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Pakistan - Broadening of Tax Base

Omar Rashid
By Omar Rashid
8 years ago
Pakistan Tax Base

Ard, Mal, Mark-Up

Banking

International Trade

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  1. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Incen%veforindustrializa%on: Ø  CorporateTaxRates Thecorpora*ontaxrateareasfollows: Pakistan HongKong 34% 16.5% China 25% Indonesia 25% Bangladesh 27.5% Turkey 20% Malaysia 25% Addi*onalimpactinPakistanisWPPF5%,WWF2%,thereforeeffec*verateworksoutto be41%. Alowrateofcorporatetaxencouragesinvestmentandinducesvoluntarypaymentoftaxes, Thisshouldbereducedto20%overaperiodofnextfiveyears. Therateoftaxonquotedcompaniesshouldbe5%lowerthennon-quotedcompaniesto encouragethecompaniestogetthemselvesquoted.
  2. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Incen%veforindustrializa%on: Ø  TaxHolidayforNewIndustrialandCommercialSetup §  §  §  Aflatratemaybeleviedbasedongeographicaldivideurban/rural,income capacityofthearea,andcoveredareaofen*ty. It is proposed that this scheme may be introduced to enhance tax base by levyofflatrateofRs.5,000/-andslabedupwardsupto50,000excludingany adjustment for taxes deducted at source, per year as income tax and sales taxifthevolumeofgrossturnoverisuptoRs.25Million. However,thisschemeshouldclearlystatethatnodocumentswillbeasked for except CNIC and complete address of the en*ty to be stated, and the En*tywillnotbesubjectedtoAudit. §  TaxpayertobegivenayearlytokenbyFBR,whichshouldbedisplayedatthe premisestoguaranteethatinthiscasenoques*onswillbeaskedbyFederal BoardofRevenue(FBR). §  Thetaxauthori*esshouldonlyverifythattheturnoverisnotmorethan25 Millionbyapplying aformulatobeworkedoutinconsulta*onoftheBar, Chamber,MarketAssocia*onsandotherstakeholders.
  3. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT ImprovementofEconomicsIndicators: Ø  TaxtoGDP Pakistan’soveralltax-to-GDPra*ohasremainedstagnantataroundapproximately 9%and,infact,hasshownadeclineinrecentyeartobelow9.0percent.Thereason behindthelowtax-to-GDPcollec*onofPakistanintheworldisrampanttaxevasion and a poor collec*on system. Today, Pakistan has a lower tax-to-GDP ra*o than otherAsiancountriesasfollows: SriLanka 13% Indonesia 15% Thailand 17% SouthKorea 16% India 16% Malaysia 14% Philippines 14%
  4. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Ø  NADRADateBase NADRAdatebaseshouldbeusedeffec*velyincludinginforma*onfromelectricity and gas distribu*on companies to iden*fy non taxpayers. FBR has a list of 2.6 Millionpersonswho: §  §  §  §  Ownsatleastonepropertyof500Sq.Yardsormore Ownsatleastonemotorvehicleof1000ccormore Hastaken2ormoreforeigntrips Maintainsabankaccount AnsuchpersonsarenotevenregisteredwiththeFBR.
  5. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT ImprovementofEconomicindicators: Ø  InvestmenttoGDP Lowinvestmentandcapitalforma*onisrecordedasoneofthebiggestimpedimentto sustainableGDPgrowthinPakistan.Followingtableprovidesstatusintheregional countries. §  Pakistan15%,itisdownfrom17%in2002 §  India35%,itincreasedfrom25%in2002to35%in2012 §  Vietnam39% §  SriLanka28% InPakistanGrosscapitalforma*ontoGDPisdeclining,incontrastaveragegrossasset forma*oninothercountriesareshowinganincreasingtrend.
