All income irrespective of source should be taxed
Pakistan Business Council (PBC) views tax policy as a primary tool for the promotion of industrialization, economic growth and for more equitable distribution of the tax burden. PBC strongly advocates that taxation needs to be based on the principle of “All income irrespective of source should be taxed.”
The fiscal space that the government is looking for to implement its ambitious socio-economic agenda will not and cannot be provided by continuing to increase taxation on the already taxed sectors of the economy. The taxation base needs to be widened through better documentation by bring the under taxed and the currently exempt sectors to the tax net.
The current tax policy is leading to a reduction in investable surpluses for the corporate sector. Frequent changes in the tax laws e.g. the introduction of measures like SUPER TAX, tax on undistributed reserves, alternate Corporate Tax (ACT) and the refusal to allow carry forward losses under the minimum tax regime may in the short term help shore up the FBR’s collection. These, however, in the long run will only lead to a reduction in the FBR’s collection as corporate review their investment plans. In addition the arbitrary and on-transparent implementation of tax laws by FBR functionaries in their zeal to achieve unrealistic targets is severally impacting viability of the formal sector.
While the PBC appreciated some of the measures taken by the Finance Minister such as bringing in the concept of filers vs non filers a lot more needs to be done to expand the tax base. The existing tax payers are being subjected to what can only be defined as tax discrimination. Pakistan’s formal taxpaying sector needs to be supported to allow it to gain scale and hence to become competitive.
Tax policy therefore needs to encourage the development scale as opposed to viewing big business in a negative framework. In the absence of a large base of taxpayers, the formal and documented sector will in the foreseeable future continue to be the FBR’s main source of revenue, it is therefore important that this sector be allowed to grow and tax policy and tax administration encourage this growth.
The Budget 2016-17 offers the government an opportunity to finally address the structural weaknesses of the economy. Tax implementation based on a policy of ‘zero tolerance’ needs to focus on increasing documentation of the economy and widening of the tax base, this needs to be priority number one of the FBR.
The current strategy of permanent and announced tax amnesties should be permanently done away with and replaced with better enforcement through increased use of technology and administrative reforms in FBR.
In order to increase the tax base to reduce burden on existing taxpayers, PBC recommended that a large pool of financial data is available with the FBR. From the formal sector the FBR portal is constantly updated with income tax and sales tax withholding data.
The FBR is required to tap into this and other data to increase the tax payers. New section be added to allow manufacturers who buy at least 90 percent of input from registered supplies a 2.5 percent tax credit.
There should be a cap on unexplained remittances beyond a threshold. Advance tax may be collected to discourage ‘whitening’ of illicit income.
Sometimes prize offered by companies for promotion of sales.
Explanation needs to be added to this section to clarify that product/cash given as part of sales promotion efforts to increase/achieve targets will be taxed at the withholding tax rate applicable to channel partners and this provision is applicable to prizes given to end consumers only.
Currently corporate are subject to one of the three income tax regimes — Alternate Corporate Tax (ACT), Minimum Turnover Tax or Normal Tax Regime, PBC has proposed that ACT should be an alternate to the corporate tax including minimum tax instead of an additional form of minimum tax.
In order to reduce the cost of doing business, the sales tax should be collected at the time of actual delivery of goods and not at the time of advance payment received from customers. Some sectors are exempted from sales tax on their output as they are not allowed adjustment of their input sales tax, those sectors whose output is exempt from sales tax should be allowed zero-rating to allow them to claim input sales tax to allow them to become competitive.
PBC strongly objects to any tax amnesty schemes or waivers in customs or other duties/levies on smuggled goods as the such moves on the part of the government penalize the formal taxpaying sector.
Expansion of plant or undertaking a new project involves investment in factor building and manufacturing related infrastructure and such these types of investments should be made eligible for tax relief.
It was also proposed that the initial depreciation allowance rate be restored to 50 percent for plants as was the case prior to Finance Act 2013. This will gear up investments in the industrial sector resulting in job creation and increased tax revenues for the governments once the unit starts earning.
Reducing cost of doing business
It is recommended that the Minimum Turnover Tax revert to 0.5 percent and in the interest of tax equity, corporates in the service sector be subject to the same rules as applicable to other corporate. This will help companies better manage liquidity and also allow investments in the services sector.
Every person paying prize of prize bonds or winning from a raffle, lottery, prize on winning a quiz, prize offered by companies for promotion of sales to end consumers or cross-word puzzle shall deduct tax.
The clear intention of this section is to capture tax through withholding at source from persons who are recipients of these prizes or winnings.
The intention is not to tax any person who belongs to the supply chain of the companies who offer prize for promotion of sales.
The income of the supply chain i.e. dealers, distributors is subjected to withholding tax in the shape of withholding taxes imposed under separate withholding regimes. It is suggested that to clear any ambiguity in law regarding application of this section, it may be amended to add term “end consumers” to oust any person in the supply chain from the ambit of this section.