Income Tax Amendment Bill 2021: Several exemptions under CPEC proposed to withdraw: expert

ISLAMABAD: International tax expert Dr Ikramul Haq has said that the proposed Income Tax Amendment Bill 2021 submitted to the National Assembly has proposed to withdraw some existing and many futuristic exemptions under the China-Pakistan Economic Corridor (CPEC).

Speaking as a guest in “Paisa Bolta Hai” with Anjum Ibrahim on Aaj News, here on Sunday, Dr Haq explains that the exemption of Thar Coal project is proposed to be deleted under the said Bill. The proposed withdrawal of First Year Allowance in the Bill would hit many capital intensive industries, and many Chinese companies committed to come for many corporate-related benefits may reconsider their plans as initial depreciation on plant and machinery used for the first year has already curtailed to 50 percent. These actions will harm new industrial investment in Pakistan.

He stated that the government has retained exemption granted to the Chinese company operating in Gwadar, but the companies support to it will get no concession and pass the burden of the port operator. There was no need to bring a Bill effective from July 1, 2021 in March instead as part of the regular Annual Finance Bill along with the Budget for fiscal year 2021. The need for urgency is not understandable when the Bill has not to take effect immediately. No public debate and consultations are held with stakeholders likely to be affected by the proposed changes in the Bill. This is undemocratic as well as against the spirit of the Constitution, Dr Ikram said.

He stated that it is a matter of concern to withdraw exemptions granted to the successful Chinese projects. On the other hand, the income tax exemption available to the existing Independent Power Producers (IPPs) would continue and only new plants established after June 30, 2021 will be taxed.

He said that the government is continuing exemptions where they have their own interest, but some CPEC-related projects [considered as game changers] and also those to be executed on the basis of joint ventures between Chinese and local companies have been targeted. The sunrise industries with innovation, especially SMEs, are discouraged to earn billions of dollars through IT and IT-enabled exports due to cumbersome procedures.

He said that the government instead of giving relief to all industries and businesses, making them unviable to survive. Huge tax expenditure in income tax is due to enormous tax-free benefits to the big segments and not because of industries that are providing jobs even in difficult times.

International tax expert stated that it is a prior condition of the International Monetary Fund for release of US$500 million to withdraw tax exemptions and concessionary rates. The same could have been made part of regular budget exercise to determine their overall impact on the economy and challenges faced due to Covid-19 pandemic.

He said that the Federal Board of Revenue (FBR) for the first time gave item-wise analysis of the tax expenditure for 2019-20. Prior to this, there was a small analysis of tax expenditure as chapter in the Economic Survey every year.

On the sales tax side, the Bill has proposed to impose 17 percent sales tax on Liquefied Petroleum Gas (LPG) imports and its local supplies LPG from July 1, 2021.

The proposed Bill has withdrawn many tax credits. For example, the government has also proposed to withdraw tax credit to companies who are offering jobs to young graduates. The credit-based exemptions being withdrawn during the current situation of unemployment and Covid.

Dr Ikram stated that the IT sector is already facing heavy taxation at the time of input like 19.5 percent provincial sales tax; 12.5 percent advance income tax and 10 percent activation charges that will be promised to be reduced gradually. The Ministry of IT and other ministries are very supportive in view of futuristic challenges being faced by the IT sector.

International tax expert said that the FBR is still not able to clear Rs50 million refunds despite clear directions from the Prime Minister issued many months back.

It is unfortunate to see that the FBR is collecting 95 percent of its direct taxes revenue from withholding taxes, advance tax and tax with returns, and remaining 5 percent with their own efforts.

Dr Ikram suggested that a simple Inland Revenue Service (IRS) code is needed for the taxpayers to avoid repetitions and complications in various federal tax laws, except customs duty that should also be reduced to maximum of 5 percent. Where there is local production of the same goods, the regulatory duty can be imposed to protect domestic sector. A tax intelligence system is needed by curtailing the discretionary powers of the tax officials and facilitates taxpayers through one-window operation.

Chairman Pakistan Software Houses Association Burqan Saeed stated that the government intended to take IT sectors into the tax credit regime which has totally failed in case of non-governmental organisations (NGOs). It seems to be an attempt to stop this sector from further growth. The proposed tax credit scheme for the IT sector is so complicated that even chartered accountants have failed to understand the same.

He stated that IT & IT enabled service sector has given record exports growth despite the pandemic with 40 percent increase in 2019-2020 and is on track to exceed $2 billion by the end of this financial year.

He quoted Bangladesh where the IT sector has not only been granted tax exemption, but also 10 percent cash rewards/rebate. On the other hand, the replacement of exemption with the tax credit scheme would only result in harassment to the IT sector by the Commissioners Inland Revenue. The IT sector would receive different kinds of notices by the FBR’s field formations. The conditions to register with sales tax of provincial authorities and filing of withholding tax statements are unnecessary for this sector. If the IT sector is not being facilitated in taxation matters, people would move to countries like Bangladesh.

He questioned what would be the future of freelancers and small IT service providers who are unable to hire tax consultants for maintaining documents under the proposed tax credit scheme.

Burqan Saeed stated that the documentation of the IT sector is evident from the fact that we have to first register with the Securities and Exchange Commission of Pakistan (SECP), then Federal Board of Revenue (FBR) and all provincial sales tax authorities. Besides, we have to register with the EOBI/social security/disability programme and operate under the provincial laws and pay local taxes like stamp duty. Now they are proposing income tax on IT and IT enabled services.

President Federation of Pakistan Chamber of Commerce & Industry (FPCCI), Nasir Hayat Magoo stated that the government should have consulted the stakeholders before withdrawal of income tax exemptions through a Bill. The FBR should have discussed the proposals with the concerned industries and sectors.

He added that the government cannot only rely on the five major export oriented sectors and need to facilitate other sectors as well.

The FBR should stop harassing the businessmen due to discretionary powers of the tax officials, said President FPCCI.

Copyright Business Recorder, 2021