ISLAMABAD: Overseas Investors Chamber of Commerce and Industry (OICCI) has conveyed its concerns over tax anomalies in the budget proposals that may hamper investment and economic activity in the country.

In a letter to FBR Chairman Asim Ahmed, the OICCI said it had noted that the recent Finance Bill had imposed further tax at three percent on non-active taxpayers, even though there could be a difference between time of supply and filing of return. Therefore, as per previous practice, the further tax should continue to be applicable on unregistered persons. In addition, the adjustment of further tax should also be allowed as admissible input tax.

The OICCI has also proposed to reinstate relief from multiple taxation of inter-corporate dividends (ICD) in eligible group structures by inserting a new sub-section in Section 59B. “Distribution of dividends within companies eligible for group relief under this section shall not be deemed a taxable event” as this is in line with established global practice of protecting inter-corporate dividend from multiple taxation. In previous engagements with FBR as well, the OICCI had highlighted that the relief from multiple taxation of ICD is prevalent in all major developed and developing countries, including China, USA, Germany, India, Vietnam and Sri Lanka.

According to OICCI, the removal of tax relief on ICD will adversely affect the competitiveness of local business groups and prove to be counterproductive to the Government’s vision of promoting investment in Pakistan. Relief from multiple taxes on ICD was introduced via Finance Act 2008 as part of the larger reforms to promote corporatization and holding company structures in Pakistan. These reforms were made on the recommendation of task force formed by the government comprising FBR, ICAP, SECP and private sector. Last year, it was removed under the mistaken interpretation that it is an exemption.

Before 2008, the taxation of ICD at the rate of five percent was identified as the main hurdle in promoting Holding Company structure as it led to double taxation, firstly from operating entity to Holding Company and then from Holding Company to individual shareholders. As a result, this translated into an effective tax rate of 50 percent including corporate taxes.

The OICCI, the foreign investors’ representative body, also expressed its worry over other amendments in proposed finance bill pertaining to disallowances of contribution towards approved employee funds and increase in customs and additional customs duties on crude oil imports.

The body of foreign investors has also recommended that the income of commercial importers should be taxed under the normal tax regime, whereas special tax regimes such as FTR should only be restricted to non-corporate or unregistered taxpayers. The OICCI also called for restoration of “zero rating” on local supplies to persons registered under Export Finance Scheme (EFS) to discourage imports, promote import substitution and support exports.

Copyright Business Recorder, 2022