In a notable fiscal shift, the cost of tax exemptions and concessions in Pakistan surged by 73% to reach Rs 3.88 trillion during the fiscal year 2023-24, as highlighted in the Pakistan Economic Survey 2023-24 released on Tuesday.
(more…)Tag: tax exemption
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FBR Extends Tax Exemption of Rs12.24 Billion on Civil and Military Pensions
Karachi, July 13, 2023 – The Federal Board of Revenue (FBR) has announced an extension of income tax exemption totaling Rs12.24 billion on pensions disbursed to civil servants and military personnel.
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Tax Exemption and Concession Expenditure Reaches 3.36% of GDP: FBR
Islamabad, June 19, 2023 – The Federal Board of Revenue (FBR) has announced that the cost of exemptions and concessions in Pakistan expanded to 3.36 percent of the GDP during the fiscal year 2021-2022.
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Pakistan allows tax exemption on tomato, onion imports
ISLAMABAD: Pakistan on Wednesday granted exemption of income tax and sales tax on imports of tomato and onion during next four months.
In this regard, the Federal Board issued notifications in this regard. The FBR issue SRO 1639(I)/2022 to allow withholding income tax exemption on import of tomato and onion imported till December 31, 2022.
READ MORE: FBR collects Rs948 billion as tax revenue during 2MFY23
Similarly, another SRO 1640(I)/2022 was issued to allow sales tax exemption on import of tomato and onion during September – December 2022.
Previously, on August 30, 2022, in a meeting at the Ministry of National Food Security and Research (MNFSR), it was decided that the Ministry will issue import permits of onion and tomatoes within 24 hours.
The Ministry has also proposed to FBR to waive-off taxes and levies on import of onion and tomatoes.
It is expected that this will be made effective on immediate basis. These steps are taken to ensure a supply of the essential commodity in the market and to stabilize the prices.
READ MORE: FBR announces tax exemptions for flood relief operation
According to the details, the importers will be allowed to import onion and tomatoes.
Ministry of National Food and Security has directed the Department of Plant Protection (DPP) to facilitate the import and ensure that there are no hindrances for importers.
MNFSR has taken on-board all the stakeholders with an aim to ensure a supply of the essential commodities to the consumers.
Furthermore, a contact group to facilitate imports is created, where importers will be able to share their problems. While a team at Ministry of National Food Security will monitor the situation and will take necessary action for redressal.
READ MORE: KTBA demands suspending further tax due to practical issues
Ministry of National Food Security and Research has taken the above decisions to ensure that onion and tomatoes are available in the market at reasonable rates to the consumers.
Pakistan Embassies in Iran, Afghanistan, UAE and other countries have been requested to assist imports. Ministry of National Food Security and Research, with stakeholders, will continue to take necessary steps to ensure food security in the country in the times when crops have been heavily damaged because of recent floods and rains.
READ MORE: FBR gets 3.38 million active taxpayers by August 28, 2022
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Pakistan grants 5-year tax exemption to promote film industry
ISLAMABAD: Pakistan has granted five-year tax exemption on income derived from cinema operations in order to promote local film industry.
The tax exemption has been granted under Income Tax Ordinance, 2001 by amendment made through Finance Act, 2022.
READ MORE: Advance tax on immovable property enhanced by 100%
The Federal Board of Revenue (FBR), the apex tax collecting agency of Pakistan, issued Income Tax Circular No. 15 of 2022/2023 to explain important amendments introduced through the Finance Act, 2022 to the Income Tax Ordinance, 2001.
The FBR said that in order to promote local film industry, following new measures have been introduced:
(i) Five years tax exemption has been granted by inserting clause (151) in Part I of Second Schedule to the Income Tax Ordinance 2001 to a person who derives any income from cinema operations, starting from the commencement of cinema operations.
READ MORE: FBR explains changes in advance tax on motor vehicles
(ii) Through insertion of clause (153) in Part I of Second Schedule to the Ordinance, exemption has been granted to profit and gains derived by a resident producer or a resident production house from production of feature films during the period from July 01, 2022 to June 30, 2027.
