Widening tax base: Heavy taxes imposed on transfer of vehicle ownership

New rates equal to charges for registering a new vehicle; move likely to lead to surge in prices of used cars.

ISLAMABAD:

Prices of used local and imported cars are expected to increase phenomenally due to the federal government’s decision to impose heavy taxes – ranging between Rs10,000 and Rs450,000 – on the transfer of ownership of vehicles.

The move, one of the dozen new measures introduced in the new budget under the pretext of widening the tax base, seeks to charge higher taxes on transfer of vehicle ownership for those who do not file tax returns. It will, however, equally punish people already in the income tax net.

With the new tax measures, the government has further increased its reliance on advance income taxes or withholding taxes. Of the Rs144 billion worth of tax measures introduced in the new budget, half the amount will be recovered through withholding taxes.

The new rates on the transfer of vehicle of ownership are equal to those imposed on the registration of a new vehicle, leaving no difference between buying a new car or a used car, according to the Federal Board of Revenue. Car registration rates were also significantly increased in the new budget. The advance income tax will be collected by the Excise and Taxation Department on the transfer of private vehicles within five years of manufacturing.

When contacted, FBR spokesman Shahid Asad confirmed that the government has proposed to introduce taxes on the transfer of vehicles. He said the transfer tax rates will be the ones mentioned in section 231-B of the Income Tax Ordinance. Asad added that the move was aimed at encouraging people to come under the tax net.

The government’s decision to charge hefty rates even from those who file the income tax returns show that the proposal is more about increasing revenues, however. It is expected to collect a minimum of Rs2 billion from transfer of ownership of vehicles.

On the transfer of an 850cc car, the owner will pay Rs10,000 tax on transfer, if the ownership is changed within five years. On 851-1000cc, a taxpayer will pay Rs20,000 and non-taxpayer will pay Rs25,000. On 1001-1300cc, the transfer rate has been set at Rs30,000  for taxpayers and Rs40,000 for non-taxpayers.

On 1301-1600cc, the taxpayer will pay Rs50,000 and the one who does not file his income tax return will pay Rs100,000.  On 1601-1800cc, the taxpayer will pay Rs75,000 and non-compliant person will pay Rs150,000.

On 1801cc-2000cc the rate will be Rs100,000 for a taxpayer and Rs200,000 for a non-taxpayer. On 2001-2500cc, taxpayers will be charged Rs150,000 and non-taxpayers will be charged twice the amount.

Similarly, on 2501-3000cc the rate for a compliant person is Rs200,000 and for non-compliant person Rs400,000.

On transfer of vehicles falling in category of over 3000cc the rate for a compliant person is Rs250,000 and for non-compliant person it is Rs450,000. The government has also levied advance income tax on registration of imported vehicles aimed at raising Rs1.5 billion. It has also enhanced annual fees (token tax) rates on vehicles.

Against the earlier maximum rate of Rs50,000 — which was applicable at over 3000 cc cars — the government has introduced rates ranging from Rs10,000 to Rs240,000. The rationalisation of annual fee rates will yield minimum Rs2.5 billion.

Under pretext of increasing cost for people who are not filing their annual income tax returns, the government has estimated getting minimum Rs14 billion against just four moves. The Rs14 billion will be raised by jacking up dividend income tax rates for non-compliant people to 15% from 10%, additional 5% on interest income and additional 0.2% on cash withdrawal. It has also enhanced capital gains tax rate on sale of property from 0.5% to 1% for non-compliant people.

Published in The Express Tribune, June 6^th, 2014.