THE AMERICAN BUSINESS COUNCIL OF PAKISTAN (ABC)
SUGGESTIONS FOR THE
FEDERAL BUDGET 2016-17
EXECUTIVE SUMMARY
Attached are the proposals for the upcoming Federal Budget
2016/2017 which comprise of 8 taxation related proposals and 11
procedural improvement/modification proposals. All these proposals
will positively impact the ability for US companies to operate
efficiently in Pakistan. The procedural suggestions are designed to
help streamline and improve tax collection and appeal
processes.
The ABC vision remains to have a robust, understandable and
transparent taxation environment which includes:
EVERY EARNING MEMBER OF SOCIETY SHOULD BE PAYING TAXES:
We have one of the lowest Tax to GDP natios in the world, at
approximately 10%.
Major sectors of the economy are not appropriately taxed, such
as agriculture, real estate & the stock market. This level of
revenue collection restricts the States ability to provide
infrastructure and services.
Industry, which makes up 20% of the GDP, is disproportionately
taxed.
Currently less than 2% of the population pays personal
taxes.
Increasing the taxation rate for professionals without widening
the tax net, is leading to a brain drain from Pakistan.
Fiscal roadmap or taxation roadmap will ensure ease of doing
business and a level playing field translating into sustainable
government revenue stream.
Effective tax enforcement is expected to increase Government
revenue collection.
HAVE A SIMPLE TAXATION STRUCTURE:
Taxes should be easy to levy and easy to file for tax
payers.
The focus should be on direct taxation instead off indirect
taxation.
Make Pakistan attractive for foreign investment by making its
taxation competitive.
Kamran Nishat
Chairman Finance &
Taxation Sub-Committee
CONTENTS: ABC SUGGESTIONS FOR FEDERAL BUDGET 2016-17
Taxation proposal indexPage Number
High Corporate Taxes
1A. Expansion of the Tax Net5
1B. Common Income Tax Rate for Corporate and other Sectors5
1C. Section 113 Carry Forward of Minimum Tax5
1D. Advances included in the definition of Supply6
1E. Custom - Increase in cost of production6
1F. Import Duty on Sodium Silicate7
1G.Import Duty on Soda Ash7
1H. Tax credit u/s 65 D & E is to start commercial
production before June 30, 20168
1I. Withholding Tax on Service Sector being the Minimum Tax8
1J. Withholding Tax for Distributors8
1K. Tax Amnesty Scheme for Tax Audits9
ELIMINATION OF FINAL TAX REGIME
2A. Final Tax Regime for Manufacturer-cum-Suppliers9
EXPANSION OF GENERAL SALES TAX
3A. tax at the time of Purchase instead of at the time of
invoice payment10
PERSONAL INCOME TAX
4A. Higher Tax on Salaried Individuals10
4B. Withholding tax @ 20% on Prizes and Winnings10
BANKING SECTOR
5A. Section 165 of the Income Tax Ordinance 200110
5B. Disallowance of Bad Debts11
5C. Bank's return as per the Seventh Schedule12
5D. New advance tax regime for banks.12
5E. Advance tax u/s 236P12
PHARMACEUTICAL SECTOR
6A. Duty Drawback Export Policy Order13
6B. Pharmaceutical Products to be taxed at zero-rated Sales
Tax13
6C. Import Duty On Pharmaceutical Raw Materials Table III of SRO
567 of 200613
6D. Import Duty On Pharmaceutical Raw Materials Schedule 5
(Table III)14
6E. Regulatory Duty on Imported Sugar14
6F. Section 18 of the Sindh Sales Tax on Services Act,
201114
CREATING VIBRANCY IN THE IT SECTOR
7A. Minimum Tax on services - Section 153/Clause 7914
7B. Industry Classification as IT Services and IT enabled
service15
7C. C.No 3(9)ST-L&P/2011-2356-R15
FAST MOVING COMSUMER GOODS SECTOR
8A. FED on Concentrate in Sales Tax Mode15
8B. SRO 1175, REGULATORY DUTY IMPOSED ON 400+ ITEMS16
Taxation proposal indexPage Number
PROCEDURAL PROPOSAL INDEX
9A. Adjustment of Sales Tax on Services under reduced rate
regime16
9B. Procedural Exorbitant excise increases16
9C. FBR Portal Section 33 & 34 (2-b)17
PROVINCIAL TAXES
10A. Input Sales tax on reduced rate paid under provincial tax
is disallowed as input tax17
10B. Provincial Sales tax on Services charge on various rates
does not allow input 17
10C. WWF Sindh Act18
10D. 15(b) of the Schedule to the Sindh Stamp Act18
10E. Sales tax on technical/royalty fee18
10F. Sales tax adjustment on technical/royalty fee Section
7(2)19
10G. Tax Challan Verification19
10H. Nil Withholding Certificates required by FBR19
HIGH CORPORATE TAXES
1A. Expansion of the Tax Net
Issue
Future prosperity of our nation depends on the ability of the
government to expand the tax net. In order to adequately invest in
infrastructure improvement and energy reliability, the government
must increase the Tax/GDP ratio beyond the 10% where it sits
currently. Government must clearly identify sectors of the economy
which are not fairly taxed and tax them in line with other sectors,
else the manufacturing sector which is disproportionally taxed
(accounts for 20% of GDP but takes 66% of tax burden) will cease to
remain attractive and survive.
