Terming Super Tax as an unjustified levy, Overseas Investors Chamber of Commerce & Industry (OICCI) has strongly proposed abolition of Super Tax and withdrawal of regulatory duty on several raw materials used in manufacturing process in budget (2018-19).
In its key budget proposals for 2018-19, the OICCI has declared Super Tax as an unjustified levy. In the past three years, basic corporate tax rate has been reduced by one percent each year, but imposition of Super Tax at the rate of 3 to 4%, has not only negated the impact of the reduction but has actually increased the effective tax rate. This unjustified levy should be removed from 2018-19. Regionally competitive tax rates are amongst the key factors for the growth of the economy and FDI inflow into the country.
The government should align the effective Corporate Income tax rate in line with regional countries, to a maximum of 25% in June 2018. OICCI analysis shows an average tax rate of less than 22% in Asia, with a range of 15% to 30%. Lowering the tax rate will contribute to the growth and will accelerate both FDI and local investment flow in large green field and employment generating projects. Tax rates of the banking sector should be aligned with other sectors.
Different Sales Tax and Sales Tax on Services rates within the country lead to a number issues for business organizations operating all over the country. Therefore all sales tax rates of the different jurisdictions within the country should also be reduced to 13 % and aligned with the Sindh sales tax on services. This should be followed by a study of the rates in the regional countries, with comparable economic parameters, to ensure sales tax rates are competitive. Our analysis shows an average of less than 12% in Asia, with a range of 6% to 17%. Finance Act 2017 substituted section 5A of tax on undistributed profits and introduced tax @ 7.5% of profit-before-tax in case a listed company does not distribute 40% of its annual profits as cash dividend or bonus shares. This amendments should be revoked in order to reinstate the condition of 50% of paid-up capital or 40% cash dividend (whichever is less) to maintain the flexibility of cash and bonus distributions, OICCI added.
Minimum Tax (MTR) and Alternative Corporate Tax (ACT) Regime be abolished and alternatively, MTR rates be reduced, it proposed.
General rate of minimum tax has been further enhanced from 1% to 1.25% in the Finance Act 2017-18, whereas it is 0.5% of turnover for refineries, oil marketing companies and certain other sectors. This high rate is leading to effective tax rate of over 50% for a number of industrial sectors. The general rate of MTR should be reduced to a maximum of 0.5%, and 0.2% for Oil Marketing/ Refineries/ LNG Terminal Operators and Large Chemical Companies with high turnover and low margins. OICCI said the regulatory duty levied during the year, be withdrawn on imports of raw materials which are not being produced locally. Mini-budgets imposed during the financial year are very discouraging for the businesses, especially manufacturing sector. The concept of regulatory duty was to discourage imports of luxury or non-essential goods. However, the SRO levies regulatory duty on several raw materials used in manufacturing process. This will discourage local investments going forward which will hinder economic growth as imports of finished goods becomes more attractive. The list of such items should be issued with agreement/consent of industry experts or Chambers.
It said the basic objective of withholding tax is to document the economy and not revenue generation. However, the inability to broaden the tax base has compelled the FBR to place heavy reliance on withholding tax regime. "We acknowledge the transformation in the withholding framework and differentiating between filer and non-filer. However, there is still a lot of room for improvement, in the existing withholding tax regimes. These include allowing organized sector to adjust the withholding tax ie do not considered the withholding tax as full and final discharge of tax. Furthermore, the number of rates currently applicable on goods and services for withholding tax purposes is very complex and cumbersome, which needs to be rationalized, including facilitating the withholding agent through a robust IRIS wherein the visibility of tax deduction certificate should be given to the tax payer instead of relying on the withholding certificates," OICCI said.
Last year timelines for number of incentives u/s 65 were extended which has been highly appreciated by the investors' community. This initiative should now be further widened by introducing the following additional measures for attracting large new foreign direct investments in line with the potential of the country.
It is suggested that for tax credit u/s 65B, the tax credit rate be enhanced from existing 10% to 15% of the amount of investment. The date for benefit be extended from existing 2019 to 2022 so that industry is given a reasonable timeframe to plan their investments and long term projects.
The tax credit shall be extended to investment in factory building associated with the plant and machinery purchased for extension, expansion, balancing, modernization and replacement purposes.
In order to minimize cost of production the Industrial undertakings be allowed to import raw material in the first year of production, without payment of advance tax u/s 148. Particulars of raw material to be imported along with an affidavit may be obtained. For subsequent years, the industrial undertaking, be allowed exemption against advance tax u/s 148 on import of raw material, as per actual requirement, instead of 125% quantity of previous year.
Section 64B provides tax credit for employment generation. Tax credit for employment generation u/s 64B, currently restricted to manufacturers, should also be extended to the service sector which contributes about half of the GDP of the country. Consequently, changes in Section 153 (1)(b) and S 153 (3)(b) shall also be made, OICCI recommended.
The government should review and reinstate the group dividend facility under Section 59AA/59B to facilitate formation of large entities with resources to promote diverse investment and employment opportunities in the country.
The amendment to restrict the right to surrender losses within a group to the percentage holding of the group in the entity surrendering the losses, is also not in line with the concept of group taxation under the internationally acceptable norms. This is a major deviation from the previously settled scheme, and therefore the law which existed prior to the Finance Act 2016-17 may be restored. [Section 59B, Clause 103A of part 1 second schedule]
For co-ordination between federal and provincial legislations, OICCI recommended that the synchronization of sales tax rates and policies need to be harmonized across all jurisdiction and sectors and should be closely aligned with the regional benchmark of 12% sales tax rate. Policy makers should always bear in mind that foreign investors, as represented in OICCI, have invested in Pakistan and not in any particular province and therefore should not be made to suffer pending resolution of inter-governmental issues/conflict.
The Federal WWF & WPPF law should be updated based on the recent provincial enactments and current minimum wage levels. Moreover, tax deductible allowance/ expenditure needs to be allowed against provincial WWF & WPPF, by appropriate amendments in sections 60A & 60B of the Income Tax Ordinance, 2001, respectively.
Protracted delays in settlement of tax refunds is one of the biggest contributors in distorting the commercial image of Pakistan in all the Perception and Ease of Doing Business Surveys and , possibly one of the factors negatively impacting inflow of FDI in the country. This has been regularly pointed out at the relevant forums, including to the Prime Minister and Minister of Finance.
OICCI strongly recommends that pending tax refund be cleared within next six months in an orderly/prearranged manner. All subsequent tax refunds be cleared within 45 days. Inter adjustment of Income tax and Sales tax refunds should be made part of the law.
Furthermore, the Federal Tax Ombudsman should be entrusted to settle all the disputed claims of taxpayers, as the taxpayers seem to have lost confidence in the dispute resolution mechanism under direct control of the FBR and to avoid lengthy and expensive litigations, OICCI budget proposals added.
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