Economic Co-ordination Committee (ECC) of the Cabinet has refused to grant a Rs 4 billion financial benefit to M/s Byco under the garb of ambiguity in minimum tax applicability despite hectic efforts by Chairman Board of Investment (BoI) Miftah Ismail.
According to official documents, on a summary moved by the Ministry of Petroleum and Natural Resources, the ECC granted tax exemption for 71/2 years to Byco Oil Pakistan Limited for the refinery project located at Gadani. This was based on the incentives approved by the ECC on October 10, 2007 for a coastal refinery at Khalifa Point which was never set up.
Meanwhile, FBR introduced exemption for the corporate tax by way of clause (132A) of Part 1 of the second schedule to the Income Tax Ordinance, 2001. At the time when this clause was being introduced and negotiations/discussions with FBR were under way, there were no provisions for the charge of minimum tax on turnover (minimum tax under section 113 of the Ordinance was deleted in 2008 and was reinstated by the Finance Act 2009). As a result, FBR notified tax holiday exemption for only corporate tax on profits without mentioning exemption from minimum tax at 0.5 per cent on turnover despite the fact that the ECC had granted a tax holiday to M/s Byco. Tax levied under the Ordinance represents taxes based on income and a minimum tax liability based on turnover. In almost all the cases, especially in capital intensive high turnover project, exemption is provided for taxes encompassing both.
M/s Byco's argument was countered with the logic that the company was granted tax holiday under corporate tax section and not against all future taxes. Secondly, minimum tax is also applied on even a loss-making company; so how the government could extend a financial benefit of Rs 4-5 billion to M/s byco. According to Chairman Board of Investment (BoI), M/s Byco had earlier approached FBR through the Ministry of Petroleum and Natural Resources for the exemption of minimum tax. However, FBR declined the request of Byco and stated that minimum tax should be charged under section 113 even in cases where exemption had been granted under second schedule to the Income Tax Ordinance, 2001.
Miftah further stated that Byco's position is that the imposition of minimum tax is not consistent with the tax holiday granted by the ECC on March 19, 2009. As the same time, a number of entities are exempted from the minimum tax (11 A of the part IV of the second schedule). To remove this discrimination Byco may be included in this list of 11A and granted exemption from minimum tax.
However, FBR, in its comments stated that minimum tax is applied even to those taxpayers whose income is exempted from tax; hence it is against the spirit of section 113 of the Income Tax Ordinance, 2001 to allow exemption from the provisions of section 113 on the basis that income of the taxpayers is exempt from tax. Clause (11A), part IV of second schedule deals with exemptions from provisions of section 113 of the Ordinance. Persons mentioned in the clause (11A) were allowed exemption from minimum tax on the basis of specific government decisions, otherwise minimum tax is chargeable even if profits and gains are exempted under part 1 of the second schedule and a number of such cases/persons are mentioned in the second schedule.
Moreover, the board as a policy is not allowing exemptions and trying to trim down the exemptions already granted as they are causing huge tax expenditure, ultimately creating a negative impact on tax revenue. It is pertinent to mention here that Board of Investment sought the Prime Minister's approval (as incharge Minister for BoI) to submit a summary to the ECC after the Prime Minister inaugurated Byco refinery at Gadani. Ministry of Petroleum and Natural Resources and Ministry of Industries had supported the proposal. However, FBR opposed the proposal whereas Finance Division backed the FBR viewpoint.