There are two key pools of tax payers that need to be tapped,
namely:
Sectors that are not taxed proportionally like Agriculture,
Retail and Wholesale, Real Estate and Stock Market. Have a strong
and effective drive to identify tax evaders.
Proposal
All sectors including Agriculture and Retail & Wholesale
need to be brought under the tax net and proportionally taxed.
All individuals and commercial businesses should be taxed
irrespective of their exemption status.
Tax evaders need to identified and taxed. This can be achieved
by better coordination between SECP and FBR: This will result in
detecting companies which are although registered with SECP but are
not registered with FBR and thus are not under the tax net.
Benefit
More funds available to the government will enhance their
ability improve infrastructure, attract investment and create a
conducive environment for businesses to function and prosper. The
businesses in turn would create jobs and give back to the
government the much needed tax revenue. Together this process will
result in much needed incremental GDP growth and improvement in
standard of living of tax payers.
1B. Common Income Tax Rate for Corporate and other Sectors
Issue
Anomaly in Tax structure, whereby listed companies are taxed at
32% while non-corporate entities such as Partnership and Sole
Proprietor are taxed at 30%
In addition to 32% direct tax, the companies also have to pay 5%
WPPF and 2% WWF which leads to additional tax burden.
The AOPs and small companies enjoy benefit of lower tax rate
with even lower documentation compared to large companies. This
discourages the economy towards documentation and further these are
also not under the detailed scrutiny of FBR as applicable for large
companies falling under the LTU and RTO facing multiple audits.
Proposal
Income Tax Rate on taxable income of Companies, Association of
Persons and Small Companies be standardized with a common rate of
30%. WWF should be abolished
Benefits
Single/common income tax rate will encourage investment in
corporate sector enabling Pakistan to be internationally
competitive. The elimination of effective tax rate gap between the
corporate organizations and others will provide equal opportunity
to all sectors to be competitive.
Corporate sector growth will generate extra revenue
contributions to the GDP and promote documentation.
1C. Section 113 Carry Forward of Minimum Tax.
Issue
As per section 113 of the Income Tax Ordinance, 2001 specifies
that where the minimum tax paid exceeds the actual tax payable, the
excess tax paid shall be carried forward for adjustment against tax
liability. The limit for carry forward is up to five succeeding tax
years.
There is an ambiguity surrounding the carry forward and
adjustment of minimum tax where there no tax is payable under Part
I, Clause (1) of Division I, or Division II for the First Schedule,
Minimum tax is not allowed to carry forward.
Proposal
Clarification required to the provision of section 113 (2) (c).
where no tax is payable under clause(1) of Division I or Division
II, of Part I of the First Schedule the amount of tax paid under
sub-section(1) shall also be carried forward for adjustment against
the tax liability under the aforesaid clause and Division of the
subsequently tax year.
Benefits / Rationale
To remove the ambiguity prevailing over the interpretation of
the provisions of section 113(2)(c).
1D. Advances included in the definition of Supply
Issue
Section 2 clause (44) of Sales tax act, 1990 includes Advances
under the definition of time of supply resulting in Sales tax to be
computed at payment stage.
Proposal
Advances should be removed from the definition of time of
supply.
Benefits
The inclusion of advances in time of payment increases
unnecessary efforts to reconcile the advances with actual
invoices.
1E. Increase in cost of production
Issue
Increase in cost of production due to higher rates of duties on
import of raw materials. Current rates of customs duties on import
of raw materials are 5% to 20%.
Proposal
Current Rates of customs duty on import of raw materials are
proposed to be reduced as follows:
Current Rates Proposed Rates
20% 5%
15% 5%
10% 0%
Benefits
Reduced rates of customs duties will decrease the cost of
production of local tiles and would enable local tiles
manufacturing companies to compete with imported tiles available in
the country.
Lower cost of production would increase sales of local tiles
which will eventually increase in government revenue on account of
sales tax and income tax.
1F.Import Duty on Sodium Silicate to Protect Local Industry
Issue
The local silicate industry which has substantial foreign
investment is currently facing an issue due to zero percent import
duty under FTA on sodium silicate imported from China. With this
duty structure it is expected to have an influx of goods and
possible dumping which will be very harmful to this industry which
also honestly pays all its due taxes.
The industry isalready at the verge of closure due to rise in
input and other production costs and if the zero duty continues and
import of goods started then it would further aggravate the
situation and will be the last nail in the coffin. It will also
affect the project long term viability and it is foreseen that the
foreign investors who have substantial investment may divest if the
things are not changed in right direction. Once the industry is
closed the government would also loose substantial revenue in the
form of various taxes and levies and we foresee that around 5,000
families will be affected as the employees and workers who are
associated with this and other related industries will lose their
jobs and thus major source of their earnings.
Proposal
It is therefore suggested and requested to impose Fifteen
Percent Protective import duty on sodium silicate in Federal Budget
2016-17.
