Budget proposal for amendments Income Tax Ordinance, 2001: The existing Tax to GDP ratio is substantially low. The FBR has put efforts to increase the ratio; but all the efforts are aimed at increasing the tax collection from the existing taxpayers, rather than broadening the tax base.
The fact remains that the number of taxpayers is very small, as evident from the number of tax returns being filed. Therefore, it is proposed that efforts should be made to increase the tax base and not to further burden the existing taxpayers. Some suggestions are as follows:
1. Holding of NTN: National Tax Number should be made compulsory
I) For sale/purchase of the property and other assets involving Rs 1000,000 and more.
II) For all new and existing commercial electric and gas connections.
III) For every business premises/commercial activity/other services within the area of municipality/development authority/cantonment board having utility bills ie electricity, gas and telephone/ mobile of Rs 50,000 or more per year.
IV) For the persons maintaining foreign currency account/having fixed deposit of more than one million other than widows/ retired service men.
V) Persons having utility bills ie electricity, gas and telephone/mobile of Rs 75,000 or more per year.
VI) Persons having property more than one house, plot, shop ie other house/plots, shops etc.
2. New NTN: The current procedure of getting NTN has been made a cumbersome process, and should be made easier in line with NADRA issuance of ID cards. Integration of data between NADRA, SECP and the FBR is required for identification and registration of all companies, proprietorship, private or public.
3. Tax on agricultural income: As the agricultural sector is Pakistan's largest sector, it is once again suggested that agricultural income should be taxed, either by the federal or provincial governments. However, the tax rate should be nominal.
4. Tax on real estate business: In recent years, a large number of people have earned from the real estate business but without contributing to the national exchequer. It is suggested that tax should be imposed on real estate business and the capital gain on such transactions.
5. Tax on wealth: In last decade, people have made money from many sources and it has added to their assets many times. It is suggested to levy tax on wealth @ 2.5% on all moveable/immovable liquid assets of a person, excluding such business assets, whose income is already taxable. It is important as it will add to direct taxation and lessened the inflationary impact. There is a need to devise methodology for valuation of assets and back it up with proper legislation to recover the accurate and reasonable tax from this segment.
6. SELF-ASSESSMENT SCHEMES Self-assessment scheme be introduced as was provided in the repealed ordinance. That persons declaring more income ie 30% as compared to last year's declared/assessed income, provided there is no induction of capital and enhancement in production/service capacity. Further, such taxpayers be exempted from the audit proceedings.
7. Audit of Taxpayer U/S 177: Under that provision, if audit is carried out with true spirit of law, this can help a great deal to enhance our tax to GDP ratio and compliance of withholding taxes keeping the country improve the shares of direct taxation, which will ultimately reduce indirect taxation along with reducing the inflationary pressure.
It is suggested to conduct the audit of all cases, except the cases under self assessment, filed with 30% increase in income to last year declared income/assessed income. Five to ten percent cases be outsourced to Chartered Accountants and Cost and Management Accountants. Continuity of this practice will improve:
i) Revenue - 100% (within three years)
ii) Compliance - 40% (within three years)
iii) Documentation - 40% (within three years)
Documentation of economy is the foremost requirement of a country for better management of its incomes and expenditures.
SOME SPECIFIC ISSUES THAT NEED TO ADDRESSED:
a. FBR Web portal: FBR has almost successfully automated system for filing of returns etc, but at the same time some problems are being faced by the users. The changes in the tax laws are made so frequently that the systems are not upgraded accordingly or if upgraded these systems are not tested with respect to practical problem of the users. It is proposed that system should be tested properly with the help of professional experts so that such problems may not arise.
b. Wealth Statement, Section 116: To keep track record of sources & disposals of individuals, it is proposed that the wealth statement with every income tax return should be made compulsory irrespective of quantum of income.
c. Appeals to the Commissioner, Section 127: Currently, Section 127 specifies the sections of orders against which an appeal can be filed before CIT (A), the scope of this section should be enhanced. Reference to section 123, 124, 152(5A) and 159 needs to be inserted in section 127 to make these orders appealable before CIT (A).
i. Delay in decision/appeals: Delay in ultimate decision by the appellate authorities and their quality is a hurdle in the development of tax base. Therefore, the quality and capacity of the first stage of appeal needs to be improved.
