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Tag: Federal Board of Revenue

The Federal Board of Revenue is Pakistan’s apex tax agency, overseeing tax collection and policies. Pakistan Revenue is committed to providing timely updates on the Federal Board of Revenue to its readers.

  • Massive cut in tax exemptions, concessions likely in budget 2019/2020

    Massive cut in tax exemptions, concessions likely in budget 2019/2020

    ISLAMABAD: The government has planned to a massive cut tax in exemptions and concessions in the budget 2019/2020, which is scheduled to be announced on June 11, 2019.

    Sources told PkRevenue.com that the government had committed with the World Bank and other international agencies to withdraw large size exemptions given to various sectors and individuals in order to boost revenue collection, especially in the wake of difficult economic situation.

    The sources said that the Federal Board of Revenue (FBR) had already initiated policy making and would introduce phases to withdraw available tax concessions and exemptions.

    According to Pakistan Revenue Mobilization Program funded by the World Bank, the FBR had already launched several initiatives including ongoing review of tax policy to formulate a medium-term tax policy framework and propose measures to reduce tax expenditure for the budget 2019/2020.

    The cost of tax exemptions and concessions in the fiscal year 2017/2018 was around Rs541 billion, which included: income tax Rs61.78 billion; sales tax Rs281 billion; and customs duty Rs198.15 billion.

    The sources said that in the first phase around 50 percent exemptions and concessions would be withdrawn in the budget 2019/2020.

    The World Bank on Pakistan report said multiple exemptions and discounted rates to select industries, economic actors, and economic activities (e.g. sugar, textiles, and fertilizer industries; ‘associations’ in the real estate sector; imports for infrastructure projects under the China-Pakistan Economic Corridor) are granted in each year’s budget law, which distort competition and economic actors’ incentives. In FY2017/18, Pakistan’s tax expenditure (i.e., tax revenue foregone due to exemptions and concessional rates) was estimated at 2 percent of GDP, primarily due to exemptions from General Sales Tax (GST) and customs duties.

    “Substantial exemptions also apply to property taxes, whereby properties below a certain size are exempted regardless of location, while revenue is also lost due to unrealistically low valuations used for taxation purposes.”

    The Capital Gains Tax (CGT) returns negligible receipts due to the zero rate applied to capital gains from the sale of immovable property after more than four years of ownership, and rates of 5-10 percent for properties sold after one to four years of ownership, the report said.

    The present PTI-led government has issued a roadmap for stability, growth and productive employment issued in April 2019 and stated that tax policy has to balance the revenue objective with equity and growth objectives.

    Presently tax policy has a predominant revenue focus and as such is likely to create distortions in the economy which can adversely affect the growth and equity objectives.

    In addition, even the revenue objective is compromised by large scale exemptions. To correct this shortcoming, the government intends the following:

    i) Enact a law to ensure that no tax exemption is allowed through law or notification without an estimate of its cost independently by the tax department as well as the concerned ministry. Such cost will be made public before notification of the exemption.

    ii) Review all existing exemptions, with the purpose of eliminating as many of those as possible. Even if an exemption is to be retained its cost will be determined and made public. Ministry of Finance to publish annually a statement of tax expenditures to show how much revenue is being foregone due to exemptions.

    iii) Ensure that all exemptions, existing or newly proposed, will have a sunset clause (ideally not more than 5 years).

    iv) Publish a list of all government owned, quasi-government and government-linked enterprises availing tax exemption/concession in any way along with quantification of the tax expenditure. In addition, a plan be prepared for phasing out of these concessions.

    v) Withdraw FBR powers to issue SROs to grant exemptions. This power will vest only with the Parliament.

    vi) Ensure that all non-procedural existing SROs will expire at the end of the fiscal year. Steps taken over the last two years to incorporate all exemptions granted through SROs to be made part of the body of law.

  • Salary income threshold may be revisited after huge tax loss

    Salary income threshold may be revisited after huge tax loss

    ISLAMABAD: The government may restore threshold of taxable salary income to June 30, 2018 level in the budget 2019/2020 after facing Rs50 billion revenue loss in the current fiscal year and considering difficult economic situation in the year ahead.

    Sources said reverting tax rates for salary persons to the June 30, 2018 position was under consideration for budget 2019/2020. However, no decision in this regard has been taken so far, the sources said.

    The new threshold may be between Rs600,000 and Rs800,000 for tax exempt income and further tax slabs may be notified accordingly, the sources said.

    In Finance Act, 2018 the rates of taxes upon salary income were considerably reduced and the threshold was increased from Rs.400,000 to Rs.1,200,000.