Benefits
It will help in reviving this industry which pays substantial
amount to exchequers in the form of various taxes. It would also
strengthen foreign investors confidence in government policies and
would attract more direct and indirect foreign investment.
1G.Import Duty on Soda Ash Raw Material
Issue
The local silicate industry is currently facing another issue
due to high prices of soda ash in Pakistan. The soda ash
manufacturers are charging exorbitant prices locally and because of
11% protective duties on import they have been making huge profits
at the expense of the local downstream industries. With this
protection domestic soda ash prices have increased 50% in last five
years. They are also exporting soda ash and making exorbitant
profit. There is no need for this protection they are enjoying.
This has increased local industrys cost of production substantially
and with the rise in production and other costs it is at the verge
of closure. It will also affect the project long term viability of
the and it is foreseen that the foreign investors may divest their
investment if the things are not changed in right direction.
Proposal
It is therefore suggested and requested for removing 11% import
duty on Soda Ash in Federal Budget 2016-17.
Benefits
It will help in reviving this industry which pays substantial
amount to exchequers in the form of various taxes. And it would
strengthen foreign investors confidence in government policies and
would attract more direct and indirect foreign investment.
It will also save around 5,000 families which will be affected
as a result of industry closure as the employees and workers who
are associated with it and other related industries will lose their
jobs and thus major source of their earnings.
The substantial tax revenue generation for the exchequer will
continue and also at a higher pace.
1H. Tax credit u/s 65 D & E
Issue
Currently, 10% tax credit is available on amount invested
through purchase of plant and machinery for the purposes of
extension/expansion/balancing/modernization and replacement by the
tax payers. As stated in law, credit of such benefit is available
during 1st July 2010 till 30th June 2015. Furthermore one of the
criteria to qualify for tax credit u/s 65 D & E is to start
commercial production before June 30, 2016.
Proposals
To promote the Foreign Direct Investment in country extension of
such tax credit should remain in place. Furthermore it is highly
recommended that credit of such investment remain in place without
any bindings of time.
Benefits / Rationale
The companies which are currently evaluating different
investment options in Pakistan could count on these incentives that
are critical for making the investment feasible.
1I. Withholding Tax on Service Sector being the Minimum Tax
Issue:
Currently, all the companies engaged in provision of services
are subject to withholding of taxation at 8%. After Finance Act
2015, the tax so withheld is treated as Minimum Tax and hence it
practically becomes Final Tax. This has rendered lot of businesses
unviable where the net margins are as thin as 6%-8%. Further, this
is against the basis principal of Income Tax which ignores the
Income part of any business.
In Nov 2015, Government offered a relief via reducing the rate
of certain (17) industries within Service Sector to 2% after
submission of Undertaking and obtaining of Exemption Certificate.
This too was applicable for the Tax year 2016 only. Some companies
having Calendar Year as Financial year could not actually take any
advantage out it. Their tax year 2016 expired on December 2015
restoring the same 8% withholding tax rate.
Further, the tax so deducted is not able to be carried forward
unlike the Minimum Tax under Section 113. This has added to the
misery of honest tax payer as they are not even able to adjust the
same in subsequent years of profitability.
Proposal:
There should not be any Minimum Tax implications in Withholding
of taxation. It should be restored to the previous status as it was
till June 2014. Also the tax paid in Tax year 2016 under the new
statue must be allowed to carry forward. There should not be any
divide in the companies having different businesses. The taxation
shall always be on the basis of Income Earned and not the Revenue.
Reduced Rate Sales Tax which does not allow Input Adjustments for
both Seller and Buyer
1J. Withholding Tax for Distributors
Issue
On supplies made by distributors, a tax of 4.0% (4.5% in non
company cases) for consumer products and 1.0% for pharma products
and cigarettes is deducted under section 153(a)3. This is deducted
by persons who fall in withholding agents category and such
deduction is treated as final tax liability. This deduction is far
more than the net margins even in best case situations. The general
perception is that this deduction is adjustable against final tax
liability which is contrary to the facts.
Proposal
It is proposed to make the tax so deducted from supplies
adjustable against the final tax liability.
Benefits
This would result as a breather for the business resulting in
increased economic activity and contribution to the exchequer
1K. Tax Amnesty Scheme for Tax Audits
Issue
The positive measure of issuance of Circular 15 of 2013 dated
December 10, 2013 was introduced in 2013 related to the immunity
from tax audit under section 177 and 214C. The purposes of amnesty
scheme will be defeated if department has continued to use other
provisions under which tax audit can be conducted by tax
authorities in respect of following:
a)amendment of assessment under section 122 5(A)
b)and monitoring of withholding tax under section 161 (205)
Proposal
In recent years, apparently the tax department has used this
tool to harass honest tax payers to generate additional revenue.
The information requested in such notices is huge and practically
impossible to gather. Clear line should be drawn between honest tax
payers and tax evaders, before initiating amendment of tax
assessments. Parameters for selection should be transparent. Only
one audit should be conducted during a year and in case there is no
adverse report, there should not be any further audit for at least
next three years.
