The Institute of Chartered Accountants of Pakistan (ICAP) has said that in principle, there should not be any exemption of capital gains, therefore, separate slab tax rates be introduced for capital gains based on the period of holding.
Five percent for holding period above 12 months and 20 percent for short-term gains. Capital gains on capital asset, held for long-term investment, may be provided exemption, say over five years.
The ICAP has suggested that all persons, in principle, be taxed on net income basis, for which, all corporate sectors be taken out of the presumptive regime.
In pre-budget suggestions for 2007-08, ICAP said that in order to broaden the tax base it was necessary to provide incentive to the normal regime and abolish withholding regime for corporate sector. The present system promoted non-documentation of economy, it added.
The ICAP said the presumptive system of taxation should be abolished for exports, which may be exempted from tax (zero rate). However, there was a need for record income, expenses, assets and liabilities. Under the present scheme of taxation, there is an apparent scheme of implied whitening of untaxed money. The ICAP suggests announcement of a timeframe by which this scheme will come to an end from July 1, 2008.
Rules be devised as to which remittance would be exempted from scrutiny subject to evidence. However, if this system needs to be continued, then as a transitional measure exemption be limited to funds invested in plant and machinery and productive business assets only.
The ICAP also suggested that provincial capital gain tax with a low rate be reintroduced on the sale of immovable property. While the rate of capital value tax (CVT) introduced last year be rationalised as collection from it is not at par, to what was expected at the time of its introduction. Further, the valuation table needs to be reviewed again in order to achieve the objective.
To encourage equity participation, the provision of thin capitalisation as provided under Section 106 to non-residents should also be made applicable to resident companies in line with other relevant laws that is prudential regulations issued by the State Bank of Pakistan (SBP). The CBR should introduce a valued customers' card, associating certain privileges, to all persons who have paid taxes above a certain limit.
The ICAP also suggested that audit of the taxpayers be conducted in relation to the purpose. The audit for other purposes should also be focused on specific objectives and mandates and finalisation of audit to be time bound.
A special schedule be introduced for laying down manner of taxation of banks and other institutions as were available for the insurance and petroleum and mineral resources sectors, the ICAP proposed. For example at present, there is no specific and detailed mechanism for the determination of bad debts in the case of a bank. The lack of this mechanism leads to maladministration.
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