Further, the Commissioners (Appeals) are under the administrative control of Federal Board of Revenue which affects fair justice. The Appellant Forums be placed under an independent authority to provide fair justice to the taxpayers as well as to the tax collection agency.
d. Withholding taxes and final taxation, Section 153: FBR has been claiming to increase the corporate culture and documentation in the country, whereas on the other side, the FBR is increasing the preview of Presumptive Tax Regime (PTR) which discourages the corporatization and documentation. Under PTR the taxpayer is not required to assess their tax payable on the basis of what they have earned during the year but merely the tax deducted at source is considered as full and final tax liability. By definition the Income tax is a direct tax based on the quantum of income earned by a taxpayer during an income year. But PTR is a clear contradiction to the basic principle of the income tax. Further, withholding of taxes on payments is creating incompetitiveness among the corporate and non-corporate taxpayers. Therefore, it is proposed that FBR should discourage the PTR regime and there should be a harmony among the taxpayers for deduction of tax at source irrespective of their registration status.
e. Tax on Transport Services as a Final Tax, Section 153: There is an anomaly in the tax law for treatment of withholding taxes for the transport services as services under Section 153 (1)b and definition of services under subsection 9 of section 153 does not include such services whereas the rates given in the First Schedule for Transport Services refer to the same subsection. Therefore, the treatment of tax withheld against transport services for private limited companies need to be reclassified. It is proposed that the anomaly be removed.
f. Exemption Certificate from withholding tax under Section 153: Currently, a taxpayer may obtain exemption certificate from tax withholding under Section 153. The exemption scope may be enhanced to other withholding tax provisions because in case of manufacturers whose major business activity is exports and tax on exports is final tax. But withholding tax charged under different provisions especially on electricity bills becomes refundable. The exemption will facilitate to such manufacturers cum exporters.
g. Rates of Taxes on Income from Property -Section 15 and Section 155: The income from property is treated as separate block of income and is subject to final taxation.
It is proposed that the income from property be brought into the normal tax regime. Further, the expenses on properties like repair and maintenance, property taxes be made admissible expenses.
h. Withholding Tax on Cash Withdrawn Section 231A: The rate of withholding tax under section 231A on cash withdrawn was initially introduced @ 0.1%, which was gradually increased to 0.3%. It is proposed that in order to encourage the business activities it should be reinstated at 0.1%, and the threshold amount be enhanced from Rs 25,000 to Rs 50,000.
i. Withholding Tax on Electricity Consumption -Section 235(4): Presently, the tax collected on the electricity bills of taxpayer other than a company is minimum tax. Up to bill amount of thirty thousand rupees per month on the income of a person and not refundable, which is against the principles of justice. Excess amount paid by the taxpayers should be refundable like companies.
J. RATE OF TAX For companies presently rate of income tax for all companies is 35 percent. The present rate of 35 percent is the highest as compared to other countries. China operates with the rate of tax of around 15 to 20 percent. India, Bangladesh, Malaysia and Thailand have brought down their rate of taxation for the corporate sector to around 30 percent. Therefore, the rate of corporate taxation in Pakistan should gradually be reduced to 25%.
Rate of tax for small companies and firms (AOPs): Through Finance Act 2010, the tax rate for small companies was increased from 20% to 25% and rates for AOPs were also enhanced to 25% which were slab rates previously.
It is proposed that the small company's rates be reinstated at 20% and AOPs be taxed at individual slab rates starting from 5% up to capital limit of Rs 10 million or having annual turnover up to 200 millions.
