Budget 2015-16: OICCI submits proposals

The Overseas Investors Chamber of Commerce and Industry (OICCI) has submitted its proposals to the Federal Board of Revenue (FBR) for the Budget 2015-16. OICCI represents 197 leading foreign investors from 35 countries, including several Fortune 500 firms, operating in 14 key sectors of Pakistan and contributing one-third of the country's total revenues.
In its 54-page budget proposals, the chamber emphasises on incentivizing investors, broadening the tax net through documentation of the economy, simplifying the tax system and re-organising FBR.
With a key focus on promoting large investment especially FDI, the OICCI has proposed that the policies, which lead to longer term investment plans, should be suitably protected for at least a five-year period so that investors could base their plans on policies that are consistent and predictable.
Incentives for new investment:
Credit under section 65A of Income Tax ordinance (ITO) should be increased to five percent and be available to all taxpayers. Furthermore, tax credit should also be extended to those companies whose 90 percent purchases are from registered sales tax persons.
To curb the menace of flying invoices and inadmissible claim of input tax, electronic invoicing should be encouraged and a rebate of five percent should be given to companies which are issuing invoices electronically.
Tax credit under Section 65B(1) should be extended till June 30, 2018, increased to 20 percent of amount invested in BMR and the unabsorbed tax credit should be allowed to be carried forward for 5 years.
Tax credit under Section 65C @15 percent should be given for at least three tax years from the year of listing.
Tax credit under Section 65 D should be extended to industrial undertaking setup till June 30, 2018. Tax credit under section 65 E should be extended to installation of plant and machinery till June 30, 2018.
To attract new FDI, upfront levy of withholding Income and Sales Tax at import stage on plant and machinery should be exempted for new foreign investment in critical sectors of energy, infrastructure facilities, oil and gas exploration, etc.
Review and Revise Alternate Corporate Tax (ACT) and Minimum Tax (MTR) Regimes:
There should be only two tax regimes for companies assessed under Large Taxpayers Units (LTU) or those registered under Sales Tax Act: the normal tax regime based on taxable income or under the ACT mechanism. The assessee should be given the option to opt for one of the two regimes and the option taken should then be made bound for 5 years.
Minimum Tax Regime (MTR) should not be applicable for certain specialised sectors with high turnover and low margins like oil marketing companies and refineries, LNG terminal operators and large chemical companies where the application of MTR is resulting in an effective tax rate of over 50 percent.
Delay in processing income and sales tax refunds:
Timeframe for scrutiny of Sales Tax refunds should be legally reduced to 30 days. All current refunds should be released against a bank guarantee before June 30, 2015, followed by an audit of those refunds. Income Tax refunds should be given within 30 days by issuing PIB's. Inter adjustment of income tax and sales tax refunds should be made part of the law.
Broadening the tax base/identifying new potential taxpayers:
All income earners pay taxes equitably, including on income from agriculture related activities and all kinds of government and banks saving schemes.
All income earners, without exception of any sector, including from agriculture activities, should get themselves registered and obtain proper NTN. Tax authorities should ensure that all NTN holders file annual income tax/wealth returns and wealth reconciliation statements.
The culture of Amnesty Schemes should be completely eliminated as it discourages the honest tax payers. Severe, and visible, penalties should be enacted in the law to punish tax evaders.
Regular coordination should be done with relevant authorities of countries, considered as tax heavens for stashing away illegal wealth, for information sharing.
Appropriate laws should be made to enable the government to seize local assets, in equivalent value, or levy appropriate taxes, if any person holds any kind of assets outside the country for which source of income could not be established.
OICCI strongly advocates that the performance of the tax collectors should not be judged solely on the basis of tax collected, but their efforts in identifying new taxpayers should be appreciated and rewarded. In this respect the following recommendations have been made:
I. FBR and SBP to agree and implement a secure framework to ensure all customers of financial institutions whose account shows turnover in excess of PKR one million during the year, have filed a tax return and wealth statement.
II. Section 111(4) of ITO should be amended to restrict tax free inward foreign remittances to immediate family members only and their names notified to the banks at the start of the year.
III. Registration of retail outlets and electronic cash registers should be made mandatory at all retail outlets without any turnover thresholds.
IV. The FBR Directorate of 'Broadening the Tax Base' should include economists and MBAs from the country's leading business schools, to ensure tax collections reflect size of the economy and investments made in all business sectors, including real estate, within and outside the country.
Corporate Income Tax and Sales tax rates:
Sales Tax rates should be reduced in line with the regional countries to about 12 percent. Government should stay on course for the proposed reduction of corporate tax rate (CTR) to 30 percent by 2017-18, and further reduce it as per rates in regional countries.
Revamping of withholding tax (WHT) regime:
Heavy reliance on withholding taxes, which currently constitutes over 85 percent of tax collections is very high and must be reduced substantially.
Companies registered in LTU or listed on the KSE should be exempted from withholding income tax under section 148 and 153. WHT on import of raw materials and capital goods should be reduced to one percent, to encourage enlargement of the manufacturing base.
Access should be given to the tax payer for online verification of their tax deductions challans by using their respective IRIS identity. This self-verification model will reduce the hardship and improve compliance.
WHT on payments to registered persons falling under LTU should be exempted, as was applicable earlier.
De-notification of services under the Federal Sales Tax Act:
FBR should immediately de-notify the services which are now chargeable under the provincial legislation after the 18th constitutional amendment.
Cognizant of the popular fallout of the systemic revamp it has proposed, OICCI concedes that revamping the taxation system will require collective political will and resolve on the part of the government, parliamentarians and opinion makers. It has therefore made the following recommendations:
I. FBR should be restructured as an independent organisation and be made an autonomous body on similar lines as State Bank of Pakistan and Internal Revenue Services (IRS) of United States. FBR and all revenue authorities be made subject to independent audit by international experts to protect privacy of data and develop international norms.
II. An independent 'Research and Analysis Unit' should be formed in the FBR headed by a Member and include representatives from leading business chambers and resourced with competent professionals to guide the revenue collection from all sectors in proportion to their earning potential.
III. Administration of the taxation system should be simplified and made consistent based on the use of state-of-the-art technology which will eliminate inefficiency and corruption. A separate cell be established in FBR to tackle this and other actions required to improve the dismal rating of taxation process in the World Bank - Ease of Doing Business (EODB) survey.
IV. One revenue body should be formed to ensure removal of all anomalies/conflicts between the laws of the different revenue boards. This is an immediate need to facilitate the tax payers and help improve the poor rating on tax matters in the EODB survey.
V. The current sales tax regime of VAT mode should be reviewed and in case enforcement is not possible it should be overhauled. This appears to be one of the most serious concerns for honest tax payers and giving Pakistan very poor rating in EODB survey.
Sales tax should be levied in non-VAT mode with a maximum rate of 4 percent, and input tax adjustment provision withdrawn, without compromising on documentation of the economy and revenue collection. In this scenario there will be no need for Sales Tax refunds.
The above proposed change could be done in phases, by introducing it in two to four business sectors at a time, for smooth transition.
Structural Reforms in Customs:
I. A thorough review of the custom regime should be done to take into account issues of counterfeiting, smuggling, rationalisation of duty structure and fixing of import tariff prices.
II. Review and revamp the Afghan Transit Trade (ATT) agreement: In addition to recent introduction of structural checks to ensure transparency in the ATT, a sustainable solution in the interest of Pakistan could be developed.