    However, in order to ensure income tax return filing a token tax of Rs1,000/year was imposed on salary persons deriving income between Rs400,000 and Rs800,000 and tax of Rs2,000/year was imposed on persons deriving salary between Rs800,000 to Rs1,200,000.

    These changes brought about a substantial decrease in the withholding taxes collected through various government and private withholding agents.

    Revenue impact of this change remained Rs.32.4 billion during the period from July 2018 to February 2019, according to a report of FBR sent to ministry of finance.

    It is estimated that total revenue loss on this account would be around Rs.50 billion in the current Financial Year, it added.

  • FBR to target large taxpayers for detailed field audit

    FBR to target large taxpayers for detailed field audit

    ISLAMABAD: Federal Board of Revenue (FBR) to conduct tax audits of large taxpayers, who are selected through an automated risk-based tool.

    According to World Bank’s updated report on ‘Pakistan Revenue Mobilization’ said that according disbursement linked Indicators (DLI) the FBR required to conduct tax audits on cases selected through an automated risk-based tool, informed by analysis of integrated data from multiple sources.

    It sets targets for detailed field audits of large taxpayers, thereby making an efficient use of resources for the highest impact.

    Riskbased audit is essential to deterring tax evasion and increasing compliance, especially for large taxpayers who use complex tax evasion techniques.

    It also benefits compliant taxpayers, as it spares them the hassle and cost of ineffective mass audits and reduces the discretion of FBR officials to pick cases for audit.

    The World Bank program also required the FBR to implement—through licensed agents—electronic production monitoring for high-risk sectors (e.g., sugar, cement, fertilizer) and electronic tracking of production, distribution, and sale of final products (tobacco, beverages).

    It will increase compliance by reducing the risk of under-declaration of output, sales, and corporate profits, the report said.

    The DLI related to new taxpayers with taxable incomes/sales identified through automated data sharing and ICT-based BI

    (number)will ensures that the FBR will use the new ICT equipment and software that enables the BI and data mining tools to identify unregistered or noncompliant taxpayers.

    It also disincentivizes the registration of individuals and firms without taxable income or sales, thereby avoiding inefficient use of FBR resources and negative impacts on micro firms and economically weaker households.

  • PTBA advises revisiting arrest, prosecution law under sales tax

    PTBA advises revisiting arrest, prosecution law under sales tax

    KARACHI: Pakistan Tax Bar Association (PTBA) has advised the Federal Board of Revenue (FBR) to revisit law related to arrest and prosecution under Sales Tax Act, 1990.

    In its tax proposals for budget 2019/2020, the apex tax bar said that under the existing law, every director and officer of the Company is liable to be arrested if the officer has reasons to believe that such director or officer is personally responsible for actions of the Company contributing tax fraud.

    Accordingly, a person who is a nominee director or employee director can be held responsible for the liability of the company.

    The PTBA said that as per interpretation of the law nominee or employee directors be who are not involved in the administrative matters of a taxpayer are being held responsible for the liability of the taxpayer.

    “It is a trite law that before any coercive action is taken against any person; it is the duty of the Revenue Officer to provide proper opportunity of being heard and pass a judicious order to establish that the act of the registered person is willful and there was an element of mens rea.”

    In the Income Tax Ordinance, 2001 such matters are covered under Section 139 thereof which comprehensively deals with the liability both in case of company and association of Persons. “Section 139 needs to be replicated in the Sales Tax Act, 1990 on the similar lines.”

    The PTBA said that the proposed amendment would protect interest of the nominee/employee directors.

    Pointing out the issue of recovery of arrears under sales tax law, the PTBA said under Section 48 which deals with recovery of arrears does not provide any time limit to initiate the recovery proceedings.

    “By virtue of section 45B of the Act, a registered person aggrieved by any decision, may file an appeal within thirty days of the date of receipt of the order. On the contrary, under Rule 71 of the Sales Tax Rules, proceeding of recovery of impugned tax may be initiated after thirty days from the date of order.”

    In addition, recovery proceedings may be initiated as soon as Commissioner Inland Revenue (Appeals) confirmed the Order under Section 45B of the Sales Tax Act or Section 33 of the Federal Excise Act.

    The PTBA said that the section 45B, 48 and the rule are not harmonized. Sometimes order is served to the registered person after many days of the date of order and the recovery proceedings may be initiated under the Rule even if the time limit provided for filing of the appeal has not lapsed.

