Small and Medium Enterprise Development Authority (Smeda) in its budget proposals, submitted to the government, has recommended that SMEs should be exempted from the deposit of 15 percent of the due tax.
While making appeal to the Commissioner of the Income Tax under Section 127(2) of Income Tax Ordinance-2001 (ITO), it suggested that if it was not possible then it should be reduced to five percent of the due tax to facilitate small & medium taxpayers.
The Smeda also called for rationalising the Section 175 pertaining to power of the tax authorities to enter and search premises to avoid confrontation between taxpayers and tax collectors.
The Smeda also stressed the need for a separate scheme for SMEs with the following features for the successful implementation of new IT law for the businesses that under-report their incomes:
The detailed "Stock Report" with "Balance Sheet" should be the only document to be required with. It means that a balance sheet declaring capital and all assets and liabilities, plus a detailed stock report should suffice the documentary requirement.
Any asset ie property, automobile or bank a/c, not declared in the balance sheet and later discovered, should be considered as concealment;
To avail of the above short documentation, the businesses will pay tax at 3-4 percent of its total capital declared.
However, to avail of the smaller documentation, one must accept a higher tax payment. The proposed documentation is though little, if once accepted will later pave a road towards complete documentation in an evolutionary manner;
It will also make audit exercise simpler, reliable and manageable for the auditor as one has to verify the stocks/assets during any surprise inspection, not the entire operation during the years to verify sales;
In case of default in making any payment of tax under this scheme, the taxpayer shall be deemed to have opted for assessment under normal law, and all provisions of the ITO-2001 should apply accordingly;
Any SME, which chooses to opt for documentation as required under the ITO-2001, should be given the same tax rebates as offered to the salaried class of the taxpayers thereby creating incentive for maintaining books of accounts and also partially hedging the cost of bookkeeping.
About Sales Tax, the Smeda has proposed that a research conducted by it had revealed that tax rate median in the south Asian region was 10 percent; whereas, countries like Taiwan had lowered it to 7 percent.
In the background of regional dynamics for attracting investment, it was proposed that sales tax rate should also be reduced to 7 percent without any exemptions.
Record keeping requirement needed to be rationalised with special focus on the SMEs. This step would facilitate all the taxpayers, as the tax return had to be filed on monthly basis, it claimed.
The record keeping requirements, as per section-24 of the Act, should be reduced to 3 years from 5 years. This will save much of the time and administrative cost of the business establishment.
It also called for continuity of the policies avoiding time to time changes in law and importance of awareness creation regarding the sales tax law.
The sales tax should be recovered at the point of sale and not at the point of purchase, while sales tax at import stage should be withdrawn.
The rationalisation of the tax might be done over a period of four-years by deleting sales tax on 10 percent items in the first year, 20 percent items in the second year, 30 percent items in the third year, and finally 40 items in the fourth year, it suggested.
Presently, 15 percent Sales Tax was applicable on the manufacturers, retailers, wholesalers and importers with annual sales above Rs 2.5 million and Rs 5 million, respectively for the former two and with no limit of annual sales for the rest.
However, retailers with the sales less than Rs 2.5 million and manufacturers having sales less than Rs 5 million have to pay two percent turnover tax without input/output tax adjustment facility.
It was also pointed out that the existing gap of 13 percent in two tax rates in partially documented economy had led to under reporting of sales.
CUSTOMS
1. Tariff rates with special reference to leather & leather goods, children ready-made garments, apparel and footwear industry should be reviewed, as the import influx from China is posing serious threat to the local industry. Enforcement of Rules of Origin is also required.
2. Smuggling is a major threat to the local industry, therefore, a list of smuggling prone items should be prepared by the Central Board of Revenue (CBR) in consultation with chambers and associations, and tax structure on all such items may be rationalised in a manner that total levies should not exceed the cost of smuggling.
CENTRAL EXCISE DUTY
1. Excise duty is being imposed on 75 items, out of which 90 percent of the revenue being generated through 11 items such as cigarettes. It is therefore proposed that excise duty on remaining 64 items should be eliminated.
2. Ultimately, excise duty should be retained only as a regulatory duty to be applicable on items/services, the usage of which the government would want to discourage eg tobacco/cigarettes, liquor, etc Sector Specific:
POULTRY
1. Import duty on feed vitamins, amino acids and minerals is currently 10 percent. The custom duty may be reduced to zero since these are used as basic raw materials for poultry feed preparations.
2. To promote poultry sector, farmers, who prepare poultry feed with imported raw material and export poultry products, should be allowed duty drawback.
3. Duty and Sales Tax free import of poultry machinery and equipment; Custom duty and sales tax should be withdrawn on import of poultry machinery and equipment.
ENGINEERING SECTOR
1. To encourage domestic engineering and auto industry, custom tariff should be lowered for those vendor enterprises that provide linkage to the industries with higher deletion.
2. Custom duty on electronic products such as CKD, SKD and CBU should be zero-rated, 5 percent and 25 percent respectively.
3. All the electronic components of an electronic device being manufactured locally should be zero-rated, while capacitors and PC boards should not be duty-free to protect domestic industry.
4. Tax relief should also be allowed to new engineering units.
5. Electro Galvanised Steel Sheet in coils of any size exceeding 0.50 mm used by AutoFilters industry should be removed from the list of locally manufactured items, as this item is neither produced locally nor by Pakistan Steel Mills.
TEXTILE SECTOR
1. Duty free import of the textile spares should be allowed to those units, who are exporting 50 percent of the additional production, and are in expansion process under SRO 554. Currently this facility is available for those industries only that are exporting only 50 percent of their total production.
2. Ring spinning frames may be permitted at zero-rated customs duty since they are not manufactured locally. This has also been acknowledged in CGO 07/98 dated 24-03-1998 that this item is neither being manufactured currently nor after 1998.
3. Value-added sectors like stitching and knitting have a tremendous export potential hence they should also be allowed duty-free import of the textile machinery and spare parts.
4. Import of the textile machinery and spares from India should be allowed in order to reduce production cost.
PULP PAPER & PAPER BOARD
1. Import duty on Kaolin Clay used as a basic raw material in paper and board industry should be reduced to 5 percent from 10 percent.
2. Custom duty on forming fabrics should be reduced from 10 percent to 5 percent, as they are not locally manufactured.
3. Import of felts, forming fabrics, dryer screens and paper sheet cutter/blades from India may be allowed to reduce cost of industry.
PAKISTAN CANVAS & TENTS MANUFACTURERS & EXPORTERS
1. Custom duty on 50 kW Generators may be rationalised to minimise production cost.
2. Efforts should be made to compensate fuel surcharges at any stage like duty drawback and sales tax refunds.
PAKISTAN JUTE MILLS
1. Withholding tax on export of jute goods should be reduced to 1.25 percent from 0.25 percent as it registered a remarkable increase in exports in 2002-2003.
2. Import duty on jute yarn from Bangladesh may be 20 percent to protect local jute industry.