Benefits
This initiative will assist FBR in winning the confidence of tax
payers who are good corporate citizens thus making way for further
investments, reducing administrative hassles, releasing resources
for operations and thus potential tax increases
2. ELIMINATION OF FINAL TAX REGIME
2A. Final Tax Regime for Manufacturer-cum-Suppliers
Issue
Manufacturer-cum suppliers are taxed under normal tax regime @
33% whereas importer cum suppliers are taxed under final tax
regime. Conversion of FTR on manufacturer-cum supplier will help
the Government to generate tax revenue from corporate sector.
Proposal
The omitted clause 40 Part IV of second schedule of Companies
Ordinance 2001 should be activated.
Benefits
All the manufacturers-cum supplier will avail presumptive tax
regime by paying WHT @ 4% as turnover tax. It will enhance the tax
revenue as well as number of tax payers.
Due to higher turnover of listed companies and unlisted public
companies, the effective tax rate on profit before tax will remain
32% or above.
Foreign and local investors will have tremendous incentive to
form companies or invest in existing companies due to higher and
varied rate of taxes.
Certainty on effective tax rate on turnover.
3. EXPANSION OF GENERAL SALES TAX
3A. tax at the time of Purchase instead of at the time of
invoice payment
Issue
Recent requirement of paying input tax at the time of Purchase
instead of at the time of invoice payment.
Proposal
Rule 2(5) of the Sales Tax Special Procedure (Withholding)
Rules, 2007 needs to amended.
Benefits / Rationale
Withholding / deduction of tax at the time of purchase vs. at
the time of payment have resulted in various complexities, besides
making buyers out of cash at the time of purchase.
4. PERSONAL INCOME TAX
4A. Higher Tax on Salaried Individuals
Issue
By the Finance Act 2013 the tax slab for salaried individual was
raised to 30% which is on a very high side because of the fact that
payroll tax is not the only income tax being paid by salaried
class, they also pay income tax in form of withholding taxes on
utilities, phone bills, sales tax on consumer goods, etc.
Proposal
It is recommended that tax slab on salaried individuals should
be restricted to maximum limit 20%.
4B. Withholding tax @ 20% on Prizes and Winnings
Issue
Section 156 of the Ordinance, 2001 requires deduction of
withholding tax @ 20% on Prizes and Winnings. The word Prize has
not been defined in the law and therefore, is being interpreted
very liberally by the tax authorities.
Proposal
The term prize should be defined in Income Tax Ordinance, 2001
and only be restricted to its general connotation i.e. where
element of chance is predominant.
Withholding tax rate be reduced to 10%.
Benefits / Rationale
To avoid un-acceptable increase of cost of doing business and
reduce the administrative complexity
5. BANKING SECTOR
5A. Section 165 of the Income Tax Ordinance 2001
Issue
Section 165 of the Income Tax Ordinance 2001 pertains to
submission of withholding tax statements to the Federal Board of
Revenue (FBR). As per this section, banks are also required to
disclose certain customer wise statements. In the past, many banks
were submitting such statements without giving party-wise details
of customers due to confidentiality clauses stated in other laws
like the Protection of Economic Reforms Act, The Banking Companies
Ordinance, The Foreign Exchange Regulation Act. The 2013 Finance
Act overrode all the above-mentioned provisions thereby making it
very difficult for Banks to submit the said statements without
giving party-wise information.
The Finance Act 2013 has also introduced a new section (section
165 A of the Income Tax Ordinance, 2001) which provides a framework
to Banks for furnishing information about the banking transactions
to the FBR. The type of information sought by FBR is on-line access
to Banks central data base containing details of account holders
and of the transactions made in their accounts. It also seeks to
receive information of deposits in excess of Rs 1 million, and to
provide list of payments made by any person against bills raised in
respect of credit card issued aggregating Rs 100,000 or more and to
also provide a copy of Currency Transaction Report and Suspicious
Transaction Report submitted to Financial Monitoring Unit under the
Anti Money Laundering Act. Furthermore, under this section Banks
were required to nominate a senior officer at Head Office to
c-ordinate with FBR for providing of any additional information and
documents as may be required by them. Again this section seeks to
override all other existing laws and pronouncements as highlighted
above.
Proposal
For Section 165 we propose that SBP as the main regulator
assists the Banks in reaching a conclusion to this controversial
issue. A discussion should be held by all stakeholders whereby a
unanimous decision is reached which ensures that no adverse
repercussions as highlighted above occur for Banks in future.
For Section 165 A, we propose that this section be suspended
immediately as providing of the said information would be in breach
of other existing laws and also the fact that should this
confidential information be received in hands of wrong individuals
it could cause hardship for Banks customers which would be
unacceptable.
Benefits / Rationale
By providing the confidential information to FBR under Section
165 & Section 165-A would result in customers confidence being
dented which could have a severe impact on cash being remitted
abroad.
5B. Disallowance of Bad Debts, Rule 1 seventh schedule ITO
Issue
Historically, the tax authorities have been disallowing bad
debts claimed in return of income. This has resulted in huge
amounts being accumulated over the years.It also seriously affects
the liquidity position of banks as huge amounts are paid which then
get stuck up for a number of years till the appeal is heard.
