Tax break: Parliament defied as FBR withdraws manufacturing tax

This tax on sales was expected to give revenues of Rs15 billion.

ISLAMABAD:

Contrary to tall claims of efforts aimed at broadening a narrow tax base, the government has withdrawn a tax levied by parliament on all types of manufacturing in a bid to capture exact details of sales made to distributors, wholesalers and traders besides raising Rs15 billion in revenues.

The Federal Board of Revenue (FBR) has held in abeyance 0.5% withholding tax imposed on all types of manufacturers through Finance Bill 2012, which had been approved by parliament in June last year. Originally, parliament had approved 1% tax, which was reduced to 0.5% by the FBR after coming under pressure from manufacturers and wholesalers, who understate their sales to evade both income tax and sales tax.

Now, it has abolished the levy at least for the current fiscal year. According to a Statutory Regulatory Order (SRO) issued by the FBR here on Monday, the new law is held in abeyance up to the end of June and the tax will again be applicable from July, which marks the beginning of the new fiscal year.



This is the second time the government has retreated in the drive to broaden the tax base. Earlier, the FBR took back a decision on treating computerised national identity cards as national tax numbers. This move also had the backing of an Act of parliament. The FBR initially put off the plan for six months, but it never undertook it despite a lapse of one and a half years.

On the eve of announcing the federal budget in June last year, the FBR had declared 1% tax on manufacturing a significant revenue source, estimating collection of Rs15 billion and also an important tool to document the economy. In this tax, the manufacturers were made to deduct 1% of the value of sales made to wholesalers, traders and distributors.



The withdrawal of the tax points to abuse of powers by government agencies. The Public Accounts Committee has already taken notice of ‘misuse of parliament’s powers’ by the FBR.

The government has recently told parliament that over the years the FBR has granted Rs659 billion in tax reliefs through SROs.

Defending the decision, FBR Chairman Ali Arshad Hakeem said the levy was obstructing business transactions as many businesses were not equipped with information technology, creating problems for the industries.

To a question whether the government would now revise the annual tax collection target, Hakeem admitted that the target would be revised. The tax on manufacturing was not a well thought out plan on the part of the FBR, he said.

The government has set the tax collection target at Rs2.831 trillion for the current fiscal year ending June this year. In the first half (July-December), the FBR managed to collect only Rs897 billion, only 37.7% of the annual target. According to tax officials, the country was facing a revenue shortfall of roughly Rs100 billion in just six months.

In a briefing to the Senate Standing Committee on Finance last week, the FBR chairman stated “there was recession in the economy, which was affecting revenue collection.”

An FBR official said tax officials had already requested the finance ministry to revise the revenue target downward by Rs187 billion and fix it at Rs2.194 trillion. Finance Secretary Abdul Wajid Rana indicated that the figure could be brought down to Rs2.224 trillion, he added. The finance secretary was not available for comments.

Published in The Express Tribune, January 8^th, 2013.

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