READ MORE: Pakistan introduces automated system for withholding tax payments
(iii) Similarly, exclusion from provisions of section 148 of the Income Tax Ordinance, 2001 has been provided through insertion of Clause (12P) in Part IV of Second Schedule on import of machinery and equipment as listed in serial no. 32 of Part-I of Fifth Schedule to the Customs Act, 1969 subject to the conditions and limitations specified therein.
(iv) Moreover, through insertion of clause (43H) in Part IV of Second Schedule, exclusion from the provisions of clause (b) of sub-section (1) of section 153 has been provided to an exhibitor or a distributor of a feature film, as payer, on payment made to a distributor, producer or importer of feature film.
READ MORE: Tax imposed on foreign payments made by exchange companies
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Tax exemptions cost Rs1.76 trillion in FY22
ISLAMABAD: The cost of tax exemptions has been estimated at Rs1.76 trillion during the fiscal year 2021/2022 as compared with Rs1.31 trillion in the preceding fiscal year, according to Economic Survey of Pakistan released on Thursday.
The cost of exemptions and concessions under sales tax has increased to Rs1.014 trillion during fiscal year 2021/2022 as compared with Rs578 billion in the last fiscal year.
READ MORE: Share of domestic electricity consumption declines
The Federal Board of Revenue (FBR) granted duty exemptions and concessions to the tune of Rs343 billion in the outgoing fiscal year as compared with Rs288 billion in the preceding fiscal year.
The cost of exemptions and concessions under the head of income tax, however, declined to Rs399.66 billion in the fiscal year 2021-2022 as compared with Rs448 billion in the last fiscal year.
READ MORE: Average inflation estimated up to 12% in FY22
The survey said that there are a variety of factors responsible for the low tax to GDP ratio including a narrow tax base particularly agriculture contributing minimally to the tax collection, tax evasion, poor documentation, the informal economy, exemptions/concessions, smuggling, weak audit & enforcement, a lack of automation, and lengthy litigation.
READ MORE: SBP jacks up policy rate by 6.75% to 13.75%
As a result of insufficient tax revenues, the country has faced numerous challenges over the years in providing much-needed fiscal space for priority areas such as infrastructure, education, health, and targeted social assistance.
READ MORE: Tax to GDP ratio estimated at 10.8% in FY22: Economic Survey
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Salt producers flay tax withdrawal through mini-budget
KARACHI: Ismail Suttar, Chairman, Salt Manufacturers Association of Pakistan (SMAP) has urged the government not to levy taxes on Iodized salt through mini-budget as the Covid-19 pandemic has already hit the salt export market badly due to rising freight costs and supply chain disruptions.
READ MORE: Mini-budget: FBR to generate Rs4.5bn through tax rate increase on cellular services
In a statement, he said: “If the government withdraws the exemption from Iodized salt, then it will create a huge impact on the cost of living of a common man as salt is the most essential ingredient in every single food item that a human consumes”.
SMAP Chairman further said that Salt is not only an essential food ingredient but has numerous health benefits especially the Iodized salt which creates hormones to regulate heart rate and blood pressure as well as burns extra fat deposits leading to heart diseases.
READ MORE: Mini-budget: income tax rates proposed for foreign TV dramas
“Previous governments have always promoted the use of Iodine in salt keeping in view the health of our children who are already suffering from stunted growth and obesity”, he said, adding that this ruthless decision to impose sales tax on such an essential item is beyond understanding and it only shows that the government seems to have no clue of its actions and is ready to meet the revenue targets even if it must compromise the common man’s health.
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FBR withdraws all appeals in exemption on remittances
ISLAMABAD: Federal Board of Revenue (FBR) has withdrawn all the appeals pertaining to income tax exemption on inward foreign remittances.
In order to implement the decision the revenue body issued, Circular No. 05 – Foreign Remittances – Exemption.