Rate of tax for business individuals and salaried individuals: The rate of tax on the income of business individuals is not rational. It starts from 7.5% and where income exceeds Rs 15, 0000/- the rate is 25%. It is proposed that this rate should be brought at parity with the salaried individuals. Further it is proposed that for salaried individuals, some justifiable expenses be made admissible like children's educational expenses.
k. Consolidation of all labour levies: In addition to corporate tax rate is 35 percent, an additional 2 per cent Workers Welfare Fund (WWF) and 5 per cent workers profit participation Fund (WPPF) is levied. This effectively makes the rate equal to 42 per cent which is one of the highest corporate tax rates in the world. We recommend consolidation of all labour levies with a rate of 2 to 3 per cent in line with regional standards.
l. Minimum tax U/S 113 of the Income Tax Ordinance, 2001: Presently, under clause (b) of sub-section 2 of Section 113 minimum tax is one percent of the person's turnover except distributors of pharmaceutical products, fertilisers, consumer goods, SNGPL & flour mills (0.2%-0.5% ). This rate was raised 100% in the previous Budget, and should be brought down at a uniform rate of 0.5%.
m. Exemptions: Part 1 of the 2nd Schedule: Presently, the exemption is available on the perquisites of the public representatives holding govt. offices including president, ministers, governors etc. Such perquisites be taxed as it is discrimination with the ordinary citizens of Pakistan.
n. Documentation of economy: To increase the documentation of economy, it is suggested to minimise the final tax regime and assess the income of all business sectors through normal tax regime under audited books of account. Proper books of account will facilitate the audit process and all other compliance's under the prevailing law. Every business entity having a turnover of more than 100 million to 750 million should have services of a part-time or full-time commerce graduate/master degree accountant to look after its day to day business affairs ie accounting, book keeping and other reporting requirements as per law. All other business entities (limited, Pvt, AOP and small companies) having a turnover of more than 750 million should have part-time/full-time services of a Chartered Accountant or Cost and Management Accountant.
o. Foreign remittances - Section 111(d): Foreign remittances received under this section are not questionable. This section providing the safe transit to the tax evaders and earning black money through drug and corruption. Its misuse needs to be restricted by making monitoring and surveillance laws on money changers and banks.
SALES TAX ACT, 1990 In the current situation, it is strongly recommended that FBR should not make new laws. As the existing laws are maturing and tax payers are getting familiar with the existing system, the new law will create confusions between the taxpayers which will result in loss of tax revenue. Under no circumstances, RGST should be implemented.
BROADENING OF TAX BASE AND RATE ON SALES TAX Tax base can be broadened by doing away with the exemptions. However, the tax rate needs to be slashed to practical and realistic level, so that people willingly pay the tax and do not take it as a burden. It is proposed that rate of sales tax be reduced to 8%, as the government has recently seen in the removal of the zero rates facility on the five export oriented industries. Let the Government not take steps in any way that may require itself from "backing down." Step needs to be well thought out prior to its implementation. Retaining the Sales Tax system will help the government to document the economy and ultimately the tax revenue through direct taxes would increase.
SOME SPECIFIC ISSUES THAT NEED TO ADDRESSED:
A. Time and manner of payment of sales tax, section 6 According to Section 6 of the Sales Tax Act, 1990, the tax in respect of taxable supplies made during the tax period shall be paid by the registered person at the time of filing of return in respect of that period.
Sometimes, due to delay in payments against the supplies, it becomes difficult to pay the sales tax during that period. Especially, in case of payments from government organisations which sometimes get delayed for a longer period.
It is recommended that it should be allowed that the payments of sales tax may be made along with the return during which the payments have been received. At least this should be allowed against supplies to government/semi government organisations. This proposed amendment will give relief to tax payers which will increase the tax revenue.
Further the discrepancies of period differences which are common now a day will be reduced, resulting in saving of time and cost to the department as well as of the taxpayers.
B. Adjustment of sales tax/fed against bad debts section 9 As per provisions of Section 9 the Sales Tax Act, 1990, a registered person may issue a debit or credit note in case of cancellation of supply or return of goods or a change in the nature of supply or change in the value of the supply etc.
But no provisions are available in case of Bad Debts. It is recommended that where Sales Tax of FED has been charged and paid in the government treasury and subsequently the receivables becomes bad, the taxpayer may be allowed to adjust such sales or the amount should be refunded.