Under the Seventh Schedule to the Income Tax Ordinance, 2001,
provisions for advances and off balance sheet items are allowed
up-to a maximum of 1% of total advances for corporate loans whereas
the threshold is 5% for consumer and SME loans. The figure of 1% is
too low as it takes a number of years till the Bank is able to
recoup the balance in excess of 1% which gets carried forward.
Despite the very low proportion of advances allowed as deduction
tax authorities misinterpreting, the word total advances as net
advances instead of gross advances which is against the intention
of the legislature.
Proposal
We recommend that the appeal procedure be made simple and its
tenure shortened to 2 years after which a final decision is
reached. We also recommend that the threshold of 1% be increased to
2% in the next budget.It is further proposed that the term total
advances may be defined as gross advances to avoid litigation.
Benefits / Rationale
This will allow the banks to recoup the corporate loans quicker.
It would also impact viability and effectiveness of banks to
operate in Pakistan and also help reduce the effective tax rate.
The Banks will be on a level playing field with other companies
which should be the case.
5C. Bank's return as per the Seventh Schedule
Issue
Bank's return as per the Seventh Schedule to be accepted to
avoid unnecessary litigation
Seventh Schedule was introduced from 2008 in Income Tax
Ordinance to provide rules for computation of the profits and gains
of a banking company and tax payable thereon. However, in actual,
when a return is filed as per seventh schedule, the commissioner
disallows various items (though allowed under seventh schedule) at
the time of finalization of initial assessment. Resultantly, tax
payer goes in appeals and it takes more than 10 years to have the
decision in favor of the tax payer
Proposal
Banks return as per the seventh schedule to be accepted to avoid
unnecessary litigation and opportunity cost of funds paid on
account of extra advance tax.
Benefits / Rationale
This will streamline the current working environment for banks
and encourage more investment in Pakistan.
5D. New advance tax regime for banks. Rule 5 Seventh
Schedule
Issue
The FBR in June 2012 has issued a SRO 561(I)/2012 whereby the
right of the banks to file estimate of lower tax liability for the
purpose of payment of advance tax under section 147(6) has been
withdrawn.
Proposal
SRO 561(I)/2012 should be withdrawn. The original provision of
Advance Income Tax should be restored for banks through which banks
can file lower estimates, if required.
Benefits / Rationale
Amendments made through the aforesaid notification have deprived
the banks from their right of filing estimate of lower tax
liability which is available to all other categories of the
taxpayer. There is no rational basis for this different treatment.
By withdrawing this SRO, banking companies will be given a level
playing field.
5E. Advance tax u/s 236P
Issue
Advance tax u/s 236P on banking transactions. Section 236P
inserted through Finance Act, 2015 whereby non-filers are taxed
through banking transactions other than cash. The provisions of
section 236P are not clear under various circumstances such as
following; Consolidation of various accounts of same customer for
threshold limit, Automated transactions such as loan repayment etc,
Low account balance, Recovery of Governments dues from customers
accounts etc.
The banking industry approached FBR for clarification. However,
FBR vide their letter dated November 24, 2015 replied by grossly
ignoring banking industrys concerns, limitations and other banking
regulations, give their opinion to apply 236P on all nature of
transactions without considering banking industrys concerns as
mentioned above.
Proposal
It is requested to clarify the applicability of Section 236P
considering banking industrys concerns and other banking
regulations.
Benefits / Rationale
A clear and practicable clarification is requested to enable
banking industry to implement the law with its true spirit.
6. PHARMACEUTICAL SECTOR
6A. Duty Drawback Export Policy Order
Issue
Export Policy Order. Para 7(2) c - repayment or drawback of
custom duty on exports to Afghanistan is subject to the following
conditions, namely:
The proof that goods exported from Pakistan have reached
Afghanistan shall be verified on the basis of a copy of import
clearance documents by Afghan Custom Authorities across the
border.
Para 7(2) c may be substituted as:
The proof that goods exported from Pakistan have reached
Afghanistan shall be verified on the basis of a copy of export
clearance documents (shipping bill/ Goods Declaration), cross
border certificate issued by Pakistan Custom Authorities along with
Export Proceeds Realization Certificate(EPRC) issued by the bank
receiving export proceeds in foreign currency.
Proposal
It is practically not possible for any exporter to fulfill the
requirements contained in para 7(2) c of the export policy order
for the following reasons 1. The import clearance documents by
Afghan Custom Authorities is the sole property of the importer in
Afghanistan & is not required by any law of Afghanistan to
furnish copy of import clearance documents to the Pakistani
Exporter.
The clearance documents in respect of goods imported into
Afghanistan consist of three copies: First is retained by Afghan
Customs. Second copy is submitted to the bank by the importer in
Afghanistan and the Third copy is retained by the importer as proof
that it has legally imported the goods in Afghanistan & for
Audit/ Checking by the Afghan tax Authorities. No extra copy is
left for the exporter.
