Budget proposals: Tax all incomes irrespective of source, says PBC

Cautions current tax policy causes a drop in corporate surplus for investment

KARACHI: The government cannot create fiscal space for implementing its ambitious socio-economic agenda just by increasing taxes on the already taxed sectors of the economy, the Pakistan Business Council (PBC) said on Monday.

In its budget proposals for 2016-17, the representative body of 50 largest private-sector businesses demanded that the government should start taxing all kinds of income irrespective of its source from 2016-17.

“The taxation base needs to be widened through better documentation by bringing the under-taxed and the currently exempt sectors into the tax net,” it said.

The PBC said the current tax policy is leading to a “reduction in investible surpluses” for the corporate sector.

Frequent changes in the tax laws, such as the super tax, levy on undistributed reserves, alternate corporate tax and the refusal to allow carry-forward losses under the minimum tax regime may help shore up tax collection in the short term, but are counter-productive in the long run, it said.

Such measures will lead to a reduction in the collection by the Federal Board of Revenue (FBR), as corporate entities review their investment plans. The arbitrary and non-transparent implementation of tax laws by the FBR functionaries in their zeal to achieve unrealistic revenue targets is severely hurting viability of the formal sector, the PBC said.

While appreciating some of the government measures, the PBC called for ending tax discrimination against big businesses.

“Pakistan’s formal taxpaying sector needs to be supported to allow it to gain scale and become competitive. Tax policy needs to encourage the development of scale as opposed to viewing big business in a negative framework,” the PBC said.

It has divided its proposals into five broad sections, namely documenting the economy and providing a level playing field for domestic manufacturing, measures for promoting industrialisation, growth and job creation, reducing the cost of doing business, redressing inequity in the tax regime, and consolidation of businesses for scale.

The PBC said a large pool of financial data is available with the FBR. The FBR portal is constantly updated with income tax and sales tax withholding data from the formal sector. The FBR should tap into this data to increase the taxpayer base in the country.

It demanded that manufacturers who buy at least 90% of input from registered suppliers should be allowed a 2.5% tax credit in order to promote documentation of the economy. The PBC also called for doing away with ‘permanent tax amnesty schemes’ besides demanding a cap on unexplained remittances beyond a threshold to discourage whitening of illicit income.

As for the measures for the promotion of industrialisation, the PBC demanded that a tax credit be extended to investments made in factory building and manufacturing-related infrastructure.

Reducing the advance withholding tax on imports of raw materials from 5.5% to 1% will help reduce the cost of doing business in Pakistan, the PBC said. “The current situation is leading to the build-up of refunds and cash flow issues,” it noted.

The PBC also called for outright deletion of the 10% tax on undistributed profits, terming it a tax on well-run companies with options for organic growth and an increased future shareholder value.

Published in The Express Tribune, April 12^th, 2016.

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