The Institute of Chartered Accountants of Pakistan (ICAP) has recommended that service providers, both corporate and non-corporate, should be exempted from levy of minimum tax and a uniform service tax law may be agreed upon by all provinces and the federal government. According to the ICAP budget proposals for 2018-19, the institute recommends that a uniform service tax law may be agreed upon by all provinces and the federal government for implementation in their respective jurisdictions by respective tax authorities. Further, a uniform tax return may also be introduced for the taxpayers. Following four major steps may resolve many issues and can bear immediate results:
Firstly, revenue authorities should decide the basis of levy of indirect tax which can be origination or termination to establish jurisdiction of taxation of services. Secondly, to promote transparency and uniform interpretation, standard first schedule should be introduced covering all services along with standard tariff headings and standard definitions. The standard first schedule should be adopted by all provinces and Islamabad Capital Territory while levying sales tax on services in their respective jurisdictions.
One return may be filed with identification of provincial head of account and direct deposit of share of tax of each province and central directorate of audit with representation from each province and the FBR. It is proposed that all presumptive/value addition/fixed tax schemes should be abolished and all such sectors/ goods may be brought under the uniform tax regime to promote the culture of income-based taxation rather than receipt-based taxation. The scope of opting out of final tax regime be expanded to cover all incomes falling under FTR and the rates of minimum tax for opting out of FTR be reduced to raise the difference between final tax and minimum tax by at least one percent.
The Section 111(4)(a) of the Income Tax ordinance (ITO) should be abolished; alternatively the applicability of Section 111(4)(a) should be made conditional ie remittances by an overseas non-resident Pakistani to a relative as defined in Section 85(5) without any threshold. However, remittances by others may be subject to tax scrutiny if it exceeds the limit prescribed by the State Bank of Pakistan, which is currently $10,000. Alternatively, until this provision is abolished, this kind of remittance should be restricted solely for the purpose of investment in industrial undertaking in Pakistan.
The Section 65A should be reinstated in order to encourage documentation and broadening of tax base. Moreover, condition of 90% supplies to registered persons be reduced to 75%. The restricted benefit of this tax credit to manufacturers be extended to all persons registered under the STA.
It is recommended that FBR values of immoveable properties may be gradually increased to match the actual fair market values. However, at the same time the rates of stamp duty and other transfer taxes levied by provinces should be reduced to keep the cost of transfers stabilized.
It recommended that the policy decisions are required with the objective to broaden the tax base to enhance resources and plug tax leakages. All sectors of the economy must be brought within the tax-net. Irrespective of the source of earning, anyone who earns beyond a certain threshold of income should be mandatorily required to file tax returns.
Moreover, an efficient model for growth requires equitable taxation and credible tax administration. The corporate sector, which is the most documented segment of the economy, has been neglected due to extreme abrupt tax collection measures taken by the government in order to meet annual budget targets. Further, the organized sector is seriously affected by incidence of sales tax (and federal excise duty, where applicable) as against non-documented economy/ unorganized sector.
There is a serious need for the policymakers to simplify the complex system of determining the tax liability. Immediate remedial measures include abolishing taxes like alternative corporate tax, tax on undistributed profits and super tax.
Furthermore, tax administration requires institutional rebuilding, designed to strengthen the independent policy-making role of Federal Board of Revenue (FBR), modernize the tax system and formulate independent, fair and transparent tax policies. Efforts are required to separate tax policy and tax administration. The FBR should be responsible for implementation of policies and collection of revenue only. The FBR may be converted to an autonomous and independent institution that has structural and strategic support necessary for its organizational development and capacity building.
It may also be noted that Pakistan''s tax-to-GDP ratio is the main impediment in the economic development, which has compelled governments to take short-term tax measures. At present, there is over dependence on the indirect taxes. It is, therefore, felt that withholding tax in indirect taxes both in federal and provincial taxes should be withdrawn, it recommended.
It is recommended that power to make adjustments to compute accounting income should not rest with commissioner and accounting income as reported in the audited financial statements of the organization, which are prepared in accordance with IFRS and Companies Act 2017 should be considered. Further, the ACT should be made applicable on the companies after two years of date of incorporation or start of commercial production, whichever is later.