    Therefore, it is recommended that Rule 71 should be amended to provide commencement of recovery proceedings after thirty days from the date of receipt of the order.

    Similarly, time limit of 30 days from the date of receipt of the order should be provided in section 48 to bring harmony between the Act and Rules.

    The PTBA suggested that thirty days shall also be allowed for initiation of recovery proceedings in case demand is confirmed by the Commissioner Inland Revenue (Appeals) while disposing appeals filed under section 45B of STA and 33 of FEA.

    Giving rationale to the proposal, the PTBA said that it would keep harmony between the Act and the Rules in the spirit of natural justice.

  • FBR urged to reduce withholding tax for FMCG distributors

    FBR urged to reduce withholding tax for FMCG distributors

    KARACHI: Federal Board of Revenue (FBR) has been urged to reduce withholding tax rate to 0.2 percent for distributors of Fast Moving Consumer Goods (FMCG) companies as higher rate is increasing the cost of doing business.

    The Overseas Investors Chamber of Commerce and Industry (OICCI) in its tax proposals for budget 2019/2020, said that the distribution of FMCG is a high turnover and low margin business.

    This fact has also been acknowledged to some extent by the FBR by prescribing minimum taxation rate for the distributors of FMCG Companies at 0.2 percent of their turnover i.e. reducing the basic rate of minimum tax by 80 percent.

    The OICCI suggested that the basic rate of withholding tax under section 153 for distributors of FMCG sector should be reduced to 0.2 percent in line with section 113 of income tax ordinance, 2001.

    Giving rationale, it said that the high rate of withholding tax is increasing the cost of doing business as the existing withholding tax rate is higher than the net margin of distributors.

    Another proposal, the OICCI said that ‘Aerated waters’ is the only item within food and beverage industry that is subject to both sales tax (third schedule of the Sales Tax Act, 1990) and FED (First Schedule of Federal Excise Act, 2005), while all other beverages (like: Juices, Tea & Milk based drinks) are only subject to sales tax at 17 percent.

    Earlier in 2011-2012, FED rate was reduced from 12 percent to 6 percent with commitment that it shall be eliminated in 2 to 3 years but this was not implemented.

    The OICCI recommended that the Federal Excise Duty (FED) should be decreased from 11.5 percent to 8.5 percent, and eliminated gradually.

    The chamber pointed out that after the withdrawal of 58R of Special Procedure Rules, 2007, relating to the payment of Extra Tax on Specified Goods vide SRO 608(I) 2014 dated 02/07/2014, Large Trading Houses are now unable to issue sales Tax Invoice to Customers.

    Resultantly, all Professional Customers are inclined to directly purchase from Manufacturers as they are issuing Sales Tax Invoice to their Customers.

    Therefore, it recommended that Rule 58R which was withdrawn vide SRO 608(I) 2014 be restored only for Large Trading Houses operating as Wholesale-cum-retail under Chapter-XII.

    Giving rationale, it said that it would create level playing field for Large Trading Houses.

    The OICCI also submitted proposal for input Sales Tax on purchase of electrical and gas appliances.

    The Sales Tax Act, 1990 does not permit adjustment of Input Sales Tax on purchase of electrical and gas appliances (including visi-coolers & industrial gas appliances etc.) under section 8(1)(h) of the Act.

    The Act should be amended to allow for adjustment of such input sales tax.
    Visi-Coolers are an integral part of beverage business and inadmissibility of input tax places beverage business at a disadvantage vis-à-vis other businesses, besides such inadmissibility escalates the cost of doing business.

    In other industries, it is reiterated, that all input tax relatable to ‘taxable supplies made or to be made’ is admissible. Removal of restriction shall provide level playing field.

    The OICCI on the issue of further tax on sales to retailers, said with reference to section 14 of the Act, retailers are required to obtain sales tax registration excluding those retailers who are required to pay sales tax through their electricity bill.

    Moreover, as per section 3(1A) further tax at the rate of 3 percent is to be charged where supplies are made to unregistered person other than those mentioned in SRO 648 dated July 9, 2013.

    Therefore it is recommended that retailers who pay their sales tax through electricity bill to be excluded from further tax through inclusion in SRO 648 dated July 9, 2013.

    It will clear the ambiguity regarding applicability of further tax on these retailers.

  • FBR to reduce withholding tax provisions under World Bank program

    FBR to reduce withholding tax provisions under World Bank program

    ISLAMABAD: Federal Board of Revenue (FBR) is required to reduce number of withholding provisions to strengthen the income tax and take out this system from indirect taxes.