Benefits
The benefit of the proposal is that it will incentivize and
uplift confidence on taxation systems
6B. Pharmaceutical Products to be taxed at zero-rated Sales
Tax
Issue
Sales Tax being paid on packaging materials, services, utilities
and other supplies used in manufacturing pharmaceutical products is
adding to the product cost. Since the final product is exempt from
Sales Tax, the tax paid can neither be passed on to the consumer
nor can be claimed as input tax. This is also against the
philosophy of sales tax which is supposed to be borne by the
consumer.
Proposal
Pharmaceutical products, their raw materials and packaging
materials should be removed from the list of exempt items and be
zero-rated for Sales Tax purposes under Section 4 of the Act.
Benefit
Reduction in the cost of doing business for pharmaceutical and
hence reduction in medicine inflation.
6C. Import Duty On Pharmaceutical Raw Materials Table III of SRO
567 of 2006
Issue
Through the Finance Act 2008, custom duty on pharmaceutical raw
materials was reduced to 5 percent. However, there are still many
items that are not included in the list of duty reduction.
Proposal:
All pharmaceutical raw materials should be added to Table III of
SRO 567 of 2006.
Benefit:
The benefit of the proposal is that it will incentivize and
uplift confidence on taxation system
6D. Import Duty On Pharmaceutical Raw Materials Schedule 5
(Table III)
Issue
Many pharmaceutical raw materials are not included in Schedule 5
(Table III) which entitles pharmaceutical companies to duty
advantages.
Proposal:
Schedule 5 under Table III. Should be modified to include all
pharmaceutical raw materials of its class
Benefit:
Cost of pharmaceuticals products will become viable for
pharmaceuticals manufacturers.
6E. Regulatory Duty and custom duty
Issue
Regulatory Duty @ 40% imposed on Imported Sugar under SRO # 1043
(I)2014. Customs duty on imported Flavors is 20% to 15% RD plus 17%
GST. Imported Flavors in liquid form attract Custom duty @ 10%
Proposal
Pharmaceutical Grade imported sugar should be exempted from
regulatory and excise duty.
Similary customs duty should be same as liquid and powder
flavors and these should be included in Schedule 5 under Table III
meant for Pharma materials.
Benefit
Cost of pharmaceuticals products will become viable for
pharmaceuticals manufacturers.
6F. Section 18 of the Sindh Sales Tax on Services Act, 2011
Issue
It makes the service recipient jointly responsible for any
amount of un-paid tax by the service provider for no fault of his
own
Proposal
Only service provider should be penalized in case of default in
payment of output sales tax. Therefore, we suggest deleting entire
section 18. A new section may be introduced to penalize only
supplier in case non-payment of output sales tax.
Benefit
This will remove the undue pressure on legitimate taxpayers, as
it is not the responsibility, neither the jurisdiction of the
service recipient to ensure that the supplier has deposited output
tax.
7. CREATING VIBRANCY IN THE IT SECTOR
7A. Minimum Tax on services - Section 153/Clause 79
Issue
Minimum Tax on services - Section 153/Clause 79
Proposal
Finance Act 2015 omitted Clause 79 after which the tax deduction
@ 8% on services is charged as minimum tax on companies. This
clause should be restored so that the Companies can pay taxes only
what is due and are liable to pay genuinely on their bottom line
profits.
Benefits / Rationale
This is extra burden on service industry. Lots of companies in
service industry are running on margins below 8% and by applying
this tax rate, those companies have gone into losses. This has
resulted in loss of business and loss of employment. Although the
Government through an Ordinance specified 12 services on which tax
@ 2% is charged, but a lot of more service sector need to be
included in it. It is also against the constitution of Pakistan
that some service industries get benefit and others do not. Also
the relaxation notified has some clarity issues as some companies
with December 2015 year end have already run out of option for
lower tax at the above 2%.
7B. Industry Classification as IT Services and IT enabled
service
Issue
Under the recently promulgated Income Tax Ordinance 2015, 12
services sectors were provided relief and allowed to pay 2% minimum
tax subject to audit of their financial statements. For the IT
industry in particular the Ordinance only mentions Software
Development Services which is a subset of IT Services and IT
Enabled Services which is the complete definition of the IT
industry provided in section 133 of the Income Tax Ordinance Second
Schedule". Furthermore in all of the IT Industry representations
made by the relevant IT industry association, P@SHA, to the
Committee formed by the Finance Minister the industry had already
stated the industry classification as "IT Services" and "IT-enabled
services"
Proposal
It is requested that FBR issue clarification in this regard to
specify the IT sector definition as stated in Section 133 of the
Income Ordinance Second Schedule as IT and IT enabled Services.
7C. (C.No 3(9)ST-L&P/2011-2356-R)
Issue
C.No 3(9)ST-L&P/2011-2356-R
Proposal
There should be some clarity on taxability of software
services.
Benefits
FBR have define that customize software shall be charged under
FBR whereas SRB said Software and IT based system development
consultant should be charged under SRB @ 14%. There is a conflict
between revenue authorizes which need to be clarify. User if paid
to SRB then
problem and if pay to FBR then Problem.