The FBR should focus on increasing the tax base instead of further burdening existing taxpayers. It is recommended that minimum tax should be reduced to 0.5%. Moreover, companies having a gross loss position for the year should be excluded from the purview of the minimum tax. The law should be clarified to allow carry forward of minimum tax paid in the year of loss.
In order to promote, encourage and incentivise export of services, income from export of all types of services should be exempted like IT enabled services. Alternatively, export of services be subjected to reduced rate of tax as in case of export of goods.
Extra tax at the rate of 2% is levied and collected by the manufacturers and importers on specified goods under Chapter XIII of the Sales Tax Special Procedure Rules, 2007. Subsequent supply of specified goods subject to extra tax at the rate of 2% is exempt from the payment of sales tax including those as made by retailers as per Rule 58T (5). Extra tax is collected to ensure collection of value addition of subsequent supply stage; therefore, levying further tax is an irritant and absurdity which needs rectification to streamline the VAT regime.
It is, therefore, recommended that no audit may be initiated unless specific scope, guidelines and mechanism of investigation is available in the law. Likewise, if detailed investigation of a registered person has already been conducted under Section 38, there should be no need to conduct audit of that person under Section 25 again.
It is recommended to obtain/utilize party wise data of unregistered persons from whom sales tax @ 1% is deducted. A minimum threshold for sales tax withholding should be introduced in lines with the Income Tax Law. Withholding should be applicable at the time of payment.
The corporate sector, which is the most documented segment of the economy, has been neglected due to extreme abrupt tax collection measures taken by the government in order to cater annual budget targets. The service, wholesale/retail, transport and the agriculture business sectors are still not fully documented, hence their contribution to the national exchequer is extremely low and most of them are out of the tax net. Even more than three million persons having commercial electricity connections are hardly into the tax net. By charging nominal additional tax and creating narrow difference in tax deduction of filers and non-filers, the government failed to attract unregistered persons to get themselves registered, the ICAP recommended.
In order to encourage payment of dividend to the shareholders, a tax on the accounting profits before tax of the company (excluding Scheduled bank or a ''Modaraba'') is imposed at the rate of 7.5%, if 40% of the after tax profits are not distributed by the company. This tax is an additional levy on the income of the company which needs to be abolished. Alternatively, if above is not possible immediately, this tax may be levied on the accounting profit after tax on the companies which have not distributed any dividend for previous two tax years.
The ICAP was of the view that it has become practice of tax authorities of visiting the taxpayer''s bank and coercing the bank manager to immediately pay the amount from taxpayer''s account against the tax amount recoverable or else face the consequences. In some cases, recoveries have been made in haste even where the matter has already been decided by the judicial forum in favor of taxpayer or even where huge amount of refund is pending to the taxpayer exceeding the amount of demand raised. While recognizing the need of some surety of recovery for the exchequer, in view of some cases where the taxpayers tend to deliberately avoid payment of tax by resorting to malpractice of withdrawing money from their account, it is suggested (in view of parallel presentation of compliant, honest and prestigious taxpayers) to allow all taxpayers some time to resort to legal means of contesting the recoveries which are considered by the taxpayers to be unlawful, it recommended.
The taxation of marginal income on loans obtained from the employer below benchmark rate should be exempted by deleting sub-sect ion (7) of Section13. Alternatively the minimum threshold of the loan amount on which the provisions of Section 13(7) would not be attracted, should be raised to at least Rs 2,500,000 from the existing limit of Rs 1,000,000. Moreover, current benchmark rate of 10% of much higher than the prevailing KIBOR rates, therefore, benchmark rate should be reduced suitably to somewhere near KIBOR rate. Alternatively, at least the mortgage loans be exempted from the operation of Section 13(7) of the ITO. This is not a significant source of revenue for the government on the one hand and very rigid piece of legislation on the salaried taxpayer on the other, who are hard hit by the present economic situation. The taxation of this notional income is highly unjust since it taxes the notional income of the salaried person, which is against the basic principle of taxation since this notional income will never ever be received by the taxpayer. Similar notional income in the hands of employees of educational institutions, restaurants, hospitals, clinics, etc, is already exempted under clause (53A) of Part I of Second Schedule. The rationale underlying this proposal is that it will boost the housing industry since in today''s economic situation and the presence of speculators in the property market it is next to impossible for a salaried employee to own a house on commercial mark-up rates. Once this industry takes off, there will be provision of cheap houses and there will be increase in tax revenue from housing and allied sector, it added.
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