Prime Minister Imran Khan on Friday approved the introduction of Money Bill in the National Assembly next week to withdraw around 80 income tax exemptions and reform the tax laws to meet a prior action for the revival of $6 billion International Monetary Fund (IMF) programme.
The IMF has asked Pakistan to withdraw income tax exemptions worth Rs140 billion through a new legislation but the exact quantum can only be determined once the government officially lays the bill in the National Assembly.
The Income Tax (Second Amendment) Bill 2021 would seek to streamline the tax regime for non-profit organisations, listing of firms in the stock market, exemptions for oil refineries, special economic zones (SEZs) being setup under the China-Pakistan Economic Corridor and the Independent Power Producers (IPPs), sources in the Prime Minister’s Office told The Express Tribune.
The National Assembly session would be convened next week to introduce the bill, said the sources. Prime Minister Imran Khan chaired a meeting to review these exemptions, which was followed by another meeting in the Federal Board of Revenue (FBR), the sources added.
On the input from Nadeem Baber, the special assistant to the prime minister on petroleum, it has been decided that some exemptions would continue, including depreciation allowance for the oil exploration and production companies and refining minerals, sources close to the SAPM revealed.
Pakistan and the IMF reached an staff-level agreement last month for the approval of second to fifth reviews and release of the next loan tranche of $500 million, subject to the fulfilment of certain conditions.
For the revival of the stalled bailout programme, the IMF had placed prior conditions of increasing electricity tariffs, introduction of new bills and withdrawing income tax exemptions.
The premier took the decision to introduce the bill a day before he would take vote of confidence. However, he shot down a proposal for slapping Rs4 per kg federal excise duty (FED) on imported LPG, directing for taking up this proposal in the main budget.
In the future, tax incentives will not be used as instrument for attracting investment, a member of the federal cabinet said.
The objective of tax reform is to make tax code simple, plug existing loopholes in the system, reduce discretionary powers of tax collectors and tax practitioners and introduce automation to ensure transparency of tax system, said Prime Minister Imran Khan.
The premier further stated that tax regime should be reformed and structured in such a way that it facilitates businesses and help the economy grow.
The FBR has estimated the total cost of tax exemptions at Rs1.15 trillion, including Rs378 billion income tax exemptions. The exemptions from total income amounted to Rs212 billion and the cost of tax credits is Rs104.5 billion.
In a major decision, the government has decided that the income tax exemptions available to the IPPs would be withdrawn in the future. The existing IPPs would continue availing the exemptions due to sovereign guarantees that cost the national kitty Rs27 billion last year.
Similarly, tax credit for investment in balancing, modernisation and replacement of plant and machinery by the manufacturing sector that caused Rs65 billion revenue loss last year would not be extended beyond June 30.
The tax exemptions available to the Real Estate Investment Trusts would be withdrawn, said the sources. Last year it cost Rs5.3 billion revenue loss. In yet another important move, the sources said, the tax credit on listing of new companies in the stock market is proposed to be withdrawn.
The concessionary income tax regime, available to the prime minister’s low-cost housing scheme would be available till June 2024 and any project that will be setup after that would not be entitled to claim the concessionary rates, said the sources.
It was decided that the income tax exemptions available to oil refinery investments would continue by the end of this calendar year. The decision to continue these concessions for another nine months was taken to get time to finalise an oil refinery deal with Saudi Arabia, the sources said.
Some major changes will also be proposed to streamline tax regimes of the SEZs, export of information technology services, Sindh coal mining projects and start-up projects, said the sources.
The NPO regime will be reformed to stop tax avoidance by the NPO sector. Instead of claiming tax expenditures, these NPOs would be given tax credits, said the sources. It was also decided that the direct deduction of donations paid to the NPOs would be withdrawn. However, tax credit equal to omitted exemption will be offered.
Similarly, tax expenditure claimed on donation paid to Prime Minister’s Special Funds for Victims of Terrorism, Flood Relief Fund, to the Chief Minister’s (Punjab) Relief Fund for Internally Displaced Persons (IDPs), would be withdrawn. But the donors can claim tax credits.
The sources said that it was decided that the income tax exemption on income of Sukuk holders from Sukuk issued by the Second and the Third Pakistan International Sukuk Company Limited will be withdrawn.
The income tax exemption available to sports boards and reduced rate for Pakistan Cricket Board can be withdrawn. Likewise, exemption on income from modarba, other than manufacturing or trading modarba, could be withdrawn. The income tax regime of the film industry may also undergo changes, said the sources.
Pakistan will take additional revenue measures equal to 1.4% of the size of its economy or over Rs700 billion to achieve a tax collection target of around Rs6 trillion in the next fiscal year under the IMF deal.
The FBR will need to collect an additional Rs1.3 trillion in the next fiscal year, including over Rs700 billion through additional revenue measures. The remaining about Rs600 billion is expected to be collected through its existing revenue base.
The FBR’s powers to declare any sector or industry as industrial undertaking, and the first-year allowance equal to 90% of the cost of plant and machinery to mobile phone manufacturers may also be withdrawn, said the sources. The sources said that the government may withdraw income tax exemption available to Sheikh Sultan Trust, Karachi.