Taxable profit: Shift from 1pc FTR to 29pc will be disastrous for exports: KCCI
KARACHI Policy Research and Advisory Council (PRAC) of Karachi Chamber of Commerce and Industry (KCCI) has noted that the proposed shift from a 1% turnover-based FTR to the standard taxation at 29% of taxable profit would prove to be disastrous for exports. Historically, the FTR has offered a transparent mechanism for taxing export proceeds, and its removal may result in exporters being subjected to the super tax, which was previously not applicable under the FTR; therefore, it must be removed from Finance Bill 2024.
In comprehensive analyses of the budget, PRAC has noted positing and negation measures adopted in the budget. The negative measures include:
Removal of Local Supplies from the EFS. The Finance Bill 2024’s proposal to eliminate zero-rating on local supplies under the Export Facilitation Scheme (EFS) will have significant adverse effects. Removal of zero-rating on local supplies to registered exporters will compel the exporters to claim refunds of Sales Tax from FBR which is a lengthy process which is contrary to the spirit of EFS.
Modification in Definition of Fraud. The definition of fraud has been changed, enabling the officials to seek records of up to 15 years to prove innocence in case of any allegation of fraud which would not be possible to comply as under the previous definition, taxpayers have been maintaining records for a maximum period of 6 years so they will not be in a position to produce records older than 6 years. The new definition of fraud, which is yet another way to grant discretionary powers to FBR, should be withdrawn and the officers should only be allowed to seek explanation or take any action strictly as per previous definition.
Tax Rate for Non-Salaried Individuals. For non-salaried individuals and AOPs, the maximum rate has been enhanced from 35% to 45%. The decision to raise tax rate up to 45 percent would force a substantial number of individuals and AOPs to exit from the tax net. Current threshold of Rs.600,000 has largely affected non-salaried class such as small shopkeepers, traders and SMEs forcing them to become non-filers. Threshold of taxable income should be raised from Rs.600,000 to income exceeding Rs.1.0 million, in view of high inflation and increase in cost of living. In addition, the tax rate for salaried individuals remains capped at 35% which introduces a horizontal inequity, as it places a disproportionate tax burden on non-salaried individuals compared to their salaried counterparts.
Investigative Audits. A newly added concept of ‘Investigative Audit’ under Section 25 of Sales Tax Act, 1990 mentioned a general concept of investigation and inquiry related to audits. Now, FBR will have the authority to conduct investigative audits if, based on the balance of probabilities, it suspects a taxpayer of being involved in tax fraud. The investigative audit can be initiated even with the approval of the assistant commissioner. Even unintentional omission or error will be subject to fraud, proven otherwise.
No Cut in Government Expenditures. Budgetary measures lack government’s plans for bringing down the exorbitantly high government expenditures which were being financed through borrowings from domestic banks, creating an unbearable burden of interest payments of trillions of rupees against the domestic debt, particularly in a situation when the key interest rate stood at 22.5 percent.
Lack of Supportive Measures for Businesses. No concrete relief measures have been provided to businesses, such as super tax reductions, minimum turnover tax adjustments, or further tax reductions. These factors contribute to the overall cost of doing business and have a dampening effect on investment.
Unrealistic Revenue Targets. The shortfall in last year’s tax collections by Rs. 2,152.5 billion casts doubt on the feasibility of achieving a 40% increase in the tax target for FY25. This goal seems overly ambitious, especially in the absence of significant tax or energy reforms.
High Proportion of Budget Allocated to Debt Servicing. Debt servicing is projected to consume 94.2% of the net federal revenues for the upcoming year, implying that virtually all other government expenditures, including defense, pensions, and civil administration, will likely need to be financed through increased borrowing, predominantly from external sources. Current volume of domestic debt has reached an alarming level of 85 percent from commercial bank which has made it impossible for SMEs to avail business financing from banks.
