The Institute of Chartered Accountants of Pakistan (ICAP) has submitted its proposals for the Federal Budget 2012-13 to the FBR. The Institute and its relevant committee have been constantly making efforts to identify areas where reforms are needed to broaden the tax base, remove ambiguities, and to simplify the process for a simple taxpayer.
The suggestions submitted to the FBR have been formulated with a view to augment tax collection without making any undue burden on the tax payer. Increasing tax collections are the dire need of the day; not by increasing the tax rates, but through harmonisation of existing rates, and by increasing the tax base. It is imperative that all segments of society should contribute evenly in building the nation, through tax contributions.
Following is the summary of 'Key Recommendations' included in the proposals:
BROADENING TAX BASE Amnesties, presumptive taxation, fixed tax and minimum tax regimes have proven to be counter-productive for documentation of economy.
It is proposed that statutory restrictions be placed on announcement of such scheme and gradual withdrawal of existing schemes available under present tax laws.
DIRECT TAXES Persons not enrolled in tax, maintain bank accounts and are engaged in sale and purchase of properties and vehicles, making air travels, paying utility bills, school fees, club memberships, and stay in hotels etc for which they are required to produce their CNIC number.
It is proposed that appropriate amendments be made in the relevant laws, including taxation laws, to make it mandatory to provide NTN/CNIC for specified transactions and such transactions be reported to the FBR to be matched with NTN data base to identify tax evaders.
The country is no doubt in dire need of foreign exchange. Accordingly, the tax laws were armed with section 111 providing immunity to the source of foreign remittances for tax purposes. However, it is generally believed that this facility has grossly been misused for whitening of untaxed income earned within Pakistan. It is proposed that appropriate checks and balances may be introduced, ie prescribing maximum immunity threshold, to discourage the trend of whitening of untaxed income under section 111.
Though agricultural income is exempt from income tax; trading in agricultural produce is not. The trading of agricultural produce is generally carried on by commission agents through various 'mandis' managed through market committees, who grants/renew licenses of these agents.
To bring this segment into the tax net, it is proposed that Market Commission Agent registered with Market Committees, dealing in agricultural produce, be subject to tax. As a first step, fixed tax may be introduced, payable at the time of renewal of their licenses.
There is a large size of black economy, which gets its way into the real estate sector and does not contribute anything to the national exchequer. These real estate investors are involved in buying and selling of property on regular basis but escape taxation by taking advantage of vagueness in law.
It is proposed that a deeming provision be added for defining a transaction of sale of immovable property to be treated as an adventure in the nature of trade and any buying and selling thereof within a period of 4 years should be treated as income from business and charged as a separate block of income.
INDIRECT TAXES The menace of undocumented economy and benami business is the root cause of our economic ills. It is imperative to put a strong barrier against such trend.
It is proposed that concept of withholding of sales tax be re-introduced, as was done earlier on trial basis in 2009, with appropriate precautions and corrective measures for difficulties faced earlier.
Present rate of 16 percent General Sales Tax is a bottle-neck in inducing people to come within tax net at one hand, and is also contributing to inflation on the other hand. It is proposed that the general rate should be rationalised over a suitable period of time, keeping in view our peculiar business environment.
Pakistan is faced with two fundamental menaces in relation to implementation of import duty structure; smuggling including abuse of Afghan Transit Trade and under invoicing. It is proposed that there should be quantitative ceiling for imports required for Afghanistan and there should be a mechanism to collect duty at import stage to be refunded on confirmation of passage from Pakistan.
POLICY MATTERS DIRECT TAXES The applicable corporate tax rate of 35 percent appears high in comparison to the rates of 25-28 percent applicable in the region. Prevalence of parallel final tax system distorts the comparative taxation of businesses, which are organised and generally subject to normal tax. Further, lower tax rate applicable to individuals and association of persons is also an obstacle in corporatisation.
It is, therefore, proposed that the corporate tax rate be reduced gradually to a range between 25 - 28 percent to provide competitive edge in the region and to induce corporatisation which would also help in broadening of a tax base.
Salaried individuals are taxed on their gross salary income without any deduction. It is generally noted that the salaries are not increased in line with inflation; hence, salaried persons are more affected due to reduction in purchasing power. To compensate, it is proposed that salaried persons be allowed tax credits for educational and utility expenses.
Association of Persons have been subject to progressive taxation since long. Through the Finance Act 2010, progressive taxation was abolished and uniform rate of 25% was prescribed without any threshold. This situation puts the association of persons in disadvantageous position.