8. FAST MOVING COSSUMER GOODS
8A. FED on Concentrate In Sales Tax Mode
Issue
The beverage industry is major consumer of Sugar and
Concentrate. The Federal Excise Duty (FED) on Sugar is levied @8%
in sales tax mode under the provisions of section 7 of the Federal
Excise Act, 2005. Whereas, FED on Concentrate has been levied @50%
under section 3 of the Federal Excise Act, 1990. The FED levy on
Concentrate is harsh due to high rate i.e. 50%. Because of this,
the beverage industry is not able to adjust 100% FED on this raw
material. Further, FBR has restricted the input tax adjustment on
concentrate maximum up to out-put liability of FED.
Proposal:
This FED @50% on Concentrate should be levied in same manners on
Sugar under section 7 of the Federal Excise Act, 2005 i.e. sales
tax mode.
8B. VIA SRO 1175, REGULATORY DUTY IMPOSED on 400+ ITEMS
INCLUDING PRODUCTS OF BASIC NEEDS
Issue
5-10% Regulatory duty and 1% additional custom duty was imposed
on 400+ items via SRO 1175. This includes Baby Diapers and Feminine
Sanitary Pads which are basic hygiene products.
This has increased the cost of these products for the
consumers.
Proposal
Regulatory duty and additional custom duty should be removed on
all products.
Benefit
This will help improve the consumers affordability to these
products.
9. PROCEDURAL PROPOSAL INDEX
9A. Adjustment of Sales Tax on Services under reduced rate
regime
Issue
Adjustment of Sales Tax on Services under reduced rate
regime
Proposal
Reduced rate sales tax levied under Provincial Statutes have
been rendered inadmissible vide Finance Act 2015. The business is
unable to claim sales tax paid on services acquired from
accountants, auditors, security agencies, rent of office buildings,
franchise, tour operators, lawyers, etc. This has added unwarranted
cost to the business.
Sales tax should remain under VAT mode thereby allowing full
adjustment of inputs on account of goods and services.
Benefit
Elimination of cascading effect on business and smooth
operations.
9B. Exorbitant excise increases:
Issue
Tax paid industrys volume has declined due to excessive excise
driven price increases post budget. This has caused serious
affordability issues.
Unleveled playing field:
The recent growth in the illicit tobacco segment has been
profound -- it has grown 43.5% in the past six years. This has
resulted in a cumulative loss of approximately US$ 1 billion in
revenue to Pakistan during the last five years and approximately
US$ 250 million in 2014.
Narrow tax base:
The government should widen the tax base rather than making the
current tax compliant companies bear more tax burden.
Proposal
a. Maintain dual tier fully specific excise structure
b. Moderate excise increase in line with inflation and GDP
growth rate
c. No imposition of earmarked taxes
Benefit
Dual tier fully specific excise structure protects governments
revenues since it removes dependency from manufacturers pricing
decision.
Year on year gradual excise increases will ensure sustainability
of the existing tax base. Sharp hikes in cigarette prices as a
result of exorbitant tax increases leads to higher switching
incidence causing non tax paid industry to grow. Consumers shift to
cheaper non tax paid products hampering the tax paid industrys
volumes and governments revenues.
9C. FBR Portal Section 33 & 34 (2-b)
Issue
Section 33 & 34 (2-b)
Proposal
Supply of goods to end consumer are not subject to further tax @
2% but this option is missing in portal. This option should be
available in FBR return filling portal
Benefits / Rationale
Although FBR has mentioned that Supply of goods directly to end
consumer are not subject to further tax but while filling return if
good recipient dont have STRN, portal automatically charge further
tax. There should be option available in portal to return filer so
these conflicts will be avoided.
10. PROVINCIAL TAXES
10A. Input Sales tax on reduced rate paid under provincial tax
is disallowed as input tax.
Issue
Sales Tax on Goods Act, 1990, the recent amendment made through
Finance Act, 2015 under section 8.
Input Sales tax on reduced rate paid under provincial sales tax
laws is disallowed as input tax.
Proposal
Clause (j) of section 8(1) of the Act be deleted.
Benefits / Rationale
Operating cost to companies increased.
10B. Provincial Sales tax on Services charge on various rates
does not allow input
Issue:
Under Sindh Revenue Board, Sales tax on Services is currently
charged on various rates. The reduced rates are those which does
not allow any input adjustments to either of Buyer or Seller
increasing the overall cost of buyer. The sales tax in Pakistan is
primarily in VAT mode and therefore it should remain so. The
reduced rates must only be introduced to encourage the seller
instead of penalizing them.
Proposal:
There should not be any restriction on adjustment of input tax
from the relevant Output Tax. Further, it is prayed that provincial
taxation should be kept at minimum as the taxpayers are currently
facing multiple conflict issues between authorities as to what is
claimable and what is not. One Central System would provide relief
to the taxpayer in terms of administrative hustle.
10C. WWF Sindh Act implemented in FY 14/15, However, Federal Act
is also still in place and not updated.
Issue
WWF Sindh Act implemented in FY 14/15, However, Federal Act is
also still in place and not updated.
Clarity on WWF split basis where Company has multiple sites in
other provinces.
