Income Tax: (1) Income tax withheld at the time of realisation of export proceeds: final discharge of tax liability: Sub section 4 of Section 154, Income Tax Ordinance 2001 states that income tax deducted at the time of realisation of export proceeds shall be a final tax on the income arising from the exports or sale to an exporter.
Under section 169(4) a ceiling has been placed on the amount of profit and any profit in excess of this amount is required to be taxed at the normal rate of income tax.
This sub section states that the exporter shall not be entitled to take credit of any sum as is in excess of an amount, which if taxed at the rate or rates other than the rate specified for deduction at source, would have resulted in tax liability equal to the tax payable in respect of income under any of the aforesaid sections.
In order to boost exports, the exporters were provided with incentives like filing a simplified statement instead of normal income tax return.
The normal rate of income tax was also reduced by 75% but this concession was withdrawn through Finance Act 2000 with the result that normal rate of income tax is now applicable to the exporters as well.
The quantum of profit and/or loss depends on a number of factors, and if through effective management an enterprise is able to make profit in excess of the limit prescribed by CBR, it deserves commendation and not condemnation in the shape of penalty ie to pay income tax at higher rate.
The exporter has to pay tax (in the shape of withholding tax) even if the accounts show a loss, and the income tax deducted is not refundable. Therefore to tax deemed excess profit at normal rate is against the cannons of justice, as no refund becomes due in case of loss.
It is therefore suggested that the concept of "deemed excess profit" should be removed from Income Tax Ordinance 2001 and the profit-and-loss as shown in the books of accounts, duly audited, should be accepted and income tax deducted at the time of realisation of export proceeds should constitute full and final discharge of income tax liability.
(2) WITHHOLDING TAX ON EXPORT PROCEEDS: In the budget 2005-2006, the rates of withholding tax on export of dyed fabric was enhanced from 1% to 1.25% which is putting additional burden on the manufacturer-cum-exporters who are already facing fierce competition in the international market.
The withholding tax rate of on exports of Fabric of 1.25% is also discriminatory when compared with 0.5% minimum turn over tax on local sales. It is therefore suggested that the rate of Withholding Tax on export of Dyed Fabric be brought at par with 0.5% turnover tax.
(3) DEPRECATION ALLOWANCE: In order to meet the challenges emerging from globalisation and phasing out of quotas in post-WTO era, the industrial units in Pakistan are in dire need of increasing the pace of investment in Plant and Machinery to compete in the international market. For this purpose depreciation allowance has been given in the Income Tax Ordinance, 2001. It is also a fact that depreciation of any asset depends on its use.
An asset if used for 8 hours per day will remain useful for longer period as compared to the similar asset which is used for 16 hours or 24 hours per day. It was for this reason that in the repealed Ordinance, Extra Shift Allowance was given while calculating depreciation allowance which has been done away with under Income Tax Ordinance, 2001. It is therefore proposed that Extra Shift Allowance may be allowed to encourage investment in the country.
(4) TAXATION OF LOANS GIVEN TO EMPLOYEES: Under section 13(7) of Income Tax Ordinance, 2001 interest-free loans given to employees are to be taxed at the benchmark rate (presently 5%).
The loans to the employees are made to defray personal expenses and other genuine needs, and such loans are normally recoverable through instalments from the salary of the employees. The term loan and advance against salary needs to be differentiated and defined. The loan which does not result in acquisition of tangible assets by the employee should be excluded from this provision.
(5) TAXATION OF INTEREST INCOME OF COMPANIES: The income tax deducted from interest income, dividend income etc at the time of payment by the payers constitutes full and final discharge of income tax if such income is received by individuals. The limited companies are required to pay income tax at the full rate. It is proposed that income tax deducted should be treated as full and final discharge of tax liability in case of all the recipients.
(6) ANOMALY IN CALCULATION OF WITHHOLDING TAX AT IMPORT STAGE: At present the value of the goods imported for the purpose of income tax is reckoned to be the import value assessed by Customs plus the sales tax.
It is an open secret that the sales tax paid at the import stage is adjustable as it is allowable as the input sales tax and, as such, sales tax paid, does not become part of the cost of the goods imported. It is therefore proposed that the income should be deducted at the import value only excluding the amount of sales tax leviable.
(7) RATIONALIZATION OF TAX STRUCTURE AND TARIFF: Present rate of income tax is too high and it needs to be reduced in order to increase the number of tax payers. The rate of tax is higher for corporate entities as compared to the individual taxpayers.