  6. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT ImprovementofEconomicindicators: Ø  StatusofSavinginEconomy AccordingtoworldBank,savingstoGDPinPakistanisthelowestintheregion, comparablera*osforothercountriesareasfollows: §  Pakistan22%itisdownfrom26%in2002 §  India34% §  Bangladesh35% §  SriLanka32%ithasovertakenPakistanduringlast6years
  7. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT ImprovementofEconomicindicators: Ø  Lowdepositratesdiscouragesavingsandfosterillegalchannels §  §  §  §  §  AveragebankingdepositrateinPakistanstoodat8%in2013whileinfla*on has been ranging at 11-13% reflec*ng nega*ve return of 3-5% on banking deposits. This saving rate is also dispropor*onate when compared to the region and theirrespec*veinfla*on,discountrateandlendingrate. This discourages the masses from saving and fosters un-documented channelsandflightofcapital. On the flip side, banks enjoy heey return on lending and investments, therebyyieldingthesectoranaveragespreadofaround8-9%in2013,which isevenhigherthanwhattheactualdepositholderearns. Recently,thebankingsectorinPakistanhasbeenpos*ngunmatchedreturn onequityandgrowthinprofitability.
  8. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Incen%veforEconomicindicators: Ø  MarkupRates MarkupratesinPakistanandinotherregionalcountriesareasfollows: Pakistan 14.15% India 6.25% Bangladesh 6.00% China 6.31% The rates in Pakistan are more than twice that of the other countries which results in higher cost of Produc*on and cost of infla*on, besides restric*ng exports, encouraging imports and pufng pressure on foreign exchange and reducingthePakRupeevalueagainstmajorcurrenciesoftheworld.
  9. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Thepresenta%onconsistsoffollowingsegments: Ø  InfrastructurePlanning Ø  Reduc*oninmarkupratesforindustrialcredits Ø  Largescalemanufacturing,SmallandMediumEnterprises Ø  Onewindowopera*onforlabourrelatedlevies
  10. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT InfrastructurePlanning Ø  EfficientInfrastructurePlanningisalwaysaneglectedsectorinourcountry.Westrongly UrgeGOPtotriggerlong-termstrategicplanforinfrastructuredevelopment.Wepropose Followingmeasurestobetakenonwarfoo*ng: §  NewIndustrialestatesandparkstobemadeandexis*ngonestobeupgraded. §  Expedi*ng Thar Coal Projects and other such avenues of cheap produc*on of electricity. §  Iden*fica*onofHydelPowerProjectsandallowprivatesectortoinvestonBOT basisandonopenbiddingmethod. §  Lease unfarmed land to investors on Private Public Partnership basis and encouragecorporatefarming. §  Use of drip irriga*on and provide interest free loans to farmers for using this technology. §  Explore deep sea explora*on and desalina*on of water for domes*c and industrialuse.
  11. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Ø  Reduc[oninMark-upRateforIndustrialCredit §  We believe that curbing growth now will dent Pakistan’s Economy further. Unless we achieve a reasonable growth of about 4% to 5%, our economy will face stagna*on and our problems will compound further. We propose lower mark-up rates for industrial credits, which will go a long way in poverty allevia*on. Ø  LargeScaleManufacturing-LSM §  LSMshouldbeprovidedallfacili*esastheyareoneofthemajoremployment providers. In fact our core assets are Agriculture Land and Human Resource – Skilled and Un-skilled. Solu*on to our future growth is based on using them efficiently.Westronglyfeelthataconcreteplanontheseaccountsshouldbea partofournextyear’sfiscalmeasuresbackedbySovereignGuarantees. Ø  SmallandMediumEnterprises-SME §  SME’sareequallyimportantplayersinthecountryandalleffortstobemadefor itspromo*onsaswell,includingsefngupofseparateindustrialestates.
  12. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Ø  One Window Opera[on for Labour Related Levies and Effec[ve use of collected funds §  Ø  WeproposetomergealllabourrelateddepartmentslikeEOBI,SocialSecurity (all provinces) into one and funds collected for labour related levies shall be u*lizedthroughaprofessionallycons*tutedboard.Wealsoproposethattheir Investments in safe securi*es, instead of inves*ng a por*on in risk oriented proposi*ons. OtherImportantAreas §  §  Loans on machinery should be given at lower interest rate (say 5%) for establishmentoftheindustriesinthecountry. The work on maintenance of exis*ng infrastructure and its further developmentandshortageofelectricityandgasshouldbeovercomeonwar foo*ngs, and in the mean*me, industry be facilitated to import generators freeoftaxesanddu*es.