    According to funding approved by the World Bank for Pakistan Revenue Mobilization Project, the FBR is required to reduce the scope of withholding regime.

    The World Bank said that the funding requires a reduction in the types of transactions subject to income tax withholding.

    “It contributes directly to transparency of the tax system, given that the withholding regime transforms income taxes into indirect taxes, which are less visible to taxpayers. It will also greatly reduce compliance costs for firms that have to act as withholding agents.

    The World Bank also approved funds for transparent tax system for Pakistan. The World Bank said that under this funding the authorities require detailed reporting of tax expenditure in the annual budget documentation with disaggregated information about the cost and beneficiaries of each exemption and concession.

    “It is important to broadening the tax base because it exposes the revenue foregone due to each exemption/concession, and the industries that benefit.”

    The World Bank also stressed on coordination of the FBR with provinces. Under this funding program the FBR needs to reach agreements with the provinces on automated sharing taxpayer information, the methodology for calculating GST input adjustments, and common updated property valuation tables.

    “This coordination will enable the FBR and the provinces to broaden their respective tax nets. Coordination can be facilitated through the newly established Fiscal Coordination Committee, comprising the federal and provincial governments.”

  • FBR is not organized revenue authority

    FBR is not organized revenue authority

    ISLAMABAD: Federal Board of Revenue (FBR), unlike most revenue authorities in the world, is not organized along functional lines, nor does it have a clear hierarchical structure.

    This was stated by the World Bank in its report on Pakistan taxation.

    It said: The FBR is a large organization with a nationwide presence and more than 21,000 staff, of whom about two thirds work for Inland Revenue Service (IRS) and one third for Pakistan Customs.

    It further said despite a government target for women to reach 10 percent of public employees, the FBR has only 962 women staff (4.6 percent).

    However, women are better represented among professional-grade staff (grades 17+), accounting for 17.6 percent of total staff in grades 17-22.

    The two services have separate career structures and human resource practices with limited shared services (e.g. accounting).

    Their audit functions, ICT systems, and territorial formations (Regional Tax Offices/Large Taxpayer Units for the IRS, Customs stations and control points) are also separate.

    The IRS is organized along tax instruments, territorial jurisdictions, and taxpayer segments (e.g. Large Taxpayer Units) rather than functions (e.g. taxpayer registration, assessment, tax audit).

    “A mixed function-based and segment-based structure is considered more efficient, as it enables technical specialization of staff, automation of business processes by function, fewer offices, and complete taxpayer profiles – rather than separate records for each tax instrument as is the case in the FBR,” the World Bank said.

    In terms of management structure, the FBR Act assigns the decision-making functions to the Board with limited powers for the Chairman.

    In turn, Board Members are responsible for different functions but do not oversee FBR territorial formations, where most FBR staff are deployed.

    Moreover, IRS Directors-General report directly to the FBR Chairman rather than Board Members.

  • Monthly sales tax return filing main reason for Pakistan’s low ranking in paying taxes

    Monthly sales tax return filing main reason for Pakistan’s low ranking in paying taxes

    ISLAMABAD: The requirement of filing monthly sales tax return is the main reason for Pakistan’s low ranking in the Paying Taxes Indicator of the World Bank.

    The World Bank in a recent report on Pakistan taxation said that the country’s tax system is complex due to overlapping jurisdictions with different laws, exemptions, and frequent policy changes.

    It said that service providers operating across Pakistan are obliged to file sales tax on services returns with all five jurisdictions every month, resulting in a total of 62 tax returns based on five different sets of rules and formats for sales tax on services alone.

    “The requirement to file monthly sales tax returns is one of the main issues for Pakistan’s low

    score and ranking in the Paying Taxes indicator, which is the country’s worst ranking in the 2019 Doing Business report.”

    Pakistan is ranked 173nd among 190 economies for this indicator with 47 payments and an estimated time to comply with tax obligations of 293.5 hours per year, down from 311.5 in the previous year.

    The World Bank said that the Constitution assigns income taxes (except for income derived from agriculture), Sales Tax on goods, customs duties, federal excises, and the Capital Gains Tax (CGT) to the federal level.

    These taxes are collected by the Federal Board of Revenue (FBR).

    The Constitutions assigns the following taxes to the provinces: sales tax on services, tax on professions, Agricultural Income Tax (AIT), Motor Vehicle Tax (MVT), Urban Immovable Property Tax (UIPT), and other taxes related to real estate (e.g. stamp duty, Capital Value Tax).

    This tax assignment essentially fragments Pakistan into five markets in the services sector, with important consequences for tax authorities and taxpayers alike.