It is also the declared aim of the Government to encourage documentation of our economy and towards this end the corporate sector needs to be encouraged and given incentives. It is therefore suggested that the rate of income tax for limited companies should not be more than 30%.
(8) REDUCTION OF RATE OF WITHHOLDING TAX: It is proposed that the Withholding tax on import of goods may be reduced from 6% to 3.5% Withholding tax on payment of royalty/technical fee may be reduced from 15% to 5%.
The 0.25% increase in rate of withholding tax under section 154 of Income Tax Ordinance 2001 announced last year may please be withdrawn.
(9) FOREIGN/OVERSEAS REMITTANCE: The quantum of foreign remittance has grown substantially in recent years and all these remittances are being received in Pakistan through proper banking channels. The source of such remittance is not questioned when such remittances are received by individuals. It is proposed that similar concession may also be extended to the corporate sector to encourage industrial growth.
GENERAL SUGGESTIONS:
1. Pakistani exporters are facing severe competition in the international market and our survival depends on the quality and competitiveness of our products. The private sector is making all out efforts to become more cost-effective but there are certain elements of cost of production where appropriate measures/action on the part of the Government is required, as discussed below:
COST OF FUEL AND POWER: The prices of electricity and gas are much higher in Pakistan as compared to our direct competitors in textile industry like, India, China, Bangladesh etc. The exporting units have to calculate and decide their export prices with the foreign buyers at least 3 to 6 months in advance of the actual shipment date.
The margin of profit is minimal in view of the competition in the international market. It is also a common practice that the prices of gas and Electricity are increased periodically with the result that the cost estimated by the exporting units becomes irrelevant and the exporting units end up in loss.
It is proposed that Government should take appropriate measures to ensure reduction in prices of Gas and Electricity.
POWER FAILURE: Apart from the fact that cost of fuel and power is higher in Pakistan, there is another problem, which is also directly affecting the exporting units. This the frequent power failure and interruption in the supply of electricity. Gas supply is also disrupted and drop in pressure is also a common complaint. The sudden power failure and failure of gas supply and such interruption for hours ruins the quality of textile products besides damaging sophisticated machinery plant of the manufacturing units. It is therefore suggested that suitable steps be taken to ensure regular supply of electricity/gas to the industrial units.
AVAILABILITY OF WATER: The availability of water is also essential for the textile industry. In Karachi there is acute shortage of water as the Karachi Water & Sewerage Board is not able to cope with the present requirement of industry. It is therefore suggested that steps be taken to increase the availability of water.
No doubt this involves long term planning and as a short term measure it is suggested that supply of water through tankers on payment may be arranged for the industrial units by the Government.
LAW-AND-ORDER: Depleting state of Law-and-Order situation in the country is yet another factor which is likely to impede the smooth running of existing industries and further expansion of the Industrial Sectors. This aspect should therefore be carefully and systematically taken care of.
2. FINAL COST:
The rate of mark-up has gone up and today the industrial units have to borrow funds to meet their working-capital requirements at the rate of about 13-14 % per annum. The rate of mark up on the funds made available to the exporters by the State Bank of Pakistan is 9.00% (SBP share 7% + Bank share 1.50%). This rate is too high and making our products uncompetitive in the international market. It is suggested that the rate of mark up should be reduced substantially. The rate of mark up on export finance should not exceed 5% at the most. This will help in increasing our export volume.
3. LABOUR LAWS:
LABOUR LEVIES: At present various levies like SESSI, EOBI, Education Cess etc are collected by difference departments of Central and Provincial Governments. The employers are also required to keep comprehensive/detailed record for checking/audit by these departments.
In order to make the collection cost effective, it is suggested that all the labour levies should be collected by one agency only at a fixed rate say @ 0.10 % of turnover of the organisation.
COMPANIES PROFITS (WORKERS PARTICIPATION) ACT 1968: This legislation was enacted about 30 years back. With the devaluation of our currency and the impact of the inflationary trend during this period, the monetary value prescribed for capital and fixed assets has become irrelevant.
It is therefore suggested that monetary limits presently laid down in the Act may please be revised in such a manner that the total profit allocated under the Act is distributed to all the employees of the organisation without any restrictions of pay etc.