“In order to win the trust of the taxpayers and spare the public resources for more productive use elsewhere, all departmental appeals filed on the strict sensu interpretation of the law, be withdrawn immediately, and no further appeals be filed if one all fours of this clarification,” according to the circular.
Further, all circulars and instructions issued on the matter previously issued stand rescinded, the FBR added.
The FBR said a controversy has loomed for a quite some time as innovations in banking, money transfer mechanism, and development of newer products for cross-border transactions have outflanked the letter of the law as now Money Services Bus (MSBs), Exchange Companies (ECs), and Money Transfer Operators (MTOs) perform almost identical to those of scheduled banks.
In some situations, IRS Field Formations have refused concessions vis-à-vis foreign remittances remitted via ECs, that is, Money Gram, Western Union and Ria France etc. relying on Appellate Tribunal Inland Revenue’s judgment reported as ITA.No.794/LB of 2021.
It has been held that four conditions are mandatory to claim the benefit of foreign remittances under Income Tax Ordinance, 2001. The exemption is available subject to fulfillment of the four conditions, namely: the remitted amount is in foreign exchange; the amount is remitted into Pakistan through normal banking channels; the amount is encashed by a scheduled bank; and a certificate of encashment is issued by the bank concerned.
However, the State Bank of Pakistan (SBP) while responding to Federal Tax Ombudsman (FTO)’s memorandum through letter No.EPD/8302/EPP16(37)-Misc-2019, dated April 08, 2019, has categorically taken the position that foreign exchange remitted into Pakistan etc. does constitute ‘foreign exchange remitted through normal banking channels’ for all legal purpose.
The FBR said that SBP’s stance legitimizing remittances via MSBs, ECs and MTOs, and equating them with scheduled bank as laid down in Section 111(4) of Income Tax Ordinance, 2001, was challenged through a precise reference bearing C.No.1(1)TP/2017(A), dated March 31, 2021, mainly on four grounds.
First, that all four conditions are to be concomitantly fulfilled and that, prima facie, “prefunded non-resident rupee account and the foreign current account of Overseas Money Service Bureau (MSB), Exchange Companies (ECs), Money Transfer Operators (MTOs) etc. locally maintained with the Pakistani banks, and the subsequent replenishment through SWIFT cannot substitute the strict conditions of Section 111(4) of the Income Tax Ordinance, 2001.
Second, as per Section 2(m) of the SBP Act, 1956, a scheduled bank means a bank for the time being included in the list of banks maintained under sub-section (1) of Section 37 of the SBP Act, 1956, and that MSBs, ECs and MTOs were not scheduled banks as per section 37(1) read with Section 111(4) of the Income Tax Ordinance, 2001.
Third, Honorable Supreme Court of Pakistan in case law titled as Army Welfare Sugar Mills Ltd. and other versus Federation of Pakistan reported and reported as 1992-SCMR-1652 has laid down a couple of fundamental principles of claiming exemption, namely that (a) the onus of proof is on the one who claims exemption, and (b) that “a provision relating to grant of tax exemption is to be construed strictly against the person asserting and in favor of the taxing officer.”
Fourth, it is for Supreme Court and High Courts to interpret law and not the regulators like SBP to do the same.
The FBR further stated that the SBP through Memorandum No. EPD-30-4-2021-97865, dated May 7, 2021, held their ground and have responded to FBR’s afore-cited observations by stating that “to claim exemption under aforementioned clause of Income Tax Ordinance, 2001, a taxpayer receiving home remittances” via MSB and ECs “strictly fulfills all the conditions set in Section 111(4)(a) of the Income Tax Ordinance, 2001.”
The SBP has also gone on to item-wise address the question of fulfillment or non-fulfillment of the four cardinal conditions laid down in the Income Tax Ordinance, 2001.
“The SBP having unequivocally responded to all four critical questions, that is, that foreign exchange ought to originate overseas, must reach and be surrendered to the SBP, and transaction should have a banking trail behind, have been answered affirmatively.”
