The government is considering imposing a 5 to 10 percent adjustable withholding tax on expenditure made by undocumented persons in case of electricity bills, purchase of vehicles, payment of school fees, marriage functions in hotels and marriage halls and travel by air in the upcoming budget (2012-13).
A participant told Business Recorder, at the conclusion of Economic Advisory Council (EAC) meeting presided over by Finance Minister Dr Abdul Hafeez for preparation of next budget that the country's economic managers are finalising the proposal to impose adjustable withholding tax on certain kinds of expenditures made by undocumented persons belonging to rich class.
He said the amendment is expected in the Income Tax Ordinance 2001 through Finance Bill (2012-13) and the withholding tax would be adjustable and anyone who would file income tax returns would be eligible to obtain refund of the same. However, those not filing their income tax returns would not be able to obtain refund of withholding tax paid on such expenditures. The Board would only target those persons earning huge income but not paying tax or filing their returns. For example, any private school charging Rs 5,000 or above fee would be subjected to 10 percent adjustable withholding tax. In case of filing returns, withholding tax would be refunded. However, the subject withholding tax would not be applicable on school fee below Rs 5,000 per month. Similarly, electricity bills above a certain amount may be subjected to adjustable withholding tax. The rich persons spending huge amount on marriage functions in hotels and marriage halls would also be subjected to adjustable withholding tax. Under the proposed formula, 10 percent of the bill of hotel/marriage halls would be deducted as withholding tax. Similar kind of adjustable withholding tax would be applicable on the purchase of cars. The purchasers would be able to obtain refund of the withholding tax on filing of the income tax returns. The rental income is already subjected to withholding tax and no new levy has been proposed in this regard. It is being examined to impose similar kind of adjustable withholding tax on the travel by air, if possible.
Sources said the government has adopted a new approach to deal with the habitual tax evaders and undocumented persons, who are not even ready to fill the Annex-D (details of personal expenditure) of the income tax return form. The FBR has tried its level best to encourage everyone to voluntarily file their income tax returns and also show details of their personal expenditures through Annex-D. Despite FBR's sincere efforts to obtain details of expenditure, there is no encouraging response in this regard. Only those persons are opposing Annex-D of the return whose expenses do not commensurate with their declared income. Anyone making expenditure as per declared income has no reason to do agitation/strikes. The resistance from some traders, etc, to the declaration of expenditures in income tax returns shows their expenditures do not match the declared income.
Now, the adjustable withholding tax would encourage persons to voluntarily come forward and file their income tax returns for obtaining refund of the withholding tax. The undocumented persons, who are not ready to file their returns, would continue to pay adjustable withholding tax in future, sources added. Later, talking to media persons after the EAC meeting, Federal Board of Revenue (FBR) Chairman Mumtaz Haider Rizvi said the country suffered around Rs 25 billion revenue loss during the recent law and order situation in Karachi and a sizeable gap is unrecoverable. However, he said the tax authorities collected Rs 18.5 billion in one day, (Friday) and the field formations have been directed to optimise their efforts to plug the revenue loss of March in the subsequent month.
He also expressed the hope that revenue collection target of Rs 1952 billion, although very steep and difficult in the face of energy crisis and ongoing sporadic incident of violence in Karachi, is achievable. He said their efforts in the next fiscal year budget would be that tax system should be simple, transparent and predictable. To a question about the perception that tax authorities normally withhold refund and tax in advance for showing that revenue collection target projected for the fiscal year was achieved.
He said he would not care about the shortfall in achieving revenue target of Rs 1952 billion for the current fiscal year but refund would not be stopped and the episode that caused embarrassment last year would not be repeated. The FBR chairman said net and not gross collection would be the actual revenue of the government. Member Economic Advisory Council, Hafeez Pasha who constituted four committees on various sectors of economy submitted their reports to the EAC which, he said would be discussed in next meetings.
The committees constituted on capital market submitted its report along with recommendations to be incorporated in the policy to improve its performance. The committee on agriculture and industrial sector also presented its report which would be discussed in the next meetings of the EAC. He said the committee on fiscal co-ordination and balance of payment also submitted its report for improved fiscal co-ordination between the Center and the provinces especially after the 7th NFC Award that increased provincial share in the divisible pool considerably.
He said the economic team intends to present budget in the Parliament at the end of May 2012 and Finance Minister Dr Abdul Hafeez Sheikh has assured the EAC that the economic team would adhere to fiscal discipline in the next budget.
The minister ruled out the perception that political considerations would supersede economic considerations in the next budget because of approaching general elections in the country. Dr Hafeez Pasha said level of government borrowing from the banking system has deepened the fear that inflation target for the current fiscal year would be missed. He underlined the need to increase the tax to GDP ratio would be required to increase to 10 per cent to contain the fiscal deficit in the next fiscal year. He expressed the fear that inflation may touch 13% in the current fiscal year against the target of 12% largely because of government borrowing from the banking system.
About Securities and Exchange Commission of Pakistan (SECP) proposals for the next budget, he said SECP wanted more elaborate investment incentives such as tax relief to the individual investment in the budget to increase savings. The SECP also wanted promotion of mutual and venture capital funds as well as incentivising the capital market. The secretary EAD said the materialisation of external assistance against the projects was relatively higher in the current fiscal year.