MULTIPLICITY OF LABOUR LAWS: At present there are a large number of Acts/Ordinances applicable to the industrial units, some of which are named below:
The West Pakistan Industrial & Commercial Employment Standing Orders Ordinance, 1968, the Industrial Relations Ordinance the Workmen's Compensation Act, the Provincial Social Security Ordinance, the Factories Act, the EOBI Act, the payment of Wages Act, the Minimum Wages Ordinance, the Cost of Living Relief Act, the Companies Profits (Workers participation) Act, the Workers Welfare Fund Ordinance, the Shop and Establishment Ordinance, the Employment of Children Act, the Fatal Accidents Act, the Employers Liability Act, the Apprenticeship Ordinance, the Bonded Labour System Act, the Children Education Ordinance.
Periodic visits/inspections are carried out under these laws by various departments and the employers have to keep record prescribed under these Laws and deal with visits queries/objections. It is suggested that these laws may be amalgamated into one or two legislative enactments.
The textile garment exports from Pakistan account for a lion's share in our total export earnings. In order to enable the industrial units engaged in the manufacturing and export of textile garments to meet the post-WTO challenges, it is suggested that this sector be exempt from the application of labour laws. In particular, the following Laws should not be applicable to the textile garment sector: The Industrial Relations Ordinance Workers Compensation Act Social Security Ordinance Employees Old Age Benefits Act Factories Act 1934.
4. MULTIPLICITY OF TAXES: PROFESSIONAL TAX:
The Professional Tax is a provincial levy and is payable to the Provincial Government where the establishments, firms or companies are situated and have their main place of business. If a company situated at Karachi supplies goods to a Government department/procurement agency located in the Punjab, a certificate/proof of payment of professional tax to the Government of the Punjab is demanded by such departments before making payment of the bills even if such a company does-not have any branch or sub-office in that province. The company has thus to pay Professional Tax to two Governments. It is therefore suggested that professional tax paid by a company to the Provincial Government where its registered office and/or principal place of business is situated, should be treated as full discharge of professional tax liability by all Provincial Governments.
PLIGHT OF SMES:
Small and Medium Enterprises happen to be the backbone of the Trade and Economy of Pakistan, or any other country for that matter.
It is the SME sector alone which provides consumer goods to domestic consumers all over, and job opportunities to the teeming millions on one hand, and keeps the Industrial and Commercial Sectors of the country glued together for overall economic development. But for reasons quite obvious, the SME Sector is being neglected by the Policy Makers, and meted out a step-motherly treatment, with the result that the middle-class consumer is gradually stepping down below poverty line while a number of hitherto organised SMEs, eg the Powerloom Sector in Faisalabad and Gujranwala, Cutlery Factories in Wazirabad and the Small Engineering Sector in Karachi, Lahore, and Faisalabad, are dying a natural death.
Before we put up certain proposals and suggestions for the betterment of SMEs, let us have a bird's-eye-view of the causes of the ongoing malaise. In our considered opinion, the affliction of SME, can be attributed to the u/m causative factors:
ABSENCE OF "SME CULTURE"
Ever-increasing cost of doing business.
Decline in the purchasing power of the consumers and elimination of the middle-class.
Pakistan's economy is rapidly transforming into the World Trade Order in the ongoing scenario of globalisation. In a frantic endeavour to switch over to the New World Order, we must not lose sight of the traditional set up. We should no doubt switch over to mechanisation, but not at the cost of human labour. To train our unskilled and semi-skilled labour, we must not lose sight of the aspect of HRD. The process of transition should be gradual and systematic. While developing the SME sector, we must not forget the Cottage Industry sector. This is real "SME Culture".
While talking of the escalating cost of doing business, the main culprit under this head is the rapidly escalating cost of industrial Inputs like electricity and gas charges. Our short-term and long-range planning for augmenting our production of these essential inputs should not be hypothetical or notional: it should be realistic and pragmatic.
ENVIRONMENTAL PROTECTION:
Environmental protection and pollution control has been perhaps the most outstanding challenge posed to textile manufacturers and exporters of Pakistan after the promulgation of WTO regime. Our buyers in EU had declined to import textile products from world sources way back in 2002 which are not covered by ISO certification (ISO-9000 and 14000). Whereas the Textile Processing Sector (viz APTPMA) has all along been endeavouring to introduce and develop the ambitious programme of "Cleaner Textile Production in Pakistan" jointly sponsored by UNIDO, UNDP and the Govt of Netherlands, regretfully, however, no appreciable headway has been witnessed so far, due partly to lack of infrastructure and finances, and partly to inadequate government support and co-ordination.
