In a bid to achieve what can at best be described as an ambitious tax collection target of Rs3,104 billion, the government has decided to raise new taxes worth Rs238 billion, in a set of measures likely to touch virtually every sector of the economy.
The new taxes are likely to have an impact on a wide variety of products, including packaged dairy products, meat and poultry, petroleum, mobile phones, cigarettes and soft drinks. It is also going to become more expensive to write a cheque or withdraw money from an ATM. In addition, several industries are likely to see their input costs go up, such as steel and machinery and equipment imports.
Gross estimated revenues from the new taxes are estimated at Rs267 billion. The government also announced another Rs29 billion in exemptions, leaving the net amount of new taxes imposed at Rs238 billion, said a senior official of the Federal Board of Revenue (FBR).
Of that amount, the vast majority of the new taxes – Rs142 billion – will be through income tax measures, and the majority of those measures will be in the form of withholding taxes. Another Rs54 billion is expected to be collected in the form of new sales taxes federal excise duties, and Rs42 billion in the form of customs duties.
The new tax measures are equal 0.8% of the total projected size of the national economy for fiscal year 2016, with the government hoping to increase the tax-to-Gross Domestic Product (GDP) ratio to 13%.
In addition to the new tax measures, a further Rs120 billion in tax exemptions have been withdrawn.
The tax proposal are finalised while keeping in mind the principles of withdrawing tax exemptions from affluent people, increasing the cost of doing business for those who do not file income tax returns and removing distortions in the tax laws, said Finance Minister Ishaq Dar during his speech on the floor of the National Assembly.
The government has reduced the corporate income tax from 33% to 32% for all companies except banks. However, it has imposed a tax on companies that do not pay out cash dividends. Any company that does not pay dividends, or pays low dividends will have a 10% tax imposed on any amount in its reserves beyond the amount equal to their paid-in capital
To pay for taking care of refugees displaced by the war against the Taliban, the government has imposed a temporary 4% super tax on all banks and 3% on other companies and individuals with an annual income of over Rs500 million. This measure is expected to help the FBR collect Rs24 billion next year.
The government has also withdrawn the withholding tax exemptions on payments of advertisement expenses to print and electronic media and imposed a 10% withholding tax, expected to raise Rs10 billion. It has also increased withholding tax on commission earned by advertising agents from 7.5% to 10%. It has also imposed a 0.15% tax on withdrawal of cash by foreign exchange companies to raise Rs6 billion.
In a major policy measure, the government has imposed a 0.6% withholding tax on all banking instruments including cheques and all modes of transfer of funds. The measure will generate Rs35 billion. “The tax will be charged only from those who do not file income tax returns,” said the finance minister.
The government has also increased Capital Gains Tax rates on investments in stocks. It has increased CGT rate on holding periods of up to one year from 12.5% to 15%, for holding periods of between one and two years from 10% to 12.5%, and introduced a new regime, where the investments with holding periods of between two and four years will be taxed at 7.5%. The estimated revenue from this proposal is Rs4 billion.
The government has also further increased the cost of non-compliant taxpayers besides bringing more sectors under this regime. Since withholding taxes are deductible from a person’s tax liabilities, raising these taxes are meant to encourage more people to file their tax returns so that they can claim any refunds they might be owed in case of being overtaxed.
The government has imposed a 3% withholding tax on contactors, an additional 2% on suppliers, an additional 3% in brokerage and commission agents and transporters. Withholding tax rates on cash withdrawals have also been increased by 0.1% to 0.6%. The estimated income from this measure is Rs23 billion. The government has also decided to charge 35% tax on all sources of incomes of the banks, including their investments, some of which were previously exempt.
The government has imposed a Rs16,000 per person tax on first class international airline tickets and a Rs12,000 tax on international airline tickets of all other classes, excluding economy. It has also imposed a 10% withholding tax on renting out of machinery and equipment. The government has imposed up to 1.4% withholding tax on fertilizer distributors and wholesalers to raise Rs3 billion.
The government has imposed a 10% sales tax on packaged dairy products, including flavoured milk, regular milk, butter, yogurt, desi ghee, cheese, cream, whey, concentrated milk, and cream. This tax is aimed at raising Rs5 billion next year.
Poultry feed, cattle feed, incinerators, motorised sweepers, plant machinery, and equipment used for bio diesel production will now face a 17% sales tax rate.
The sales tax on five export oriented sectors, including textile, has been increased from 2% to 3% on yarn and fabric. The sales tax on each unit of electricity used by steel melters has been increased from Rs7 per unit to Rs9 per unit and on ship plates from Rs6,700 per metric ton to Rs7,500 per metric ton.
The sales tax on mobile phones have been doubled and the new rates will be Rs300, Rs500 and Rs1000, depending upon the model.
For businesses without tax registration, the government has increased the overall sales tax rate from 18% to 19%. The move will generate an additional Rs8 billion in revenues.
The federal excise duty rates on cigarettes have been increased from Rs2,632 to Rs3,030 per thousand sticks on cigarettes having printed sales price above Rs3.35 per stick. For cigarettes cheaper than Rs3.35 per stick, federal excise duty rates have been increased from Rs1,085 to Rs1,320 per thousand cigarettes. The measure will generate Rs12 billion revenues.
On aerated water, FED rates have been increased from 9% to 12% to generate Rs3 billion revenues.
The government has increased customs duty rates from 5% to 10% on the import of fresh and dry fruits from Afghanistan. It has imposed a 10% customs duty on high speed diesel to generate Rs5 billion. A 2% customs duty has been imposed on crude oil and motor spirit, expected to generate Rs19 billion, and a 5% customs duty on furnace oil to generate Rs15 billion.
It has increased the minimum customs duty rate from 1% to 2% to generate an additional Rs5 billion. The government has imposed a 5% customs duty on coal and a 20% duty on imported Portland cement.
Published in The Express Tribune, June 6th, 2015.