  13. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Thepresenta%onconsistsoffollowingsegments: Ø  SectorialRevenueContribu*on Ø  RealEstateValua*on Ø  NADRADataBase Ø  AusterityMeasures Ø  CurbingDiscre*onaryPowersofOfficials
  14. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT SectorialRevenueContribu[on Thecontribu*onoftaxtoGDPascomparedtothetaxtoGDPcontribu*onisverylopsided. Section Share in GDP Tax to GDP - Agriculture 21% 1% - Manufacture 19% 51% - Electricity, Gas, Mining & Construction 7% 14% - Transport, Storage & Communication 10% 7% - Wholesaler & Retailer 18% 6% - Finance & Insurance 7% 5% - Other Services 18% 16% 100% 100% Reviewofthecollec*onoftaxalsorevealsthatthedirecttoindirecttaxesare1/3:2/3 whichprimarilyisreverseofwhatitshouldbe.
  15. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Ø  Ø  RealEstateValua[onandConsequentReduc[oninStampFees §  A formula for determina*on of market value of real estate has to be evolved throughmarketsurveys §  Incen*ve to owners should be given by bringing Collector Value in close proximatetomarketvalue NADRADatabase §  To curb Parallel Economy and to promote tax culture, effec*ve use of NADRA database by FBR is indispensable to apprehend alleged tax evaders without discrimina*on. §  Iden*fica*onofCNICmustbedonebeforeexecu*ngmajortransac*onsincluding buying and selling of proper*es, valuable assets of more than Rs.500,000/-, we areproudtomen*onherethattheGOPhasrecentlyannouncedthatCNIC(for individuals)willreplaceNTNwhichwillgoalongwaytowardsdocumenta*onof theeconomy,thiswasbeingdemandedbyourBARforanumberofyears.
  16. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Ø AusterityMeasures We understand that the GOP is working to reduce expenses, we would like to highlight coupleofkeyitemsasfollows: §  Ra*onalizingsizeofcabinet,management&staffofGovernmentPublicCompanies §  CappingofAdministra*veexpenses §  EndofVIPculture Ø CurbingDiscre[onaryPowersofOfficials §  UsingDiscre*onaryPowerisoneofthebiggestavenueofcorrup*onandindirectly triggers black economy. We, at KTBA strongly, believe that GOP must put safety valvesonuseofdiscre*onarypowersespeciallyinfiscallaws §  Furtherincaseofdetec*ngwrongdecisionsormissdeclara*on,fineisleviedbytax officialontaxpayers,therefore,jus*ceandequitydemandthatitshouldbeequally applicabletotheconcernedofficialsforwrongdecisionsaswell,wheretaxpayers areprovedtoberight.
  17. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Ø Selec[onOfPersonsorClassesofPersonsForAudit [Sec[on177&214(c)] Casesoftaxpayersfiledareconsideredasfinalizedunderselfassessment. However,caseswerebeingselectedforauditundersec*on214(c)byFBRthroughcomputer ballo*ng. Powershavebeengiventocommissionstoselectcasesforauditundersec*on177,which hasnowbeenstartedtobemisused,andthisiscrea*ngharassmentforthetaxpayers. Thisisinaddi*ontocasesbeingselectedundersec*on122(1)/122(5)/122(5A)etc. It is suggested that there should be some restric*on put on the commissioner before selec*ngacaseundersec*on177orusingthepowerundersec*on122.
  18. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Ø RecoveryOfTaxes Ithasbeenno*cedthatthepastfewyears,frivolousdemandsarecreatedandtherecovery startsimmediatelyaeertheexpiryofthe*melimitof15days. It is therefore, proposed that to avoid harassment, tax demand of only 15% should be recovereduptothefirstappealandanaddi*onal35%uptothetribunallevel.Thismeasure will go a long way in reducing harassment and also corrup*on. (This was prevalent in the pastandhadreducedthecorrup*ontoaconsiderablelevel.
  19. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Ø IncreasingTheThresholdForWithholdingTax [Sec[on153] In1999throughSRO586(1)/91datedJune30,1991thethresholdfordeduc*onoftax wasfixedat §  Rs.25,000/-ForGoods §  Rs.10,000/-ForServices Sincethesewerefixedabout15yearsagoitisproposedthatthethresholdshouldbe increasedtoRs.200,000/-andRs.100,000/-respec*vely.
