Pakistan’s tax chief disclosed on Thursday that the government successfully resisted pressure from the International Monetary Fund to charge normal income tax rates to the real estate sector, which still enjoys a “much-favourable” regime.
It was also revealed by the Ministry of Industry that prices of hybrid and electric vehicles are set to increase 15% from July due to an increase in their taxes from 8.5% to 25% on these vehicles. In addition to the automobile sector, Pakistan's thinning telecom sector also made hue and cry against the government’s decision to make them their police force.
The Chairman Federal Board of Revenue Malik Amjad Zubair Tiwana made the statement about the real estate sector during a meeting of the Senate Standing Committee on Finance. The Pakistan Peoples Party is helping the government to pass the budget by smoothly conducting the standing committee’s proceedings.
The committee’s proceedings also revealed that the budget was made in isolation, as at least two ministries or their stakeholders claimed that they were not aware of changes made in tax laws related to their subjects under the Rules of Business.
While discussing the taxation of the real estate sector, the Chairman FBR disclosed that the IMF was putting pressure on Pakistan to charge normal tax rates from the real estate sector instead of fixing it at 15%.
“The real estate tax regime is still much-favourable”, said Tiwana while responding to a question raised by the Senator Faisal Vawda about the capital flight after the changes in the capital gains taxes being charged to the real estate sector.
The Chairman’s statement shows that the government can go to any extent where it wants to give protection to the holy cows –a facility that is not available to the marginalized salaried class of Pakistan.
Cars price hike
Senator Vawda also raised the issue of heavy increase in duties and taxes on the imported and locally made vehicles. The government doubled the custom duty to 50% on import of electric vehicles above $50,000 price and also increased the sales tax rate from 8.5% and 12.75% on hybrid and electric cars to 25%.
The FBR has cherry-picked the 2021-26 policy and hit only those companies that have begun hybrid production with 25% sales tax, said Ali Asghar Jamali, the chief executive of the Indus Motors.
The increase in sales tax rates is in violation of the Auto Industry Development and Export Policy and is in breach of the commitments given by Pakistan four Prime Ministers to Japanese investors and the ambassador to Pakistan, said Jamali.
He went on to say that the new tax regime will bring the sales of hybrid vehicles to zero from the current 7,000 per annum.
The General Manager of the Engineering Development Board (EDB) Asim Ahmad claimed that the FBR did not consult the Ministry of Industry before reversing the incentives given in the automobile policy.
The General Manager told the standing committee that after the increase in the tax rates, the expected increase in prices of various hybrid vehicles range from Rs1.4 million to Rs2.3 million in various variants being manufactured locally by respective companies. This translates into a 15.2% increase in prices.
The EDB official further said that the price of Corolla Cross HEV X would jump to Rs11.4 million, Santa FE Signature to Rs16.9 million and Haval H6 HEV to Rs13.7 million after applicability of 25% tax.
“I have talked to the concerned ministers and they do not have any knowledge of change in tax rates for the automobile sector”, said Vawda.
In violation of the 2021-26 policy, the sales tax on Hybrid Electric Vehicles has been enhanced from 8.5% to 25% without any consultation with the government and private sector stakeholders, which has resulted in exorbitant price increase, expected to result in reduced sales with effect from July 01, 2024 and extremely low return on investment, according to the EDB.
The EDB official told the committee that the Indus Motor Company has invested $100 million in hybrid technology, Sazgar Engineering Works invested $15 Million and Hyundai Nishat has invested $10 million on hybrid specific vehicles.
Increase in sales tax from 8.5% to 25 % in case of HEVs will jeopardize the investment already made in the hybrid technology by Japanese, Chinese and Korean Companies, according to Asim.
Under the 2016 policy, to promote electric vehicles sales tax for cars below 50 KWH battery pack was reduced to 1% from the prevailing rate of 17%. Similarly, sales tax on hybrid electric vehicles was reduced to half 8.5% to provide a differential announced as a major incentive for investment in the new technologies including EVs and Hybrids.
Asim said that the FBR’s tax changes may hamper the investment being planned by various companies in further advance technology i.e. Plug-in Hybrid Electric Vehicles (PHEVs), which are almost similar to EVs in operation, but do not necessarily require charging infrastructure, which is one of the biggest challenges in faster adoption of electric vehicles.
“The decision taken by the Finance Division in isolation will create unrest amongst the investors, who have invested in Hybrid Technology after due deliberations with the Government in the recent past in the light of incentives announced under AIDEP 2021-26”, according to the EDB’s written response submitted in the committee.
Telecom sector
All the telecom companies also made hue and cry in the standing committee over the government’s decision to make them their “police” to bring non-filers in the tax net or ready to pay Rs100 million per week fine.
The telecom sector and the Ministry of Information Technology have been taken by surprise as even the Information Technology Minister was not aware of tax changes, a representative of the telecom companies told the standing committee. The FBR and the government needs to understand that the companies cannot act as their police.
The suggestions made in the budget will kill the already challenged industry and badly hamper the dream of Digital Pakistan, according to the telecom firms.
The government has proposed 75% advance tax for non-filers mobile phone users and in case these companies fail to block their sim cards the government has proposed to charge from Rs100 million Rs200 million penalty for every fortnight.
The telecom infrastructure is not equipped to handle multiple tax rates, leading to operational inefficiencies and increased consumer costs, according to the industry.
The companies have also agitated against increasing sales tax on mobile phone sets of value up to $500, which they said will destroy digital penetration in lower income groups and severely compromise any dream of a Digital Pakistan
All essential services including the Banking sector, ATMs, Credit Cards, E-commerce, Passport Control, Security Institutions, National Data Base, E-commerce, Digital applications are connected and governed through the Internet bandwidth and services provided by Telcom Companies.
Imposition of Sales tax at 18% on handsets below $500 and 25% on more than $500 will impede broadband penetration and digitalization in Pakistan. Affordable mobile handsets are crucial for increasing digital access, especially in a country where mobile phones are the primary means of accessing the internet for majority of the population.
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