Govt mulls tax levy on middlemen’s income

Could also increase tax on interest income to 30%

ISLAMABAD: The government plans to slap tax on the income earned by middlemen from farm produce to capture their Rs1-trillion untaxed income and it could also increase the tax rate on interest income to 30% in the new budget.

It is also considering withdrawing tax exemption on the dividend income being availed by industrialists under Section 65B and 65D which deal with tax credit on industrial expansions, said sources in the Federal Board of Revenue (FBR). The tax credit may be restricted to only business income, according to the budget proposals.

These proposals are part of the tax plan being finalised for the next fiscal year 2019-20 aimed at achieving the tax collection target of Rs5.550 trillion. The FBR is in the process of giving final shape to around Rs700 billion worth of additional revenue measures besides finding avenues to collect another over Rs250 billion through administrative measures.

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Monetary values of these budget proposals will be examined by the International Monetary Fund (IMF).

In a bid to capture the income earned by middlemen, known as arthis, the government is considering imposing tax on their turnover, according to the sources.

At present, the arthis and commission agents are subject to an annual fixed tax ranging from Rs5,000 to Rs10,000 only. The FBR received only Rs121.2 million on this account in July-March of the current fiscal year, according to official statistics.

But FBR Chairman Syed Shabbar Zaidi claims that the untaxed income of middlemen is “the biggest black hole in Pakistan’s economy” that he wants to plug through the new Finance Bill 2019.

In his view, these middlemen are not commission agents but the traders of farm produce, therefore, they should be taxed accordingly. The middlemen did their business transactions through banks and could be easily taxed, he said.

Tax potential in the income earned by the traders of farm produce, the middleman or arthis, is no less than Rs1 trillion, according to a statement from Zaidi which appeared in Business Recorder in January this year.

Zaidi stated that the trading and wholesale business of farm produce was a money-making machine and its tax contribution was zero. In all of the farm produce - wheat, rice, cotton, sugarcane, milk, meat, fruits and vegetables, the farmer earns 10-20% and the rest is earned by the middleman, according to Zaidi.

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In January, he stated if the Pakistan Tehreek-e-Insaf (PTI) really meant business, it must go after the arthis.

In his view, these middlemen are no more than a few hundreds in number across Pakistan and the influential ones are big enough that provide financial support to political leaders during elections.

The FBR faces a hurdle in the shape of agriculture income tax exemption and taxing real income of the middlemen could be one potential source to bring the income from farm produce in the federal tax domain. Under the constitution of Pakistan, the income from agriculture is a provincial subject - a lacuna that almost every influential landlord and industrialist exploits to dodge taxes by claiming income from land.

The share of agriculture in the economy is about one-fifth but its share in total revenues is less than 1%, indicating huge tax evasion in the sector.

“All over Pakistan, 9,352 taxpayers have shown agriculture income and 6,668 have not paid provincial agriculture tax,” according to the Federal Tax Ombudsman (FTO).

It added only 2,384 people - only one-fourth of the total declarations - actually paid provincial agriculture income tax during tax years 2016 and 2017.

In order to evade income tax, the landlords claimed tax exemptions from the FBR by declaring agriculture as the source of income. However, 75% of them gave false statements in their annual income tax returns as they did not pay tax in the provinces, according to the FTO’s findings.

The middlemen buy farm produce from the farmers and hoard these commodities in order to sell at a later stage at higher prices, influencing demand and supply in the market.

Sources said the FBR was also considering taxing the dividend income which was currently exempted due to certain tax concessions available to the industrialists. Initially, the FBR wanted to abolish Sections 65B and 65D, which allowed income tax exemption on industrial expansion. But it faced resistance and had to retreat.

Now, the FBR plans to restrict these exemptions only to the business income.

According to another budget proposal, the government may increase withholding tax rates on interest income to 30%. At present, the filers pay 10% tax on their interest income and non-filers are subject to up to 17.5% tax.

There are certain types of interest income that are either exempted or are subject to lower tax rates. These schemes are run by Central Directorate of National Savings (CDNS), being administered by the Ministry of Finance. There is a possibility that higher withholding tax on interest income may channel money from banks to the CDNS.

Published in The Express Tribune, June 8^th, 2019.

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