The Federal Board of Revenue (FBR) is contemplating to increase the maximum tax rate of salaried persons from 20 percent to 25 percent in the budget for 2011-12. Sources told Business Recorder on Saturday that the board is reviewing the budget proposals of Institute of Chartered Accountants of Pakistan (ICAP) for 2011-12, which advocate increase of maximum tax rate of salaried person from 20 percent to 25 percent.
The Institute has said that separate tax rates for salaried and non-salaried persons are against the norms of personal taxation, which encourage non-salaried persons to understate their incomes. Keeping this in view, the ICAP has suggested to the board to unify maximum tax rate to 25 percent, if the income exceeds Rs 3 million. Likewise, the institute in its budget proposals for 2011-12 has not only given several pensive suggestions to the board to improve its revenue generation but has also shared notions to eradicate lacunas for making policy and administrative reforms successful.
The institute has recommended to the board to raise the amount of tax credit for enlistment on a stock exchange in Pakistan-section 65c of the Ordinance from 5 percent to 15 percent as single-time tax credit equal to 5 percent of the tax payable is available to company in the year in which it is listed on any registered stock exchange in Pakistan. The amount of this tax credit, equal to 5 percent of the tax payable (effective tax rate stands reduced to 33.25 per cent from 35 per cent) and that too for only one year, is too small to attract listing of companies on a stock exchange. Therefore, the amount of this tax credit needs to be raised to at least 15 percent of the tax payable, which would mean an effective tax rate of 30 percent, instead of 35 percent. Moreover, the tax credit should be for at least the first five years of enlistment.
It said that in Pakistan, there is need to incorporate planning mechanism that would simultaneously encourage documentation and assist in bringing untaxed services sector into the tax net. This requires introduction of ''tax credit'' against personal taxation on submission of evidences of expenses incurred on: medical and education of children.
Such a credit would provide incentive for the user of such services in obtaining evidences for payments. That would in turn induce the recipient to be within the documented sector. Like other measures, this system had also been introduced in the past. However, due to procedural difficulties and lack of will by the tax executives, positive results could not be achieved. Therefore, the tax credit for personal expenditure on medical and education of children should be introduced with the only condition of submission of evidence of payment with full particulars of the payee.
Earlier, the government had allowed tax relief on life insurance policy premiums to help the industry and the economy growth. Life insurance and pension plans are the only segments of financial services that address the needs of individuals in the long term. Successive governments had applied different forms of tax incentives to promote savings but there had been no significant support in tax policy to actively encourage long-term savings. Keeping this in view, the government should introduce tax credit for life insurance premiums paid and contributions towards ''takaful'' to promote long-term savings.
The proposals further said that tax at a flat rate of 25 percent, without any "zero" tax threshold, was introduced in tax year 2010 through Finance Act, 2010, for ''association of persons'' as against the incremental slab rates with "zero" tax threshold of Rs.100,000 earlier applicable. This would serve as an incentive to convert an ''association of persons'' to a corporate structure.
In fact, the incentive to convert an ''association of persons'' to a corporate structure is further strengthened in terms of effective tax rate since a ''small company'' is entitled to deduct directors'' remuneration/salary in determining the taxable income and reducing effective tax rate on taxable income. However, the small and medium sized ''associations of persons'' which for many other reasons could not convert to a corporate structure and ''association of persons'' of professionals, like engineers, architects, lawyers, chartered accountants, doctors, etc, which by their governing statute are not permitted to carry on the profession in a corporate structure are hard hit by this abrupt increase of flat rate of tax of 25 percent on taxable income. Therefore, the rationalisation of this abrupt increase in tax rate has been recommended.
Further, it has suggested to the board to extend the benefit of small company to companies incorporated before July 1, 2005; and small company to be brought at par with an ''association of persons'' and ''individuals'' by providing the threshold of turnover of Rs 50 million for the purposes of withholding agent under section 153 of the Ordinance.
The institute has urged the authority concerned to reduce the rate of minimum tax under section 113, from 1 percent to 0.50 percent as the same was high and resulted in financial hardships to the taxpayer, especially in the current scenario where there are frequent power outages and deteriorating law and order situation in the country.
There is unanimity of views that policy framework for Presumptive Taxation Regime (PTR) was, in principle, introduced to cater for certain negative aspects of Pakistani tax culture. But the same was unsustainable model and appeared as ''stopgap'' arrangement. Hence, the final tax regime should be converted into minimum tax for all corporate taxpayers.
The rate of tax on retailers being an individual or an association of persons having turnover up to Rs. 5 million was raised through Finance Act, 2010 from 0.50 percent to 1.00 percent. However, the rate of tax on retailers having turnover of more than Rs. 5 million and registered under the special procedure for payment of sales tax remained 0.5 percent on turnover up to Rs 10 million and 0.75 percent for the turnover in excess of Rs 10 million under section 113B of the Ordinance. Therefore, the figure of 0.5 and 0.75 in section 113B should be substituted by "1.00" and "1.25", respectively.
It said there was need to rationalise the regime for taxability of capital gains in case of a non-resident persons. Therefore, it is suggested that the tax on capital gain should be calculated after allowing indexation for devaluation of Pakistani rupee, if any.
The taxation of marginal income on loans obtained from the employer below benchmark rate should be exempted by making necessary amendments in clause (53A) of the Part I of the Second Schedule and by deleting sub-section (7) of section 13; or alternatively a minimum threshold of the loan amount should be specified on which the provisions of section 13(7) would be attracted eg loans exceeding the limit of Rs 2.5 million. Besides that the mortgage loans will be exempted from the applicability of section 13(7) of the Ordinance whereas all other concessionary loans like auto loans, personal loans will continue to be taxed on the difference between the actual and the benchmark rate, which will boast the housing industry and tax revenue from housing and other allied sectors as well. The proposals said the restriction of set off of foreign losses against subsequent foreign income should be removed. Like corporate sector, professional service providers, who by their governing statutes are not allowed to get themselves incorporated, should also be excluded from the ambit of ''minimum tax'' concept.
The institute is of the view that presumptive/final/fixed tax regimes are distortion to the taxation system. Therefore, the income from property of the corporate sector should be excluded from the presumptive/final/fixed tax regimes.
It said thaat exemption granted to inter-company dividends under clause 103A of Part I of the Second Schedule should be expanded to inter-corporate dividends received by all resident companies instead of the present exemption to only group of companies entitled to group taxation under section 59AA.
Through Finance Act 2008, the employer''s contribution in the recognised provident fund in excess of Rs 100,000 is deemed to be income of the employee. This matter has importance since employer contribution though a constructive receipt is not an actual receipt as the same is not at disposal of an employee and therefore tax incidence should not be levied at the point of time of contribution. It has been suggested that ceiling of rupees one hundred thousand may be withdrawn as in many case this is the only long-term benefit. To promote and encourage export of services, it has been proposed that this should be brought at par with export of goods. It has also been recommended that the withholding agents should be allowed to retain 10 percent of the amount of tax collected as service charges on the principle of natural justice.