  20. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Ø TaxabilityOfProvidentFundContribu[on Sub-rule (a) of Rule 3 of the Sixth Schedule provides that any contribu*on made by an employertoaprovidentfundinexcessof10%ofthesalaryorRs.100,000/-,whichever is lower,shallbedeemedtobeincomeoftheemployee. Proposal Wesuggestthatthedeemingofincomeofanemployeemayberestrictedto10%ofsalary onlyandtherestric*onofmonetaryamountofRs.100,000/-perannummayberemoved.
  21. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Ø Computa[onOfCapitalGainsOnDisposalOfSecuri[esByTheNon-Residents • NonresidentsinvestmoneyinforeigncurrencyconvertedtoPakistaniRupees. • Whensold,capitalgainiscalculatedinhistoricalterms(PakistaniRupees). • Profitarises,howevertherecouldbeactuallyaloss. • IndiaIncomeTaxAct,1961–Sec*on48. Proposal SimilaramendmentbemadeinSec*on76oftheOrdinance.
  22. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Ø Separa[onOfTaxJudicialSystemFromCollec[onmachinery The present scheme of tax appellate authori*es being under the control of the execu*ve sideofthetaxmachineryhasbeenanobviousimpedimentinprovidingquickjus*cetothe taxpayersandassuchithasbeen*meandagainproposedthatthejudicialsideshouldbe madeindependentoftheexecu*vesidewithnocrossbordermovementfromonesideto theother;beingalsoacons*tu*onalrequirement.Thisaspectneedsimmediateapen*onso that the system be brought in line with the provision of the Cons*tu*on of the Islamic RepublicofPakistan.Wefeelthatadjudica*ngofficersmayberemovedfromsubordina*on ofFBR.AppellateForumsshouldworkundertherespec*veHighCourtsInsteadofFBR. Proposal It is proposed that the tax judicial system should be given under the control of a Chief (placed in every province), who may be a Judge of the High Court or Supreme Court of PakistanandthehierarchycanbecreatedunderthesaidChief.
  23. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Ø DefaultSurcharge/Penalty The basic inten*on of the law to impose any penalty or addi*onal tax was to educate the taxpayersandtodiscouragethetaxpayerfromdelayingthepayment.However,theratesof thechargehavebecomesounreasonableastheGOPhasnowmadeitasourceofrevenue. InarecentcasereportedasCITKarachiV.MessrsGeneralTyreandRubberCo.108TAX359 &2013PTD387,itwasheldthattheimposi*onofpenalty/addi*onaltaxshouldnotbemade asourceofrevenueforthegovernment. Itisthereforesuggestedthatthedefaultsurchargeshouldbebroughtdowntoreasonable limits.
  24. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT RevisionOfReturnByTaxpayers [Sec[on114(6)] Now revision of return/wealth statement can not be done without the permissionoftheCommissioner. Approval of Commissioner is not accorded for a long period, hence revisionofreturnsisnotpossible. Itishenceproposedthata*melimit(say15days)shouldbeincorporated and aeer the said period the computer access should be automa*cally available.
  25. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT CreditForDeduc[onOfTax Whenthededuc*ngauthoritydeductstaxanddepositsthesametothe governmenttreasury,thepersonfromwhomthededuc*onismadehas torunfrompillartoposttogetthecredit. It is proposed that since the NTN/CNIC of the said person is mandatory, credit should automa*cally to available to the said persons e-portal account
  26. PAKISTAN-BROADENINGOFTAXBASE INCOMETAXPRE-BUDGETPROPOSAL2015-16 , PROMOTIONOFINVESTMENT&EMPLOYMENT Ac[veTaxpayers Thenewsec*onintroducedforac*vetaxpayersisnotavailablefor i.) Taxpayerswhofilemanualreturn ii.) Newtaxpayers It is therefore, suggested that all returns filed should be immediately incorporatedinthesaidlistandforthosewhotaketheNTNforthefirst *me,theyshouldbeonthesaidlist*llthenextdateoffilingofreturns.