FBR proposes increase in minimum tax on firms, individuals

Profit or loss, tax rate could go up by 25% to 1.25% of revenue

ISLAMABAD: In a bid to enhance dwindling revenues, the Federal Board of Revenue (FBR) has proposed to increase the rate of ‘minimum tax’ on firms as well as individuals by as much as 25%.

According to the proposal, the upcoming budget could see the rate go up to 1.25% from the current 1%.

However, the suggestion contradicts the recommendation given by thegovernment-constituted Tax Reforms Commission (TRC) for the upcoming budget. The commission had instead advised slashing the current rate by 50%.



The proposal is expected to antagonise the corporate sector since it has already been overburdened by heavy taxation.

The minimum tax had initially been introduced to make every taxpayer contribute towards the exchequer. Therefore, every corporate entity having an annual turnover of over Rs10 million was bound by law to pay a minimum 1% of its sales in taxes - irrespective of whether it was earning a profit or not.

In case the FBR’s proposal gets through the approval stages, at least 7,000 companies will be affected by the move. At present, around 24,000 companies are filing their returns and about 30% of them are showing losses. Another 39% showed ‘no profit and no loss’ in the tax year of 2015.

The proposal suggests that in the upcoming fiscal year, the FBR will rely on the existing tax base to extract more instead of widening the base.

In the previous four budgets of the present government, the revenue on the back of new taxation measures grew by Rs1.2 trillion. The tax collection increased from Rs1.956 trillion in June 2013 to Rs3.114 trillion by June 2016, which was exactly equal to the level of new taxation. This exhibits that the FBR failed to capitalise on inflation, which should have automatically resulted in increased tax revenue.

What lies ahead?

For the upcoming fiscal year, the FBR wants to set a target of Rs3.887 trillion, while the International Monetary Fund suggests it should be set at Rs4.06 trillion. According to sources, the FBR will have to rely on new tax measures to achieve the target since it has failed to enhance revenues by improving efficiency.

Additionally, the policy to increase the tax rates for non-filers has failed to yield desired results. The filers of income tax returns remain even below 1.1 million.

Issue of tax on REITs

Meanwhile, FBR authorities have reacted to Finance Ministry’s suspicions that it has proposed to abolish 25% dividend on rental income from Real Estate Investment Trusts (REITs) to give benefit to a few individuals.



They said five institutions have proposed to end this tax, terming it a hindrance in promotion of REIT projects in the country.

On the other hand, Arif Habib, whose Group had set up the first REIT - Dolmen REIT - said that in presence of 25% dividend on rental income, they cannot flourish in the country.

However, he added that it would be wrong to assume that the abolishment of the tax would benefit him personally, as he had already exited from the Dolmen project.

Published in The Express Tribune, May 9^th, 2017.

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