Pakistan Business Council presents detailed critique of new budget

In a letter to finance minister, PBC discusses avenues for improvement


Our Correspondent June 11, 2016
In a letter to finance minister, PBC discusses avenues for improvement. PHOTO: EXPRESS

KARACHI: The proposed federal budget for 2016-17 lacks concrete proposals to widen the tax base, according to the Pakistan Business Council (PBC), a policy advocacy forum representing 48 private-sector businesses.

In its letter to Finance Minister Ishaq Dar on June 9, the PBC said subjecting non-filers to higher rates of withholding taxes (WHT) can only meet short-term cash flow objectives. WHT is eventually passed on by non-filers to consumers and the formal sector, thus raising the cost of living and doing business, it said.

WHT alone will not provide incentive to non-filers to join the tax base until the FBR’s powers to inflict arbitrary audits and other measures bordering on the harassment of existing taxpayers are curbed, it added.

“Much has been made of the 60% increase in tax collected over three years. It would be enlightening to see how much of this came from broadening the tax base,” it said.

Denial of input tax relief

The PBC said a fundamental departure has been proposed in sales tax regime that is governed under the VAT principle. The change in the definition of input tax implies dual indirect taxation, as indirect taxes paid to provinces will not reduce the incidence of sales tax paid to the federation, it said.

The PBC suggested that the VAT principles should be completely adhered to. Under the proposed budget, input tax adjustment will not be available if the supplier has not declared such supply in his return or has not paid tax due as per his return.

“This amendment effectively means that an eligible input tax shall become inadmissible for the buyer only for the reason that the supplier of goods has not declared such supply in his return of sales tax or has not paid the tax due,” it said.

Tax on contracts executed abroad

Currently gross receipts from services rendered and construction contracts executed outside Pakistan are taxed at 1% of the amount declared.  The budget proposes that it be increased to 3.5%-4% for companies and 3.75%-5% for others.

“The manifold increase in tax on services is inconsistent with the widely recognised need to encourage the broad basing of exports. This should be reconsidered,” it said.

Group taxation

The finance bill aims to abolish the exemption for inter-corporate dividends in a group structure. Similarly, it proposes that the surrender of losses will be restricted to the percentage holding of the holding company in the entity surrendering the losses.

The PBC said that double or sometimes even triple taxation arises in the absence of the exemption of tax on inter-corporate dividends. This means companies first pay tax on their profits and these are taxed again when inter-group dividends are distributed. They are further taxed on the distribution to the shareholders of the parent company as dividends.

WHT on distributors of FMCG

The distribution of fast-moving consumer goods (FMCG) is a high turnover and low-margin business. The average gross margin of distributors ranges from 3% to 8%, the PBC said. While the budget proposes a reduction in WHT from 4% to 3.5%, the PBC said it still represents more than 50% of the distributors’ gross margins and a very high multiple of their net margin.

The PBC suggested that the rate of WHT on FMCG distributors should be reduced to 0.8%.

Super tax

The finance minister proposes to extend the super tax of 3% (4% for banks) on taxpayers having income of Rs500 million or more for the tax year of 2015. Furthermore, the budget proposes that depreciation and business loss will not be taken into account for the computation of income for the purpose of levying the super tax.

The PBC said the proposed change in the computation method will result in higher incidence of tax, adding that the continuation of a one-time tax for 2016-17 is itself unjustified.

Alternate corporate tax

The alternate corporate tax on accounting profit of businesses that incur a net loss, post allowable depreciation, is in principle unjustified, the PBC said. “The proposal to change it in advance is untenable and should be reconsidered.”

CPEC

The PBC said the success of the China-Pakistan Economic Corridor (CPEC) is contingent on the readiness of public and private sectors to execute its obligations. One impediment is the capacity of existing domestic capital market to provide long-term rupee finance, it said.

“The PBC believes that an infrastructure investment bank established with government and multilateral assistance is required,” it added.

Real estate

The PBC called for the adjustment of real-estate valuations to realistic values while lowering the rates of taxes.

Welcoming the increase in the tax deductible amount on housing loans, the PBC said the real constraint for the development of mortgages is the absence of financing for 10 or more years. “PBC can work with the State Bank of Pakistan to outline possible solutions,” it said.

Published in The Express Tribune, June 11th, 2016.

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