ISLAMABAD: The Federal Cabinet is said to have barred Federal Board of Revenue (FBR) from withdrawing tax exemptions available to the industry in Special Economic Zones (SEZs) fearing that it will negatively impact on existing and expected CPEC projects, well-informed sources told Business Recorder.

Another key proposal about dividends, income from corporate agriculture has also been dropped after strong opposition at the cabinet meeting.

The Revenue Division briefed the Cabinet on March 9, 2021 that the FBR has been undertaking corporate income tax reforms under the assistance of development partners. The basic purpose of reforms is to follow the ideal principles of taxation and remove distortions in law and encourage documentation so that corporate tax rates may be lowered in the medium to longer term.

To fulfill this purpose, the provisions relating to accelerated depreciation, tax credits, exemptions, and exclusions/ concessions had been re-visited. Further, many provisions relating to exemptions and tax credits had already expired but still remain on the statute book unnecessarily. Moreover, some of the penalty provisions also require rationalization.

The regime in-place relating to the taxation/ exemption of non-profit organizations requires more clarity. In order to give legislative effect to the proposed tax policy, recommendations of other Ministries/organizations/stakeholders, and removal of distortions including certain changes in tax laws for providing a level playing field are imperative. These were discussed in a series of meetings with the development partners, Ministry of Finance, and Special Assistant to Prime Minister on Revenue and were required to be implemented through the Income Tax (Second Amendment) Bill, 2021.

It was noted that the Prime Minister had dispensed with the condition of submission of summary to and approval by the Cabinet Committee for Disposal of Legislative Cases (CCLC) and had approved submission of the summary to the Cabinet.

During a discussion, the cabinet members questioned the withdrawal of exemptions on the income of text-book boards and Sheikh Sultan Trust.

It was argued that withdrawal of exemptions on the income of textbook boards may negatively impact the prices of textbooks. Similarly, withdrawing exemption on income of a Trust did not seem desirable.

The rationale for switching SEZs from tax exemption to tax credit regime was sought. It was noted that tax exemptions promoted malpractices as businesses located in SEZs get the opportunity to claim exemptions on income derived from other sources. Chairman, Board of Investment ( BOI) argued that changing of goal post would discourage investment in SEZs as there would be no predictability as to when the government may decide to reduce the rate of the tax credit from 100 percent to 90 percent or 80 percent.

The reasons for the withdrawal of tax exemption on the income of corporate farming were also sought. Revenue Division contended that there were no takers for this exemption and that is why it has been proposed to be withdrawn.

The Cabinet members stated that considerable interest was now evident in corporate farming, which would be discouraged by the withdrawal.

After a detailed discussion, the cabinet accorded its approval to the amendments in the Income Tax Ordinance 2001 through the Income Tax (second amendment) Bill, 2021 with the direction to drop the proposed amendments with respect to SEZs and dividends income from corporate agriculture, contained in the Draft Bill.

When contacted, senior FBR officials stated that there would be an insignificant revenue impact of some exemptions which were actually part of the Income Tax Amendment Bill 2012 and are now omitted from the proposed Bill on the directions of the Federal Cabinet. For example, the exemption granted to the special economic zones (SEZ) was brought into the tax credit regime. Now, it has been reversed and exemption available to the SEZs would remain intact. This would have no revenue implications, i.e., of reverting back from the proposed tax credit regime to exemption.

Moreover, presently, the exemption is available to income received by a taxpayer from a corporate agricultural enterprise, distributed as a dividend out of its income from agriculture. The exemption is available for the last 10 years, but not a single company has been registered as a corporate agricultural enterprise. The Bill submitted to the National Assembly has proposed to withdraw this exemption. On the directions of the cabinet, now, it has been proposed to delete the entry from the proposed Bill and to retain exemption on the income received by a taxpayer from a corporate agricultural enterprise, distributed as a dividend out of its income from agriculture.

This change has zero revenue impact because none of the companies are registered as corporate agricultural enterprises and retention of exemption regime has no revenue implications, senior FBR officials added.

Officials said a few further changes in the proposed Bill are also under consideration, they added.

Copyright Business Recorder, 2021