    The World Bank said that several taxes are often levied on the same transaction (e.g. stamp duty, registration fee, Capital Value Tax, and Capital Gains Tax on property transactions) and/or affect the same taxpayer segments (e.g. professionals are liable to income tax, professions tax, and sales tax on services).

    Double taxation is particularly serious problem for firms that provide services across the country.

    These firms are liable to Corporate Income Tax paid to the FBR and sales tax on services paid to each of the provinces where they operate and to the FBR for operations in the Islamabad Capital Territory.

    The five jurisdictions have different rates for sales tax on services and apply different principles in levying this tax (e.g. some levy the tax based on the firm’s registered address, others based on the customer’s location).

    Disagreements on the definition of goods and services also affect the restaurant and catering sector, which the federal level subjects to sales tax on goods (food and beverages), while the provinces also levy sales tax on services.

  • Super tax application may be amended to generate around Rs2 billion

    Super tax application may be amended to generate around Rs2 billion

    KARACHI: Federal Board of Revenue (FBR) may recommend amending application of super tax in the forthcoming budget 2019/2020 to generate around Rs2 billion.

    FBR sources said that the tax authorities had recommended amendments to Section 4B of Income Tax Ordinance, 2001 through Finance Bill, 2019.

    The sources said that it had been recommended to apply super tax on the income computed under Fourth, Fifth, Seventh and Eighth Schedules ‘other than brought forward depreciation and brought forward business losses.

    According to the recommendation, the proposed amendment would bring uniform chargeability of super tax to all taxpayers including taxpayers falling within the purview of Fourth, Fifth, Seventh and Eighth Schedules of Income Tax Ordinance, 2001.

    As per the ordinance the fourth schedule covers insurance companies, fifth schedule covers exploration and production companies, seventh schedule for banking companies and eighth schedule covers capital gains and National Clearing Company Pakistan Limited.

    The sources said that the proposed amendment will help the FBR to generate around Rs2 billion as revenue.

  • FBR urged to allow one sales tax registration for multiple businesses

    FBR urged to allow one sales tax registration for multiple businesses

    KARACHI: Federal Board of Revenue (FBR) has been urged to allow multiple businesses on one sales tax registration for better documentation of the economy.

    In its tax proposals for budget 2019/2020, the Pakistan Tax Bar Association (PTBA) said that after amendment in Sales Tax Act, 1990, through Finance Act, 2008, FBR has directed to cancel multiple registrations under single proprietorship.

    It said that proprietor having two businesses faces with the dilemma to show his entire sales under one business, which is creating hardship for his customers in their respective returns.

    Moreover, tax department often raise queries as to how a registered person can raise a invoice relating one business if he is registered with the department under another ‘business category’.

    “FBR should issue necessary instructions to incorporate multiple business features in its web-portal to facilitate taxpayers,” the PTBA suggested.

    The PTBA said that by implementing this suggestion it would result in better documentation of economy and proper maintenance of records of taxpayer.

    Highlighting another issue, the PTBA said that the definition of time of supply as amended through the Finance Act, 2013 stating receipt of advance as subject to sales tax, has created number of practical problems because of which sales tax on advance was earlier withdrawn by Finance Act 2007.

    The registered persons besides other practical issues has to undertake a tremendous exercise of reconciliation between the books of account where sales is recorded on the basis of delivery of goods with the sales tax returns where sales tax is paid on advance receipts.

    Furthermore, this also leads to discrepancies in CREST resulting in hardships to taxpayers as well as to the department.

    Therefore, the tax bar proposed withdrawal of the amendment made through the Finance Act, 2013.

    It said that it will help taxpayers to avoid unnecessary hassle as well as for the department; as charging of sales tax on advance receipts will not create any additional revenue for the Government.

    The PTBA also pointed out ‘hire purchase’ transaction involves periodical installments received/earned over a period of time.

    Currently, Sales Tax is being charged on full amount at the time of signing (entered into) of hire purchase agreement.

    The registered is burdened with increased amount of output tax on hire purchase sale at the time of sale although the amount is received from the customers in installments.

    Definition of time of supply’ may be amended and tax should not be levied at the time of signing of HP arrangement.

    Instead, tax should be levied at the time when installment is effected / paid.

    Further, the element of interest embedded in such installment should also be excluded for assessment of sales tax.

    Charging sales tax on full amount at the signing of hire purchase agreement is not justified and is in conflict with the definition of value of supply which states that it is the consideration which the supplier receives from the recipient for the supply.