An initial tax holiday for a period of two years to new SME units has been recommended by the Small and Medium Enterprises Development Authority (Smeda) in its proposals for federal budget 2006-07.
This would encourage SMEs registration as taxpayers in addition to simplifying the registration process. The Smeda, like previous years, has conducted an exercise with particular focus on SMEs operating in vital sectors making considerable contribution to the country's GDP and export earnings. The compilation process comprised meetings with stakeholders and suggestions received from time to time.
The recommendations relate to income tax, sales tax and customs, besides sector-specific recommendations which cover dairy sector, gems and jewellery, marble, granite & mineral, cutlery and stainless utensils manufacturers and exporters.
Other sectors include leather, hotel industry, rice exporters/manufacturers, kintwear industry, cables & conductors manufacturing industry, steel re-rolling industry, surgical instrument manufacturers, canvas and tents manufacturers and exporters, textile, and automotive parts and accessories manufacturers.
Among the general recommendations is included abolition of withholding tax on electricity bills for industrial consumers as it increases the cost of production. Further, it has been recommended that withholding tax deduction from SMEs may either be removed or the limit be raised from Rs 25,000 to Rs 100,000. This may also be treated as an alternative to formal tax registration for undocumented SMEs.
SMEs-specific recommendations relate to audit, record keeping and documentation. Smeda has been submitting these proposals on income tax to CBR since July 2002.
It says that there is need for a separate scheme for SMEs with following features for the successful implementation of new income tax law for businesses that under-report their income.
The detailed stock report with balance sheet may be the only document to be required. It means that a balance sheet declaring capital and all assets and liabilities plus a detailed stock report may suffice as documentary requirement. Any asset ie, property, automobile or bank account not declared in the balance sheet and later discovered may be considered concealment.
In Japan, in 1949, old taxation system was replaced by a new system to resolve the problem of incomplete bookkeeping and public fear of over-taxation of SMEs. The system allowed certain tax merits if a tax return is made with a 'certain formula of quick bookkeeping'. This system resulted in improvement of financial accounting and strengthening of financing systems for SMEs. In Korea, SMEs are allowed similar concessions.
The income tax or corporation tax for new SMEs has been reduced by 50 percent in Korea for the first six years, including the year during which such income accrues for the first time.
There are 1.05 million active tax return filers in Pakistan. In 1999-2000 the number of salaried tax payers was 440,000 and those filed under self-assessment scheme were 275,000. In the past, these two categories of taxpayers were subject to very little scrutiny.
As long as businesses are reporting growth in their incomes, taxpayers should be spared from audit or scrutiny. This will help them to focus on their business activities and establish goodwill of income tax department as business friendly agency.