The Pakistan Business Council (PBC) has sent a set of post budget proposals to the Federal Finance Minister Ishaq Dar, seeking review of several tax measures announced in his 3 June budget speech. In the letter to Finance Minister Ishaq Dar, PBC said, there are no concrete proposals to widen the tax base, but imposing with holding tax (WHT) on non-filers is tantamount to imposing fine on motorists who repeatedly violate traffic rules but allowing them to do so at will, and without further legal consequences.
The PBC had pointed out to the Federal Board of Revenue (FBR) the need to effectively mine the data of millions of tax deductions that the formal sector provides each month when acting as unpaid tax collectors. The budget proposals to subject non-filers to further or higher rates of WHT may meet short term cash flow objectives. However, it is pertinent to mention that WHT is eventually passed on by non-filers to consumers and the formal sector, thus raising the cost of living and cost of doing business.
Furthermore, until FBR powers to inflict arbitrary measures bordering on harassment of existing taxpayers are curbed, avoidance of WHT alone will not provide incentives to non-filers to join the tax net. For Budget 2016-17 to be truly development orientated, the fundamental flaw of funding from a narrow tax base must be addressed boldly and urgently.
Much has been made of the 60 percent increase in tax collected over three years. In our proposal to the FBR, we had recommended that presumptive tax should not be treated as final liability but that it should be determined on the basis of assessment.
PBC has also proposed a fundamental departure in Sales Tax regime which is governed under the Value Added Tax (VAT) principle. The definition of Input tax has been proposed to be amended to exclude the sales tax paid under respective provincial laws. In economic sense, this would imply dual indirect taxation in the country as indirect taxes paid to provinces shall not reduce the incidence of sales tax paid to the Federation. It is suggested that the VAT principles should be completely adhered to.
In addition to the above, input tax adjustment will not be available, if the supplier has not declared such supply in his return or has not paid tax due as per his returns. This amendment effectively means that an eligible input tax shall become inadmissible for the buyer only for the reason that the supplier of goods has not declared such supply in his sales tax returns or has not paid the tax due on his returns. The validity of the aforesaid amendment needs to be examined with reference to the timing and relationship / control which a buyer could have on the conduct of supplier. The letter further seeks the attention of the finance minister for reconsidering tax on services and contracts executed abroad, saying presently gross receipts from services rendered and construction contracts executed outside Pakistan are taxed at 1 percent of the amount remitted - this is the same rate which is applicable on remittances received against the export of goods. The budget proposes to increase this to 4 percent for companies and 3.75 percent to 5 percent for others. The manifold increase in tax on services is inconsistent with the widely recognised need to encourage the broad basing of exports and should be reconsidered.
The PBC has also urged the government to withdraw the amendments on Group Taxation through the Finance Bill 2016, saying that the move would hamper the confidence of large industrial groups and discourage group formation as it will become economically more adverse compared to direct holding in companies.
Further, these would cause a drastic change in investment strategies of many major industrial groups and non-incentive investment due to dilution of profit from the holding company. The PBC has also suggested that the rate of WHT on FMCG distributors should be reduced to 80 percent of the basic rate of 4 percent ie 0.8 percent.
The letter further sought reconsideration of the finance ministry on Super Tax system proposed in Finance Bill 2016. The PBC also said that proposal to charge the Alternate Corporate Tax (ACT) in advance is untenable and should be reconsidered. The PBC opined that CPEC has the potential to transform Pakistan in numerous ways however its success is contingent on the readiness of Pakistan public and private sector to execute its obligations. One impediment is the capacity of existing domestic capital market to provide long term rupee finance, PBC said, that an infrastructure investment bank established with government and multilateral assistance is required. On real estate industry, PBC said industry remains largely outside the formal sector and is used to hide wealth, raising the rate of tax on transactions is a short term cash flow measures. A more sustainable solution would be for the federation and provinces to jointly and simultaneously adjust valuations to realistic levels.
Whilst lowering the rate of tax if also accompanied by a tax regime which encourages REIT and long term mortgage solutions for the middle class, the formalisation of this large sector will accelerate. PBC notes the increase in tax deductible amount on housing loans proposed in the budget. Whilst this is a step in the right direction the real constraint for development of mortgages is absence of 10+ years financing. "PBC can work with the State Bank of Pakistan to outline possible solutions," the letter concluded.
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