Moreover, the SBP under the Foreign Exchange Regulations Act, 1947, is the institutions to attend to all matters pertaining to ‘dealings in foreign exchange and securities and the import and export of currency.”
Therefore, the SBP being the frontline regulator of all foreign exchange moving into or outside the country, is in best position to decide as to whether the necessary legal requirements have been met or not of a particular transaction to be able to avail the benefit cover under tax laws.
Foregoing in view, it is clarified, the FBR said, that all cases of claim of foreign remittances be disposed of by according lenient interpretation to the conditions stipulated in section 111(4) of the Income Tax Ordinance, 2001.
“Moreover, in order to win the trust of the taxpayers and spare the public resources for more productive use elsewhere all departmental appeals filed on the strict sensu interpretation of the law, be withdrawn immediately, and no further appeals be filed if on all fours of this clarification.”
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Finance minister urged to allow tax exemption on raw salt sales
KARACHI: Ismail Suttar, President, Employers’ Federation of Pakistan, and Chairman of Salt Manufacturers’ Association of Pakistan (SMAP), while appreciating the people-friendly Federal Budget of 2020-21, appealed to the Finance Minister, Shaukat Tareen to reconsider for exemption raw salt from tax regime.
In an appeal to the Finance Minister, EFP Chief stressed that table salt is considered an essential food item. He added that from 1990, until today, the iodized salt has remained exempted but businessmen producing iodized salt from table salt will have to pay sales tax on table salt and this will be reflected in the retail price of iodized salt.
“Table Salt is produced from raw Sea Salt, Ismail claimed, and Iodized Salt is produced by adding Iodine to the Table Salt. Law forbids marketing of table salt and allows only iodized salt for eating purposes. Therefore, raw salt if taxed will increase the cost of iodized salt and it will be a burden on the common man. So, the raw salt should be exempted from the sales tax regime”, he added.
Ismail Suttar further said that the salt which will be used and supplied as industrial salt may remain taxable because it will not affect the common man. It will be without Iodine so there should be two grades of salt: one iodized and the other non-iodized salt mostly used in industries after proper processing.
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Premature reversal of tax exemption hurt investors’ sentiment: PBC
KARACHI: Pakistan Business Council (PBC) has said that the premature reversal of tax exemption hurt the investor sentiments.
In a letter sent to Finance Minister Shaukat Tarin, the PBC said that the recent reversal of tax exemptions, some which had just a few years to run, and others which were conceptually aimed at promoting scale and consolidation through formation of groups, wider shareholding through listing, and resultant improved governance and formalization of the economy have hurt the investor sentiment.
“We urge you to restore the incentive to list companies, exempt inter-corporate dividends from tax (and from withholding tax), allow corporate players in agriculture to avail the same tax benefits as the unincorporated and restore the tax benefits on income arising from use of intellectual property abroad. The earlier termination of tax credits on investment in plant and machinery also needs to e reversed,” the PBC said.
The business council about the fiscal targets said that a 27 percent increase in the tax target for fiscal year 2021/2022, in an economy forecast to grow at a nominal rate of under 14 percent, with little evidence of improvement in FBR’s capability to broaden the tax base, bodes ill for existing tax-payers.
“Successive governments have lacked the political will to pursue non-taxpayers. Relying on existing taxpayers for additional revenue accelerates the informalization of the economy,” it said.
The PBC has long advocated for the separation of fiscal policy from collection of taxes and for addressing the talent and technology gaps that prevent the FBR from broadening the tax base.
“Unrealistic tax targets is putting the cart before the horse. Taxing the already taxed is akin to killing the goose that lays the golden eggs,” the PBC said.
Fundamental fiscal reforms will take time to deliver, and the benefits will be sustainable. We must not be distracted by short-term targets.
Regarding energy costs, the PBC said that the mooted 27 percent increase in power tariff, on top of the already uncompetitive energy cost, the burden of which will fall entirely on the shoulders of honest customers, is not a growth driver.