Increased FED on Cement. The increase in FED from Rs. 2 per kg to Rs. 3 per kg on cement is likely to negatively impact the growth of the construction industry, which is already facing multiple challenges. This increase will lead to higher construction costs, affecting both commercial and residential developments.
Surge in PDL. A 33% hike in the Petroleum Development Levy (PDL) from Rs. 60 to Rs. 80, along with increases in other levies, is expected to intensify inflationary pressures. This reliance on indirect taxation can reduce savings rates, deter investment, and dampen economic activity overall.
Proposed GST on Essential Food Items. The government has proposed imposing an 18 percent General Sales Tax on milk (PCT heading 04.01) and fat-filled milk (PCT heading 1901.9090) in the Federal Budget 2024-25 which are currently zero-rated. The proposed bill seeks to eliminate this zero-rating benefit, making these goods subject to an 18% sales tax. However, milk not sold under a brand name will be exempt from this tax. As milk is a basic consumable item, removing exemptions and imposing an 18% GST is expected to further fuel inflation
Capital Gain Tax on Securities. Capital gains tax on securities will be 15% for filers, while non-filers will be subjected to taxes up to 45% under different slabs, irrespective of the holding period. The withdrawal of the holding period for the levy of Capital Gains Tax will be detrimental to the capital market, which saw the revival of foreign portfolio investment.
Import Duties on Paper Products. The increase in import duties on paper products will likely further burden the local printing industry, which is already unable to meet demand with domestic production. This could lead to higher costs for consumers and continued reliance on imported printed materials.
Shift of Local Mobile Phone Assembling from Reduced Rates to Standard GST. The removal of fixed sales tax on locally assembled mobile phones, replaced by a standard 18% tax, would negatively impact the nascent local mobile phone industry, affecting its growth and competitiveness.
Removal of Surgical and Medical Equipment from the 6th Schedule. Surgical instruments, tools, equipment and medications required in Cardiac surgery, Neurovascular Electrophysi-ology and Angioplasty etc. (Serial No.112 of the 6t Schedule of Sales Tax Act) have been omitted from 6th Schedule and added to 5th Schedule. Consequently, the said surgical instruments and tools will be subject to standard rates of Customs Duty, Sales Tax and WHT making the surgical treatment very costly for average citizens.
Removal of Medical Supplies to Charitable Hospitals from the 6th Schedule. Goods used in medical treatment supplied to charitable hospitals (S.No.166 of 6th Schedule) have also been removed from the scope of 6th Schedule and added to 5th schedule which will make the essential medical supplies very costly for charitable hospitals which are serving the poor patients and working for a noble cause. While the government hospitals are unable to provide essential medical services to a population of 240 million, at least the charitable hospitals are providing much needed treatment to the poor.
Concession on Sales Tax on Imported Waste & Scrap of Plastics. The Finance Bill 2024 proposes to include Waste and Scrap of Plastics into the 11th Schedule thus giving concession in Sales Tax on imported garbage. While the provincial governments of Punjab and Sindh have announced restrictions on production of Plastics bags of a specified thickness in order to protect the environment and clogging of drainage and other environmental issues but on the other hand, the Finance Bill 2024 has allowed the massive influx of Plastic Waste.
Increased GST on Tier-I Textile & Leather Retailers. Elevating the General Sales Tax from 15% to 18% for Tier-I retailers in the textile and leather sectors could exacerbate existing industry struggles, particularly as the textile sector has already seen a contraction of -8.3%. This could lead to increased inflation and reduced competitiveness in domestic and international markets.
Removal of Vegetable Imports from 6th Schedule. Vegetable imports from Afghanistan out from 6th schedule which needs to be reversed as sometimes both countries face shortage of numerous commodities including tomatoes, potatoes and onions; etc., in their markets which are imported from Afghanistan and also exported from Pakistan. Removing vegetables from the sales tax regime means that the prices will increase by 20 to 30 percent. As these were very sensitive consumer items, therefore, vegetables should be reversed back into to 6th Schedule.
Copyright Business Recorder, 2024
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