Institute of Cost and Management Accountants of Pakistan on Monday asked the Federal Board of Revenue not to impose Value Added Tax until the unorganised sector is fully documented. In the absence of an efficient, transparent and tested refund mechanism, it would create opportunities for unethical business environment based on bogus claim and wrong declarations under the VAT regime.
The institute has conveyed its reservations over imposition of new tax collection system to the Ministry of Finance, the FBR and other concerned through its proposals for budget 2010-11. The institute feels that the imposition of VAT before a properly documented economy may lead to massive shortfalls in revenue collection. It is recommended to continue existing general sales tax system.
The institute said that the high rate of sales tax encourages evasion. Low tax rates would encourage greater compliance and reduce cost of doing business in the formal sector. The institute had proposed gradual reduction in sales tax. It is strongly recommended to gradually reduce the corporate tax rate also.
It said that the rate of the corporate income tax in the country is much higher as compared to the regional and global rates. As compared to the highest tax rate of 25 percent, the non-corporate sector is becoming a big incentive for convergence of the limited company culture into partnerships and proprietorships institutions.
Therefore, it is strongly recommended to reduce rate of the corporate income tax by 1 percent per year over the next 5 years. Regaining competitiveness of the industrial and services sectors like China and India, there is need for the technology and machinery upgradation.
Investment tax credit would not only help the industry to regain lost domestic market share, but also allow to compete with regional players in the international market. Corporate sector should be allowed an investment tax credit as was the practice in the past (Section 107 A 4 of the income tax ordinance 1979). The institute proposed the investment tax rate should be 25 percent. In the current budget, the Indian government has allowed Research and Development (R&D) sector big incentive. For pharmaceutical sector weighted deduction of capital expenditure incurred on in-house R&D has been increased from 100 percent to 200 percent.
The budget does not carry any provision in the taxation laws, which allows the deduction in respect of insurance premium paid towards a health insurance policy for self, spouse and dependent children. Whereas to encourage healthy society, the Indian government has announced a deduction of approximately Rs 50,000 in respect of dependent parents, spouse and the children.
To offer relief to the salaried class and to meet the recent hikes in the prices of the utilities and food items, the utilities allowance for the computation of the tax should be increased from 10 percent to 25 percent. There's need to offer a deduction of cost of living at the rate of 20 percent of the taxable income.
In order to provide the level playing field for the organised sector and to increase the government revenues while at the same time helping to reduce the impact of undervalued imports, the commercial importers be brought into normal tax regime and till accomplishment, the previous rate of presumptive tax of 6 percent be reintroduced, the institute said.
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