Budget brings extra Rs106b into tax net

Tax on defence sales imposed, sales tax reduced to 16%, withholding tax on cash withdrawal cut to 0.2%.

ISLAMABAD:

The government has slapped Rs106 billion additional taxes by removing two dozen sales tax exemptions including on defence sales and has vowed to get tax evaders cough up another Rs50 billion in a bid to achieve the Rs1,952 revenue target for the next financial year.

According to the Member Inland Revenue Service, Khawar Khursheed Butt, with the tax base of Rs1,588 billion – the target for this year – the government would get a windfall of Rs294 billion on account of 18.5 per cent nominal GDP (14.3 per cent inflation and 4.2 per cent growth). This would bring the number to Rs1,882 billion and in addition to this the government will generate Rs20 billion through additional taxes and Rs50 billion through curbing tax evasion.

But according to the finance ministry’s working, the nominal GDP would be 16.2 per cent (12 per cent inflation and 4.2 per cent growth). This would give Rs258 billion benefit to the Federal Board of Revenue (FBR), taking the number to Rs1,845 billion. The doctored nominal GDP would give the FBR a Rs37 billion benefit.

The positive aspect of the tax policy is the government’s decision to provide relief on income tax and customs duties and bring more exempted sectors into the tax net.

New sectors under sales tax net

The government has withdrawn 21 sales tax exemptions in addition to exemptions withdrawn on March 15, from which it would earn Rs31.2 billion and Rs75 billion respectively. The biggest step in this regard was the withdrawal of sales tax waiver on sales of defence stores both at local and import stage. Defence trucks, trailers, vehicles, defence equipment, parts and accessories would be subject to 16 per cent sales tax. FBR is expecting to generate Rs10 billion and the decision will take effect immediately.

Sales tax exemption on cement, concrete blocks and bricks has also been withdrawn. Additionally, 16 per cent sales tax has been levied on the following items that would generate Rs7 billion. These items include surgical tapes, ultrasound gel, diapers for adults, computer software, ambulances, firefighting vehicles, waste disposal trucks, lorries, aircraft, commercial ships, air navigation machinery, imported plants and machinery, bulldozers and combined harvesters.

The government has levied 16 per cent tax on sale of CNG kits, cylinders, valves, commercial catalogues, rock phosphate, phosphoric acid and mineral oil imported by importers, formulators and manufacturers of pesticides. This will generate Rs1 billion.

It has also increased excise duty on locally produced cigarettes that will generate Rs9 billion. A 20 per cent tax has been imposed on filter rod of cigarettes and Re1 per filter tax has been abolished.

Value added tax on commercial importers has been increased to three per cent from one per cent to generate Rs3 billion. The government has abolished eight per cent sales tax on sugar and instead introduced eight per cent federal excise duty to generate an additional Rs1 billion. The government has also increased excise duty on raw tobacco from Rs5 per kg to Rs10 per kg.

Sales tax relief

The government has taken Rs52.3 billion sales tax relief measures. It has provided the biggest relief by lowering sales tax from 17 to 16 per cent that will cause a revenue loss of Rs35 billion. But economists believe that it would instead generate more revenues. The second biggest relief was abolition of 2.5 per cent special excise duty that will cause a dent of Rs12 billion with a positive impact of ending multiple taxation.

The government has reduced regulatory duty to 5 to 10 per cent which will cause a loss of Rs800 million. It has also abolished federal excise duty on 392 items but retained on five items – betel nuts, luxury cars above 1800 cc, arms and ammunition and bathroom ceramics. Federal excise duty on beverages has been reduced from 12 to 6 per cent, taking a hit of Rs1.5 billion.

Income tax relief

In order to provide relief to low-income groups, the government has increased the income tax exemption limit to an annual income of Rs350,000 from Rs300,000. As many as 80,000 people will benefit from this and the state will take a revenue hit of Rs800 million. But the FBR has made it compulsory for all individuals including salaried and business classes to file income tax returns. Earlier, the monthly tax payable income was Rs25,000 which will now be Rs29,166.

The second important relief is the reduction in withholding tax from 0.3 per cent to 0.2 per cent on cash withdrawals above Rs25,000 from banks. This will cause a revenue loss of Rs3 billion. In order to encourage equity financing, a five-year tax holiday has been offered on 100 per cent equity financing.

Customs duty relief

The government has removed regulatory duty on edible items and has reduced the duty to five per cent from 20 per cent on pharmaceutical raw material. Duties on the glass industry’s raw material have also been brought down to five per cent. A relief of Rs2.2 billion has been provided in customs duties.

Published in The Express Tribune, June 4^th, 2011.