Proposals call for lower taxes on corporate sector

ICAP seeks abolishment of super tax, tax on bonus shares

ISLAMABAD: As tax authorities begin deliberations on the new budget, various lobbies are speaking against some of the regressive taxation measures that the PML-N government has introduced; seeking their reversal, particularly abolishment of the super tax and tax on bonus shares.

The Institute of Chartered Accountants of Pakistan - the representative body of the country’s chartered accountants - have now sought reduction in the tax burden of the corporate sector, making it fairer.

In its set of budget recommendations, the ICAP has sought abolishment of 4% controversial super tax, the 5% bonus share tax, restoration of group taxation relief for big conglomerates and withdrawal of 17% alternate corporate tax. The PML-N will unveil its sixth budget on April 27, which provides it the last chance to reverse some of these measures.

Since there is also opposition to some of these taxes from within the government, there are fair chances that the government may withdraw tax on bonus shares and could also restore group relief, said sources in the Federal Board of Revenue (FBR).



This week, the FBR formally began internal discussion on the new budget. Special Assistant to Prime Minister on Revenue Haroon Akhtar Khan and FBR Chairman Tariq Pasha started looking at the budget proposals.

The corporatisation is essentially being discriminated by way of higher tax, including taxes on dividends, bonus shares and undistributed profit and huge burden of reporting and compliance in comparison to non-corporate sectors, according to the ICAP.

It is the tax system that has to conform itself to the business, not the business that has to be aligned with the taxation, said Ashfaq Yousaf Tola, chairman of the Fiscal Laws Committee of the ICAP.

The contribution of the industrial sector in the total national output is only 20.9% but its contribution in total tax collection is almost triple to its share in GDP.

It stated that immediate remedial measures are to abolish taxes like alternative corporate tax, tax on undistributed profits and super tax. The super tax had been imposed four years ago on big firms and banks only for one year to raise funds to fight the war against terrorism. But subsequently, the government decided to retain it, which effectively increased the income tax burden of the corporate sector.

The ICAP said that corporatisation is essentially being discriminated by way of higher tax. The labour levies, super tax and tax on undistributed profits take the effective tax rate on companies beyond 40%, according to the ICAP. It said that even the present corporate tax rate of 30% is one of the highest in the entire region. This is effectively a disincentive to multinational groups for locating their manufacturing base in Pakistan.



The ICAP has also sought abolishment of the highest tax slab for salaried individual, which is 30%. It has recommended that the rate of corporate tax should be reduced to 25%. Further, highest tax slab rate for salaried individuals may be restricted to 20%.

Group tax relief

The ICAP has also demanded restoration of the group tax relief. The concept of group taxation was introduced to promote corporatisation and group formation, allowing the corporate entities to grow into conglomerates. But through the Finance Act 2016, section 59B that deals with the group relief was excluded from the benefits of exemption of inter-corporate dividend.

Minimum tax

The ICAP has also demanded about 60% cut in rates of minimum tax. In the last budget, the government increased the rate of minimum tax from 1% to 1.25%. The FBR should focus on increasing the tax base instead of further burdening existing taxpayers. “It is recommended that minimum tax should be reduced to 0.5%,” according to the ICAP, adding companies having a gross loss position for the year should be excluded from the purview of the minimum tax.

On the sales tax side, the ICAP has recommended that the extra tax at the rate of 2% is levied and collected by the manufacturers and importers on specified goods from unregistered buyers. It said levying further tax is an irritant and absurdity, which needs rectification to streamline the VAT regime.

Tax broadening

The ICAP has also given certain recommendations for broadening of the extremely narrow tax base. It said that in order to increase the tax base the unregistered persons having industrial or commercial undertakings and whose billed amount, in any month, exceeds Rs15,000 be charged with extra tax at the rate of 5% on supply of electric power and natural gas.

Published in The Express Tribune, March 24^th, 2018.

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