All Pakistan Textile Processing Mills Association had signed a Memorandum of Understanding with the Royal Netherlands Embassy of Pakistan during July 1998. Consequential to this MoU, APTPMA established a sophisticated Testing Laboratory in Karachi in collaboration with the Govt of Netherlands. This laboratory is still providing the facility of Eco-Label Testing of international standard to textile processing and manufacturing units at concessional rates.
During the year 1999, UNIDO embarked upon an ambitious programme of water treatment under the name and style of "CLEANER TEXTILE PRODUCTION IN PAKISTAN" worth US $42.0 million in collaboration with UNDP and the Govt of Pakistan which was planned to be formally handed over to APTPMA on 30th October 2001 by Dr Rober G. Gumen, the then Country Director of UNIDO in Islamabad. The project could, however, not fructify, and had to be abandoned, due to a number of administrative impediments and practical difficulties. During this period, nonetheless, APTPMA had successfully arranged a series of training workshops at Faisalabad, Karachi and Lahore for dissemination of knowledge about Eco-Label testing of hazardous Azo-dyes, besides holding a training workshop for Dye Masters at the National College of Textile Technology in Faisalabad. In January 2001, a Mini Pre-Testing Lab was set up at Faisalabad by APTPMA on self-help basis.
Earlier, a country-wide survey of textile processing units was conducted by FPCCI in 1996 under the Environmental Technology Programme for Industry (ETPI) to evolve health-aiding and pollution-free technologies in Pakistan over a period of 5 years in collaboration with the Textile Processing Sector and the Dutch Govt, through a consortium of five foreign and Pakistani Consultants. ETPI prepared a detailed survey Report after repeated inspections of three representative textile processing units in the country, but no further news was made available to us by ETPI or FPCCI who appear to be working half-heartedly in isolation.
Yet another ambitious project for Environmental Protection was undertaken by the Asian Development Bank (ADB) in June 2003 under the name and style of Industrial Efficiency and Environmental Sector Project for the establishment of six Common Effluent Treatment Plants (CETPs) and two hazardous Waste Handling Facilities (HWHF) in various regions of Pakistan for which a substantial amount of US $100.00 million has been earmarked over a period of five (5) years. Our Association tried to closely associate itself with the ADB Project. After participating in the initial meetings and deliberations, we sent a detailed letter to Director General Environment Islamabad on 07th November 2003 wherein we had tabled the following suggestions with the request that our recommendations may be forwarded to the Federal Minister of Environment:-
Equity rate of contribution may be altered from 60:40 to 80:20 so that the private sector units/organisations with limited means may have to pay 20% instead of 40% and the remaining 80% may be borne by ADB.
The duration of the Project may be enhanced from 5 to 15 years to ensure sustainability.
An amount of 10% out of the project loan may be set aside and placed at the disposal of the unit/organisation concerned for in-house/initial water treatment prior to its disposal in the larger external outlet.
Instead of installing costly water treatment plants on individual basis, small and medium textile processing units may be encouraged to install collective treatment plants on Community/Cluster basis which would be more economical.
An amount of 20% of the project cost may be utilised by the stakeholders for disposal of sludge where no shallow land is available for "land-fill".
Mark-up ratio may be reduced from 6.5% to 5% because the Mission has to pay only 1% to ADB. Besides the above cited suggestions, we also submitted the u/m additional recommendations.
Instead of importing sophisticated water treatment and recycling plants at huge cost, we should try to procure inexpensive technology from friendly countries like Korea, China, Taiwan and India, and/or to develop inexpensive indigenous technology. For the sake of dissemination of knowledge, services of electronic media may be provided by the Govt.
Environmental Protection Act 1997 may be withdrawn and got repealed through Act of Parliament as it has become out-dated and its penalty clauses are too harsh and impracticable. Before repealing the Act, concerned stake-holder may be duly consulted.
Registration under ISO-14000 may be further facilitated through additional incentives and simplification and streamlining of the existing procedure.
But as ill luck would have it, we did not get any response to our letter either from the Directorate General or Ministry of Environment. In view of the paramount importance of Environmental Protection during the ongoing WTO scenario, therefore, we suggest that instead of half-baked sporadic attempts, a properly concerted and co-ordinated line of action may be adopted under personal supervision of PM Shaukat Aziz or the Federal Minister Environment after taking all the concerned stakeholders into confidence.
(Concluded)
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