Cut in corporate tax may be reversed

Published: May 26, 2019
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A Reuters representational image.

A Reuters representational image.

ISLAMABAD: Tax authorities have proposed reversing the decision of reducing corporate income tax rates to 25 per cent as the government faces stiff resistance from industrialists over its plans to withdraw tax exemptions in the new budget.

Separate meetings were held on Sunday at Q Block and Bani Gala over next year’s budget proposals. At both occasions, the government faced resistance over its plans to withdraw the sales tax and income tax exemptions being availed by the industrialists, according to sources in the Finance Ministry.

The tax authorities also proposed to abolish concessionary tax rates charged on the sales of sugar, steel, edible oil, imported raw material and semi-finished goods aimed at generating maximum possible revenues to meet the condition of the International Monetary Fund.

Receipts of nearly two-thirds of tax units fall

The tax authorities have recommended increasing number of income tax slabs for the individuals, suggesting 35pc highest income tax rate for business income of the individuals. The current rate is 29pc.

The meetings took place a day after Adviser to Prime Minister on Finance Dr Abdul Hafeez Shaikh announced Rs5.550 trillion tax collection target for the Federal Board of Revenue. To achieve this, FBR requires at least 36pc annual growth over this year’s revenue collection.

It has never happened in the history of Pakistan that the FBR achieved more than 21pc growth in tax collection in any year. In absolute terms, the FBR will need to generate Rs1.5 trillion more in the next fiscal year and it is now looking for only big-ticket items. It has to raise Rs1 trillion through a combination of additional taxes and enforcement measures. This will cost the government to lose its political capital while people belonging to every income group will be exposed to inflation.

At the Q Block meeting, the Adviser to PM on Commerce Abdul Razak Dawood did not agree with the Finance Ministry’s proposals to withdraw concessionary sales tax rates being availed by five export-oriented sectors, the sources said. He also opposed the proposal of withdrawing income tax benefits availed by the industrialists on expansion of their industrial activities.

The Q Block meeting remained inconclusive on the question of withdrawing zero-rating facility for textile, leather, garments, surgical and sports goods due to Dawood’s opposition.

The tax benefits to these sectors have been ensured through Statutory Regulatory Order 1125, which the FBR wants to withdraw from the next fiscal year 2019-20. It has estimated to yield Rs100 billion potential revenue by withdrawing tax exemptions given under SRO 1125, mainly to the textile sector.

Despite OECD data, FBR fails to increase tax collection

The FBR has estimated the total cost of tax exemptions at Rs800 billion while another Rs300 billion are lost due to low tax rates. These fresh estimates are double than the published figures, which suggests that the tax authorities were in past not fully reflecting the actual losses to the exchequer.

Meanwhile, leading industrialists of the country on Sunday met with Prime Minister Imran Khan at his residence. Among them were Mohammad Ali Tabba, Tariq Shafi, Bashir Ali Mohammad and Seema Aziz. They opposed the plan to withdraw the tax concessions, according to the sources present in the meeting.

If the government remains unable to convince the industrialists to accept the new normal, it will have to increase the standard General Sales Tax rate to at least 18pc, which will be highly inflationary and will hit every segment of the society.

One of the options were that instead of completely abolishing the SRO 1125, the government may reduce the number of items, currently 126, that are entitled for reduced tax rates, the sources said.

Meanwhile, the FBR shared preliminary tax proposals with the finance adviser. One of the main income tax proposals is to freeze the corporate income tax rates at current 29pc. This would effectively mean 1pc increase in tax liabilities of the big firms from the next fiscal year.

There was resistance to the proposal of lowering the income tax exemption threshold from the current 1.2 million annual income. The FBR has proposed to increase the number of tax slabs from seven to eight for salaried and eight to nine for business income individuals by adding another slab for highest income group, earning more than Rs20 million annually. The proposed rate is 35pc.

It has also been proposed to rationalize the tax incentives available to the industrialists under section 65 B of the Income Tax Ordinance. It says that where a taxpayer being a company invests any amount in the purchase of plant and machinery, for the purposes of extension, expansion balancing, modernization and replacement of the plant and machinery, credit equal to 10pc of the amount so invested shall be allowed against the tax payable.

It has also been proposed to increase the sales tax rate on sugar from 8pc to 17pc aimed at generating nearly Rs25 billion. Similarly, the tax rate on the local supplies of edible oil is also proposed to increase from Rs1 per kilogram to standard 17pc. The FBR collects Rs435 million from local supplies of edible oil as compared to Rs45 billion on palm oil at the import stage. It expects that after revision of rates, the tax collection would jump to over Rs20 billion but it will also increase the cooking oil prices by Rs4.25 per kilogram.

It has also been proposed to end special sales tax procedures for the steel sector that currently pays Rs5,600 per ton at the import stage and Rs13 per unit of electricity at the local stage. The FBR has proposed to end these special procedures and charge the standard sales tax rate to fetch Rs25 billion additional from the sector.

No major changes are expected in the sixth schedule of the sales tax that offers concessional tax rates on imports of food, pharmaceutical and machinery. But the FBR has proposed that the sales tax rate on tractors may be increased from 5pc to 17pc to generate additional Rs10 billion revenue. This will push the tractor prices up by Rs37,000 roughly.

The meetings will continue this week to thrash out the budget proposals, which will formally be unveiled on June 11 in the National Assembly.

Extensive work is underway for finalization of a budget reflective of the needs of the economy and the government is taking all stakeholders on board through consultations, said Ministry of Finance Spokesperson Dr Khaqan Najeeb.

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