Low profit margins: service providers say unable to pay eight percent minimum tax

The corporate service providers and associations representing different services sectors Wednesday expressed inability to pay 8 percent minimum tax under section 153 (1)(b) of the Income Tax Ordinance, 2001 due to low profit margins. During the day-long meeting at the Federal Board of Revenue (FBR) here Wednesday, the committee constituted by Finance Minister Ishaq Dar to review 8 percent minimum tax on services sector analysed the viewpoint of service provider companies threadbare, whose representatives tried to justify the proposed reduction in tax rate for specific services' industry/sector.
Almost all service providers claimed that they have low profit margins. It has been decided that the associations and service providers would submit recommendations on minimum tax rate that can be absorbed by the relevant sector/industry. The committee would again sit together to finalise whether it is justified to provide relief, in the form of reduction in tax rate, to the said service providers on sector to sector basis.
The representatives of courier companies, engineering services, tracker services, security services, freight forwarders, advertising, hotels, software houses and others submitted their viewpoint to the committee. Besides the chair of the committee Haroon Akhtar Khan Special Assistant to Prime Minister on Revenue, the meeting was attended by FBR Senior Member Inland Revenue Policy and his team of tax officials.
Sources said that the committees do not have the mandate to make this 8 percent minimum tax adjustable. Presently, the 8 percent minimum tax under section 153 (1)(b) of the Income Tax Ordinance, 2001 is not adjustable. The ToRs of the committee will be to review the incidence of tax u/s 153 (1)(b) of the Income Tax Ordinance, 2001 and to determine what should be minimum tax rate under this section for each of the service sector. Therefore, the committee is not legally empowered to recommend the government to make this tax adjustable.
The committee has heard the viewpoint of stakeholders in detail and it would again meet on Thursday (September 17) to finalise reformations on the said issue. The committee has accepted that by and large representatives of service providers termed 8 percent tax as very high. According to sources, most of the service provider companies informed the committee that they are operating on less net profit margins. In different cases, 2-3 percent net profit earning service providers cannot pay higher rate of 8 percent minimum tax.
The committee informed the representatives of service providers that they have heard the viewpoint of these service providers in detail. They should submit the rate of minimum tax which service providers can pay as per their profit margins. The committee discussed the service provider's data of last three years covering gross revenue; revenue generated from services; revenue where section 153(1)(b) is applicable (services rendered to prescribed persons); revenue where section 153(1)(b) is not applicable (services rendered to persons not prescribed); revenue generated from other activities; tax deducted under section 153(1)(b); taxable income or loss declared and total tax paid during the year.
Pakistan Software Houses Association (P@SHA) informed the committee that an opportunity has been provided to present their case about reversal of 8 percent minimum tax levied through Finance Act 2015. The association was given to understand that the committee would independently deliberate the issue after obtaining point of the both the government and the industry stakeholders. However, even association's audited financial statements were questioned without giving any basis of levying this 8 percent tax.
Through presentation the association has demonstrated that IT and ITES Sector is working on significantly low single digit margins and consequently it is impossible to absorb 8 percent minimum tax, which will result only in payment of tax out of their own capital and ultimately leading to closure of business. The committee finally desired the group to submit recommendations on two specific points minimum tax rate that can be absorbed by IT & ITES Sector instead of 8 percent. And possibility of adding this 8 percent tax as an enhancement of existing price of their services passed on to customers.
After deliberation amongst the group, P@SHA reached conclusion that the sector would like to be taxed under the regime applicable prior to June 30th, 2015 and tax deducted at source should be adjustable. The association is operating under competitive environment and it is impossible to enhance their existing pricing structure.
Pakistan International Freight Forwarders Association (PIFFA) and Air Cargo Agents Association of Pakistan (ACAAP) informed the committee that given the fact that 97 percent of their bill represents sea freight/air freight paid by them to airlines/shipping companies hence the incidence of 8 percent tax to be withheld is both unjust and unacceptable. The associations are not comfortable with the regime of withholding tax, where the business is invariably conducted on credit and the incidence of bad/uncollectible bills is rampant. The association said that the Freight and Other Direct expenses may kindly be removed from the ambit of withholding regime. On the quantum of service charges, the Associations would be amenable to a fair and just deduction of withholding tax not exceeding 1 percent of the gross profit (GP) margin.
Alternatively, they can also consider 0.4 percent of Gross turnover including Freight (the rationale of which is given in our presentation and copies of the same have been provided to all the Committee members). These recommendations, if adopted will result in manifold increase in tax revenue from the freight forwarding industry and will be a win-win situation, they added.