It is therefore proposed that tax rates for association of persons, which are statutorily barred from corporatising be brought in line with individual's tax rates by re-introducing progressive taxation. In 90's, minimum tax at 0.5% on turnover was introduced with an objective that primarily the corporate sector should pay at least 0.5% of their turnover in tax, despite the fact that this was against the basic principles of income tax. In 2008, minimum tax regime was abolished but re-introduced in 2009 with an increased rate of one percent, which is burdensome for low margin businesses.
It is therefore proposed that the rate prevailing over two decades ie 0.5 percent be restored. Final tax regime has, in fact, proved to be counter-productive for documentation of economy.
It is proposed that final tax regime may be gradually phased out. As a first step, presumptive taxation for corporate sector be substituted with minimum tax, allowing for unadjusted balance to be carried forward and adjusted against tax on taxable profits for subsequent years.
The net value of investments made through foreign currency gets diluted due to devaluation. This is generally considered as a major obstacle in attracting foreign investments. It is proposed that the foreign investments should be taxed after allowing indexation (for appreciation / depreciation) of Pakistan Rupee in line with best international practices.
Pakistan has great potential for export of services which is a source of foreign exchange earnings and providing employment within Pakistan. In order to attract setting up service centres in Pakistan, export of services be exempted from tax or alternately be equated with export of goods.
Withholding agents are obligated to deduct/collect tax from payments, deposit it in Government treasury, report such taxes to the FBR, and then get audited. To accomplish these responsibilities, withholding agents need to incur substantial time and cost, without any compensation. It is proposed that appropriate compensation be awarded to withholding agents performing state duties.
INDIRECT TAXES Services rendered, initiated or consumed in the Province of Sindh are being taxed under the Provincial law. There are certain overlapping situations under the Federal and provincial laws eg admissibility of Sindh Sales tax on services for refund claim with FBR.
It is proposed that FBR and Sindh Revenue Board should agree upon legal framework and thrash out the legal and procedural impediments. Whitening Schemes announced from time to time have encouraged the trend of under/over invoicing issues and promoting remittances through hundi/hawala, depriving the exchequer with its due revenue. Also, immunity from audit to the commercial importer also encourages misdeclarations.
It is proposed that value addition tax/minimum tax regime should be abolished and immunity from audits be withdrawn. Input tax credit is not admissible to the registered person if the corresponding output tax is not paid by the supplier. In recent times, frivolous cases have been witnessed when the FBR web portal was unable to cross match the output tax in the returns of seller and corresponding input tax in the return of buyer.
It is proposed that standard operating procedures be designed to cater for issues relating to cross verification of claims. Under section 8A of Sales Tax Act, 1990, a registered person purchasing goods is jointly and severally liable if the sales tax is not paid by the seller of the goods. It is quite unjustified to punish a genuine buyer by disallowing genuine input tax for an offense committed by another person.
The Institute believes that Section 8A is against the law of natural justice where a person is punished for an offense, which he has not committed. Therefore, it is strongly recommended that the provision of Section 8A should be amended to provide protection to registered buyer, in case(s) where compliance of Section 73 of the Act has been duly made.
Under section 6 of Federal Excise Act, 2005, FED is adjustable only if the registered person holds a valid proof to the effect that he has paid the price of goods purchased by him including FED and received the price of goods sold by him including FED through banking channels. The condition of payment and receipt is creating problems for the taxpayers.
It is, therefore, proposed that FED should be made adjustable on accrual / paid basis as per section 7 of Sales Tax Act 1990. Further the duty adjustment should not be made subject to receipt of sale proceeds and related duty. Present structure of customs duty supports promotion of trade in commodities rather than manufacturing the same in Pakistan, putting local manufacturers on disadvantageous pedestal. It is proposed that customs duty structure be reviewed afresh to facilitate promotion of local manufacturing industry.
OTHERS Appeals at Appellate Tribunal are generally adjudicated by a Division Bench comprising of Judicial Member and Accountant Member. An officer of FBR is appointed as an Accountant Member for specific period.
In order to provide professional resources, it is proposed that Chartered Accountants with at least 10 years of experience in tax practice be appointed as Accountant Member of the Appellate Tribunal. Penalty provisions on delay / failure to file return of income etc contained in section 182 on the basis of tax liability instead of tax payable (ie tax liability reduced by tax payments already made) is creating hardship and an impediment in inducing non-taxpayers. Further, levy of penalty for not filing of withholding statements with reference to tax liability of a person is contradictory to law.
It is proposed that penalty for non filing of tax return be imposed on the basis of net tax payable and the explanation inserted vide the Finance Act 2011 should be abolished. It is also recommended that penalty for non-filing of withholding statements u/s 165 existed before the Finance Act 2011 be restored.-PR
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