The narrative on denying the five main export sectors of energy at a regionally competitive cost and forcing the captive power producers to switch to the grid, reliability of which is yet unproven, does not portend well for exports.
Efforts should instead be focused on fixing the inefficiency and losses of transmission and distribution. Ominously, the delay in settlement of the agreed dues of the IPP’s threatens the gains made on renegotiating capacity charges. Industry, both export oriented and domestic is the engine of employment.
Burdening it with the cost of systemic inefficiencies and cross subsidies to residential users impedes its competitiveness and restricts its capability to create jobs.
Subsidies are best addressed through the Ehsaas Programme. Allow industry to create livelihoods and generate taxable revenues. Facilitate the major export sector through the much-awaited Textiles Policy.
The PBC is encouraged by the State Bank of Pakistan’s differentiated treatment of demand-pull and supply/utility cost-push inflation. However, if the latter causes remain unchecked, there is a high risk of a multiplier effect on core inflation. Higher borrowing costs on this account will also sap growth.
The business council said that the Temporary Economic Refinance Facility (TERF) which lapsed in March led directly to over Rs400 billion investment in plant and machinery and indirectly to an approx. Rs300 billion investment in land and industrial buildings.
This will add jobs, enhance exports, and strengthen “Make-in-Pakistan.” The cost of the interest subsidy will more than be covered by additional tax revenues. At least retaining a version of TERF should be considered for medium sized businesses. Beyond the immediate timeframe, SME and longer-term lending can be taken over by properly configured and resourced development finance institutions which need to be established.
It said that the current fiscal policy discourages incorporation of businesses by levying tax on dividends and subjecting gains on sale of shares to CGT, irrespective of the holding period. Unincorporated businesses escape both these taxes. Manufacturers suffer from taxation at each stage of the value-chain whilst commercial importers benefit from presumptive tax at the import stage. Minimum tax based on turnover, besides being inequitable, also acts as a barrier to entry of new players by increasing the capital investment required to fund the tax liability until their businesses become profitable. Incentives hitherto available to motivate business with the formal sector have been removed.
The PBC urged a comparative study of the fiscal policy affecting corporatization and the manufacturing sector.
The rate at which import tariffs on raw and intermediate industrial inputs is being reduced could be accelerated to promote domestic manufacturing.
Food shortages and inflation risk hunger, unrest and law and order stability. Higher cost of food also reduces discretionary spending, lowering demand, a critical driver of growth. The government should walk the talk on “agriculture emergency,” especially on wheat and cotton. These have the greatest impact on hunger, jobs, and exports.
Impeding investment, cost, and ease of doing business are colonial-era, complex, time consuming, paper-based, and personal interaction-reliant bureaucratic processes. Fragmentation between the federal and provincial authorities has further made doing business more complex – taxation and unharmonized food standards are just two examples. We are encouraged by the government’s resolve under the Pakistan Regulatory Modernization Initiative (PRMI) and Civil Service Reforms to address the regulatory environment. The recent move to unify reporting of federal and provincial GST on a common portal and the Single Window initiative to speed up clearance of consignments portend well for the economy. The Raast and Roshan digital initiatives undertaken by the SBP also hold potential to promote financial inclusivity, visibility, speed, and cost of transactions. The lessons on digital “Know-Your-Customer” can be emulated in the wider economy – in opening of bank and broker accounts, for instance. Supplemented by fiscal incentives, digital transactions would also help broaden the tax base.
The continued bleeding of revenue by State-Owned Enterprises (SOEs) remains a lingering concern. This depletes the amount that the government can invest in socio-economic development. Several attempts to restructure and dispose SOEs have failed. Impeding this process are: PPRA regulations, public sector recruitment rules and fear of action by the National Accountability Bureau (NAB). These and other factors that thwarted the success of Sarmaya-e-Pakistan need to be addressed to arrest the bleeding of SOEs.
Reform of the NAB law is necessary to address the near paralysis of decision making by the bureaucracy. Two examples, from just the critical energy sector are delay in settlement of amounts due to IPPs and decisions affecting K-Electric.