C. Time limitation of input adjustment, section 66 As per section 66 of the Sales Tax 1990, refund on account of input adjustment not claimed within the relevant tax period, shall be allowed, unless the claim is made within one year of the date of payment. Since no loss of revenue is involved in claiming late input adjustment there should be no limitation of time in respect of claiming input adjustment.
The Supreme Court of Pakistan has also given many decisions in favour of taxpayer in respect of Sales Tax late claim of adjustment.
D. Joint and several liabilities of registered persons in supply chain where tax is unpaid section 8a The Finance Act 2006 introduced a proviso, whereby, a registered person receiving a taxable supply from another registered person, having knowledge or reasonable grounds to suspect that some or all of the tax payable in respect of that supply or any previous or subsequent supply of the goods supplied would remain unpaid, as well as the person making the taxable supply shall be jointly or severally liable for the payment of such unpaid tax.
This is a very harsh provision and has opened a wide window for disputes, audit observations, additional tax and penalties in future as it would be very difficult to establish the fact that the person receiving the supply was in the knowledge or had reasonable grounds to suspect that the sales tax would remain unpaid. In view of above, this proviso should be deleted.
E. Filing of revised returns - section 26 Under section 26, the sales tax returns can be revised within 90 days of filing of sales tax return subject to approval from the department. It is recommended that the period to revise the return be increased and approval from the department may not be required if any proceedings has not been started by the department to make it in line with the Income Tax Ordinance 2001
F. Transactions not admissible, section 73
a. Under section 73(1) for admissible transactions under Sales Tax Law, the limit of amount of the Rs 50,000 for payments other than through banking channel may be enhanced to Rs 100,000.
b. Under the provisions of section 73(2) of Sales Tax Act, 1990, claim of input tax is not allowed if the payment of the invoice is not made within one hundred and eighty days of the issuance of invoice. This time limit may be condoned by the Collector under SRO 642 dated 26-07-2010.
Since the payments of invoices are made on the basis of agreed terms between the two parties, this provision is harsh.
It is recommended that time limit of payment of the invoice (other than Sales Tax) should be as per the agreed terms; there should be no requirement to get approval from the Collector to condone the time limit.
g. Special Procedures for Importers - Value Addition Tax @2%.
Currently, a value addition tax @2% is being collected at import stage from importers except manufacturers. This is against the spirit of Sales Tax (Value Added Tax). It is recommended that: This value addition tax at import stage be abolished or The imports for self-consumption may be exempted from such value addition tax.
h. Special Procedures for Sales Tax Withholding
The registered persons falling in the jurisdiction of LTU are liable to act as withholding agent under the Special Procedures from those who are non LTU registered sales tax persons. Further, the sales tax registered persons as recipient of Advertisement Services are also liable to act as withholding agent irrespective of their jurisdiction status. This is discriminatory and not workable.
It is recommended that private sector may be excluded from sales tax withholding as it will increase the cost of doing business. They are already working as withholding agent under different provisions of the Income tax Law.
-- Blacklisting and suspension of registration Rules 12 of the Sales Tax Rules, 2006
According to Sub Rules 5 of Rules 12 of Sales Tax Rules, 2006 once a person is blacklisted the refund or input tax credit claimed against the Invoices issued by him, whether prior or after such blacklisting shall be rejected through self-speaking order. This Sub Rule is harsher and needs to be modified.
-- Rate of sales tax
Presently the sales tax rate is 17% and SED is 2.5%. The tax rate to be slashed to practical and realistic level so that people willingly pay the tax and do not take it as a burden. It is proposed that rate of sales tax be gradually reduced to 8% and SED may be abolished as it is an extra burden on the business.
Federal Excise Act, 2005
Due to high inflation, the prices of consumer goods are increasing day by day. It is recommended that the excise duty on consumable goods, which are necessities of life like ghee, edible oils, fuels, natural gas be reduced and duty rate may be enhanced on luxury items to increase the tax revenue.
Customs Act, 1969
-- The customs duty on the import of items being produced locally be increased to promote the industry.
-- The customs duty on raw materials imported by local industry be reduced to facilitate the local industry.
-- Afghan transit be regulated strictly so that such imports may not hamper the local industry.
(Concluded)
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