tax withholding under sections 236G and H would be applicable universally to all goods and sectors, with lower rates for active taxpayers and higher rates for non-active taxpayers. These withholding taxes on the purchase side of the wholesale and retail sector would be considered as minimum tax.
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To ensure transparency, manufacturers and commercial importers would be required to provide comprehensive details of their buyers, including names, CNIC (Computerized National Identity Card) numbers, NTN (National Tax Number), and addresses, in their sales tax return and withholding statements. Failure to comply with this requirement would result in the disallowance of proportionate income tax and input tax for such manufacturers and commercial importers. Similarly, wholesalers, distributors, and dealers would also need to furnish complete buyer details (retailers) in their sales tax return and withholding statements filed under section 236H. Non-compliance with this provision would lead to the disallowance of proportionate income tax and input tax.
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The RRMC has recommended that the withholding tax rate for the service sector and contractors should be uniform to eliminate any distortions caused by varying rates. However, a detailed evaluation is necessary to ensure the overall impact of this proposal remains tax neutral.
Furthermore, the Minimum Tax regime should be gradually revamped or withdrawn as it creates distortions within the system. Nevertheless, until the regime is eliminated, taxpayers should be allowed to offset any excess of Minimum Tax over their normal tax liability in subsequent years, subject to certain conditions explained in the detailed comments provided.
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According to the RRMC, the immediate revenue impact of these measures would be neutral, with a positive effect expected in the future if the conditions for tax credits are met.