Proposal
Federal WWF Act should be updated based on the recent provincial
ACT implementation. Moreover, deduction of provincial WWF be given
as deductible allowance / expenditure from the taxable income hence
it needs to be given a legal cover, by appropriate amendments in
section 60A of the Income Tax Ordinance, 2001. Further this WWF
should not be charged on service sector where no workers exist like
industrial units and ultimately service sectors employees do not
get any return from the WWF.
Clarity required on the basis of allocation of WWF charge in
case of taxpayers having industrial establishments in more than one
province and / or Islamabad Capital Territory.
Benefit
To avoid chaotic situations for the taxpayers and unnecessary
litigations involving both Federal as well as Provincial
Governments.
10D. 15(b) of the Schedule to the Sindh Stamp Act
Issue
Under Entry 15(b) of the Schedule to the Sindh Stamp Act imposes
stamp duty of 0.2% on Purchase Order etc. of the Stamp Act, 1899
[applicable to the province of Sindh].
Proposal
GoP has imposed Stamp Duty @ 0.2% on Purchase Orders, as a tax
on instruments. The progressive nature of the tax is increasing the
cost of doing business [More Purchases and More Tax] and further
raises the issue of double taxation [As Sales/Revenues are taxed
under Income Tax Ordinance, 2001; double taxed on Purchases @
0.2%].
Benefit
It is suggested to eliminate Stamp Duty @ 0.2% on purchase
orders or to fix a nominal amount on each purchase orders or
relevant instrument. This will reduce the cost of doing business in
Pakistan, that will help maintaining current Business base and also
to attract further foreign / local investors in Pakistan.
10E. Sales tax on technical/royalty fee
Issue
SRB levies sales tax on franchise under the origin principle
while PRA levies PST on the same under the reverse charge concept.
Furthermore, in cases where the production and distribution of
goods is carried out within the jurisdiction of Province of Sindh
but sold or consumed in Punjab, PRA requires payment of PST on the
portion of franchise relating to the goods sold or consumed in
Punjab. This has resulted in double taxation and enormous confusion
amongst taxpayers.
Proposal
Clarity in law is required to avoid double taxation and dispute
between taxpayers and tax regulators i.e. FBR, SRB and PRA
via.a.viz chargeability of sales tax under Sindh Sales Tax on
Services Act, 2011, Punjab Sales Tax on Services Act, 2012 and
Federal Excise Act, 2005
Benefit
Appropriate clarification would result in avoidance of disputes
amongst different authorities.
10F. Sales tax adjustment on technical/royalty fee Section
7(2)
Issue:
Sales tax adjustment on technical/royalty fee
Proposal:
In terms of Provincial ST Laws, sales tax is to be paid on
reverse charge basis when services are acquired from non-residents.
However, Section 7(2) of the Act specifies that input tax can only
be claimed if the taxpayer has a valid tax invoice issued under
Section 23 of the Act. Obviously, in the case of services like
franchise / royalty arrangements with non-residents, such tax
invoice is always missing which debars the business from claiming
the necessary and vital input tax.
Section 7(2) of the Sales Tax Act 1990 should be amended to
allow adjustment of sales tax paid on reverse charge basis under a
contract / agreement with non-residents.
Benefits
Avoidance of double taxation.
10G. Tax challan verification
Issue
Vide section 176, tax authorities are empowered to call for any
information / documents as and when required. This also includes
verification of tax deducted at source, tax deduction challan and
tax certificates issued to different vendors
Despite implementation of electronic / automatic filing of
monthly and annual statements of tax deduction and maintenance of
database at PRAL, notices under section 176 are still issued to the
taxpayers for verification of data already available at the PRAL.
This results in duplication and unnecessary hassle for the
taxpayers.
Also, a link of the same shall be given to the taxpayers so they
are aware of the payment of tax by their customers and can be
traced back. This will help reduce duplication of work and extra
ordinary follow ups at all ends.
Proposal
It is recommended that FBR should use the data collected and
compiled at PRAL for verification of tax payments by tax payers.
There should be a time limit defined of 5 years after which no such
request should be made to the tax payer.
Benefits / Rationale
Minimized paperwork and lower number of notices issued is likely
to facilitate taxpayers.
10H. Nil Withholding Certificates required by FBR
Issue
Nil Withholding Certificates required by FBR from Provident
Funds and Gratuity Funds which are already exempted from
withholding under clause 47B of Part IV of 2nd schedule to the
Income Tax Ordinance, 2001.
Under clause 47B of Part IV of the 2nd Schedule to the Income
Tax Ordinance, 2001 various funds are already exempted from
withholding tax on their Dividend Income and Interest Income under
sections 150 & 151, respectively. The DG Withholding of FBR
cancelled the Clause 47B through its letter dated May 2015 FBR vide
its letter dated May 12, 2015 and where after the exemption from
withholding was taken away and obtaining the Exemption Certificate
was made mandatory for all the funds failing which they would
suffer withholding of income tax invariably despite that they are
under Clause 47B. This has resulted in litigation between Funds and
FBR which is completely unnecessary and avoidable.
Proposal; Benefits/Rationale
It is requested to restore the original Clause 47B for Provident
Funds and Gratuity Funds and withdraw the condition of extra
Exemption Certificate which is not necessary at all.
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