Trade bodies advocate restoration of final tax regime

Trade bodies have expressed concern over the imposition of the normal tax regime under the Finance Act and proposed several measures to resolve their pressing problems. They have advocated that the final tax regime for the export sector should be reinstated and under this mechanism the tax rate can be increased gradually.

They suggested tax rates of 1.5% for FY25, 1.75% for FY26 and 2% from FY27 onwards, adding that this approach would ensure the required increase in revenue without the need for complex tax filings or audits.

A high-level delegation comprising representatives from the Sialkot Chamber of Commerce and Industry, Pakistan Readymade Garments Manufacturers and Exporters Association and Pakistan Hosiery Manufacturers Association met with Special Assistant to Prime Minister (SAPM) on Industries and Production Haroon Akhtar Khan on Monday.

They discussed crucial matters including the final tax regime versus the normal tax regime, industrial policy and measures to improve the ease of doing business. A major worry was the emerging practice of tax officers, who were demanding an additional 0.5% advance tax from exporters to meet revenue targets. This raises the effective tax burden by 150%, a level that is utterly unsustainable for the value-added export sectors, especially those dominated by small and medium enterprises (SMEs), the representatives of trade bodies said.

The final tax regime was introduced in fiscal year 1991-92 with a 0.5% fixed tax on exports. It was a remarkable success as tax collection rose from Rs343 million in 1990-91 (pre-final tax regime) to Rs855 million in 1991-92, reflecting a staggering 149% growth.

They stressed that it not only boosted government revenue with minimal administrative cost but also paved the way for exponential growth in exports, particularly from regions like Sialkot, while significantly reducing corruption and discretionary interventions.

Over the decades, the final tax regime provided exporters with a simple, transparent and harassment-free taxation model, but the imposition of the normal tax regime increased the burden, they said. The new policy allows a 2% deduction at source on export proceeds (a 100% increase), an unprecedented move that undermines export viability.

They pointed out that there was 1% minimum tax and 1% advance tax (total 2%) at source, and 29% tax on companies and 45% on individuals/Association of Persons (AOPs) after assessment.

The trade representatives also raised the issue of 10% surcharge on income exceeding Rs10 million for AOPs/individuals and super tax of 1-10% for income exceeding Rs150 million.

They were of the view that the shift to the normal tax regime would have significant implications with the potential for unfair practices. The introduction of refunds and complex tax assessments may incentivise exporters to manipulate financial statements to maximise refunds.

The normal tax regime could also reduce the inflow of export proceeds as businesses may seek to avoid higher tax burdens by resorting to under-invoicing. Exporters may deliberately declare lower values for goods or services to reduce the taxable income, leading to minimum tax liabilities and parking of funds abroad.

Addressing the concerns, SAPM Haroon Akhtar assured the delegation that the government was fully aware of the challenges faced by the business community. "We are committed to taking all possible measures to resolve these issues," he stated.

He revealed that a proposal would be drawn up to include a comprehensive and standardised definition of SMEs in the new industrial policy.

"A stable and predictable policy framework is essential for attracting investment and ensuring sustainable industrial growth," the PM aide remarked.