ISLAMABAD: In the last budget of its tenure, the PML-N government has once again proposed Rs120 billion worth of new tax measures in a desperate attempt to broaden income tax base and curb import of goods, taking the total volume of new taxes imposed in five years to more than Rs1.3 trillion.
The tax proposals would result in a surge in prices of goods besides squeezing people’s incomes by compelling them to join the tax net.
It proposed to change the structure of Capital Gains Tax on stock market to a single-tier by abolishing the condition of holding period. This will significantly increase tax liabilities.
The construction industry’s cost will significantly go up because of new taxes on cement and steel.
The government has set a tax collection target of Rs4.013 trillion for the Federal Board of Revenue (FBR) for the new fiscal year 2017-18. This will be Rs492 billion or 14 per cent higher than the downward revised target of Rs3.521 trillion for the outgoing fiscal year.
“It will be an exaggeration if I say that it is a non-tax budget, but we have levied minimum possible taxes,” said Chairman FBR Dr Mohammad Irshad after the announcement of the budget.
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New tax measures are equal to 0.33 per cent of the total projected size of the national economy for fiscal year 2017-18, with the government hoping to increase the tax-to-Gross Domestic Product (GDP) ratio to 11.2 per cent, keeping it at the outgoing year’s level.
The government has proposed Rs52.6 billion worth of sales tax and federal excise duty measures, Rs47.4 billion income tax measures and Rs20 billion customs duties. Over 60 per cent of the proposed measures are indirect taxes -- sales tax and customs duties.
However, Dr Irshad said that the FBR also proposed relief on various taxes that will cost the government Rs32.5 billion, effectively reducing the net impact of new measures to Rs87.5 billion.
The chairman FBR said that as a principle, the income tax rates for non-filers have further been increased by 50 per cent.
Dr Irshad said that non-essential imported goods have also been targeted and the government has proposed five to 15 per cent increase in regulatory duties on 565 imported items, including food items, chocolates, clothes, shoes, cosmetics, tiles and electronic goods.
The standard corporate income tax rate, excluding for banks, has been reduced to 30 per cent from 31 per cent.
The additional four per cent super tax on all banks and three per cent on other companies and individuals having an annual income of over Rs500 million for raising money for TDPs would continue for another year, said the finance minister.
The government has proposed to increase the dividend income rates from 10 to 12.5 per cent and for those who are already paying 12.5 per cent, the rates are proposed to be increased to 15 per cent. The rates on profit on debt have also been phenomenally increased.
For up to Rs5 million interest income, the new rate is 10 per cent, for Rs25 million income the new rate is 12.5 per cent and for those having more than Rs25 million interest income, the proposed rates are 15 per cent.
The government has also proposed to end three-tier CGT slab rates and proposed fixed 15 per cent CGT rate for filers and 20 per cent for non-filers.
The FBR has proposed to withdraw 30 per cent tax credit available to all manufacturers who make 90 per cent of their sales to sales tax registered persons, citing misuse.
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In yet another major change for the corporate sector, the government has proposed to withdraw tax exemption on undistributed reserves if the lesser of at least 40 per cent of the after-tax profit or 50 per cent of the paid-up capital is distributed as dividend. Now, if companies do not distribute dividends, they will have to pay income tax on undistributed reserves.
The special income tax regime for builders and developers has been proposed to be withdrawn. The minimum income tax rate has been proposed to be increased to 1.25 per cent on companies declaring losses. The withholding tax collected from urea manufacturers on imports will no longer be returned to manufacturers.
The government slapped five per cent withholding tax on the value of tobacco. Advance tax on manufacturers of batteries has been imposed. The advance tax on stock exchange brokers has been made as their final liability.
The government has doubled the withholding tax rates on the sale of electronic goods to one per cent in addition to levying one per cent withholding tax on all sales made by non-filers.
Withholding tax has been imposed on those who lease vehicles from Islamic mode of banking.
Income tax rates for non-filers have been increased on payments for sales of goods, services and contracts, payments to non-residents doing business in CNG, petrol pumps and rental income.
Income Tax relief measures
The withholding tax rates for mobile phone subscribers have been reduced from 14 per cent to 12.5 per cent. To encourage software development, the government has proposed three-year income tax exemption for tech start-ups.
In order to encourage compliant taxpayers, withholding tax on registration of motor vehicles is proposed to be reduced from Rs10,000 to Rs7,500 for engine capacity up to 850cc, from Rs20,000 to Rs15,000 for 851 to 1,000cc and from Rs30,000 to Rs25,000 for engine capacity between 1001 to 1,300cc. The rates for non-filers will remain unchanged.
In an important relief measure for pharmaceutical sector, the government allowed the pharmaceutical companies to claim advertisement expenses up to 10 per cent of their total turnover, twice the existing limit.
The withholding tax rates on companies doing business in fast moving consumer goods has been reduced from three to two per cent and to 2.5 per cent for others.
In a bid to encourage listing, the government has extended tax credit on stock market listing to four-years-up from 2 years.
Sales Tex and Federal Excise Duty
The government increased the sales tax rates on mobile phones at Rs650 per set by merging the three existing rates of Rs300, Rs1,000 and Rs1,500. It has proposed to increase the federal excise duty on cement from Rs1 per kilogramme to Rs1.25 per kilogramme.
The government has proposed three-tier prices for cigarettes. On Rs4,500 per thousand cigarettes, the new tax rates are Rs3,740. On cigarettes of Rs2,925 to Rs4,500 per thousands, the new rate is Rs1,675 and for the third and new tier of below Rs2,925 per thousand cigarettes, the rates are Rs800 which will make it cheaper.
The government has increased the sales tax rate for steel sector from Rs9 to Rs10.50 per unit for steel melters and re-rollers.
The government has increased the sales tax rates on domestic sales of textile, leather, carpet, sports goods and surgical goods from five to six per cent. Similarly, on imported clothes and fabrics, six per cent sales tax rate has been imposed for the first time.
Sales Tax relief measures
The sales tax on DAP fertilizer has been fixed at Rs100 per bag, down from Rs400. The sales tax on poultry machinery from 17 to seven per cent. The federal excise duty on telecom services has been reduced from 18.5 to 17 per cent. The sales tax rates on imported sunflower and canola hybrid seeds have been removed. Up to five-year-old harvesters have been exempted from sales tax. The 2% extra tax on lubricating oil supplied by oil marketing companies has been withdrawn.
Gifts and donations received from foreign governments or organisations by federal and provincial governments have been exempted.
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The government has disallowed input sales tax adjustment of Rs425 per metric tons on supply of locally-produced coal.
The government has slapped five per cent regulatory duty on import of synthetic filament yarn in addition to already 11 per cent customs duty. It also increased customs duty rates on aluminium beverage cans from 11 to 20 per cent.
It has imposed 5 per cent regulatory duty on finished metallic yarn but reduced the customs duty rates on uncoated polyester film and aluminium wire to 11 per cent from 20 per cent. It also slapped two per cent regulatory duty on import of PVC Resin in addition to existing 11 per cent customs duty. Five per cent regulatory duty has been imposed on float glass and mirrors in addition to existing 20 per cent customs duties.
It imposed 10 per cent regulatory duty on import of sacks and bags in addition to existing up to 16 per cent customs duty. It also increased customs duty rates on bituminous coal from three to five per cent, except for coal being used in power projects. On non-composite solvent oil, customs duty rates have been increased to 16 per cent.
Besides, five to 15 per cent regulatory duty has been imposed on 565 items.
Customs duties on betel nuts and leaves have been increased from 10 to 25 per cent in addition to Rs200 per kilogramme regulatory duty.