Multiplicity of taxes heavily burdening industrial sector

ISLAMABAD: Nineteen to twenty different federal and provincial taxes are currently levied on industrial sector/manufacturing units, increasing their cost of doing business in Pakistan.

A senior official of the Federal Board of Revenue (FBR) told Business Recorder that the multiplicity of taxes at the federal and provincial level has created serious problems for the industrial sector in the country.

The claim by the manufacturing sector is that while their share in Gross Domestic Product (GDP) is 20 percent yet their contribution in taxes is over 60 percent. In-depth research revealed that except corporate income tax, all remaining federal/ provincial taxes are indirect taxes collected in the sales tax mode - taxes passed onto the consumers and thereby contributing to inflation.

Industrial sector slams SBP for keeping policy rate unchaged

According to an estimate, the contribution of corporate income tax in total tax collection is nearly 35.87 percent.

Three types of corporate taxes are applicable on manufacturing or industrial sector with the manufacturer/ industrial unit paying the highest of these three corporate taxes: (i) 29 percent corporate income tax on their normal profit; (ii) 17 percent Alternate Corporate Tax (ACT) on gross profit; and (iii) 1.25 percent minimum tax on the turnover payable for certain categories of manufacturers.

Official told this correspondent that practically 90 percent of corporate entities pay turnover tax.

Details of other taxes applicable on manufacturing/ industrial sector included Super Tax (1 to 10 percent) applicable on income of over Rs 150 million to Rs 400 million. However, the newly elected Finance Minister recently stated that he is not in favour of the super tax though any decision he may make in this regard would be part of the finance bill for next year.

The standard rate of 18 percent sales tax is applicable on the manufacturing sector and “further sales tax” at the rate of 4 percent is applicable in case of supplies made by manufacturers to those who are un-registered.

The manufacturing/ industrial units also act as withholding agents as per FBR declaration with no compensation given, which increases their cost of doing business. Withholding tax is chargeable on electricity consumption: in the event that monthly electricity bill of an industrial consumer exceeds Rs20,000 the rate of withholding tax would be Rs 1950 plus 5% of amount exceeding Rs. 20,000.

Five percent withholding tax is applicable on payment of goods, services and contracts.

In addition, sales tax is levied at the rate of 18 percent on electricity and gas bills of manufacturers/ industrial units.

FBR also levies customs duty, withholding tax and sales tax on import of raw materials and inputs consumed in the manufacturing of finished products.

The federal Excise duty (FED) is paid by certain categories of manufactures -cigarettes, beverages, locally-manufactured vehicles and other non-essential items.

Sales tax under section 8B of the Sales Tax Act is also payable by industry which is not allowed to adjust input tax in excess of 90 per cent of the output tax for a particular tax period. The remaining 10 percent sales tax has to be paid by these entities.

Manufacturers/ industrial units are also bound to obtain provincial sales tax registration and pay provincial sales tax (13 percent to 15 percent as per the rate levied by each province) on services and are required to pay Workers Welfare Fund (WWF)/ Workers Participation Fund (WPF)/ EOBI.

There are social security and old age-related payments, as well as, provincial and local taxes including property tax, stamp duty and Zila tax. The Infrastructure Cess (1.20 to 1.25 percent) is also a provincial tax and charged on total value of goods.

Other provincial/ local taxes include municipal corporate tax, professional tax, labour levies and employees’ social security.

Small and medium enterprises (SMEs), defined as one engaged in manufacturing of goods whose business turnover in a tax year does not exceed Rs 250 million, are classified into the following two categories, and tax on taxable income is required to be computed at the following rates:

(i); Category-I: 7.5% of the taxable income, where annual business turnover does not exceed Rs 100 million.

(ii); Category-II: 15% of the taxable income, where annual business turnover exceeds Rs 100 million but does not exceed Rs 250 million. The SMEs can also opt to be taxed under the final tax regime (FTR), an option required to be exercised at the time of filing the return, which will be irrevocable for three tax years. SMEs that opt to be taxed under the FTR shall not be subject to tax audit.

The category-wise rate of tax under the FTR is:

(i) Category-I: 0.25% of the gross turnover, where annual business turnover does not exceed Rs 100 million.

(ii) Category-II: 0.5% of the gross turnover, where annual business turnover exceeds Rs 100 million but does not exceed PKR 250 million.

Minimum tax on turnover does not apply to SMEs.

Copyright Business Recorder, 2024