ICAP submits tax proposals for ease of doing business

The Institute of Chartered Accountants of Pakistan

KARACHI: The Institute of Chartered Accountants of Pakistan (ICAP) has submitted tax proposals for budget 2019/2020 and suggested measures for ease of doing business.

The ICAP suggested following tax proposals for ease of doing business:

Facilitating Small and Medium Enterprises (SMEs)

The ICAP said that SMEs serve as the backbone of the economy by playing the most vital role of production, employment generation etc. To facilitate their growth and ease of doing business, there is dire need for SME and retailers to have a separate and simplified income tax regime. It is proposed that, with simplified one-page return and minimum possible book-keeping requirement, the taxation regime should encourage SME/retailers for income based taxation.

“It is proposed to exclude SMEs from the list of withholding tax regime specified within different sections of the Income Tax Ordinance, 2001. Such simplified regime should also be aligned with the sales tax regime.”

A special regime in the form of Ninth Schedule (as presented by Tax Reform Committee) should be adopted.

Retailers falling under SRO 1125(I)/2011 dated December 31, 2011 are allowed reduced sales tax rate of six percent, if their sales transactions are integrated with the FBR system. Considering the effectiveness of this system and in order to curtail loss of revenue in other sectors due to under-reporting of revenue, option may be provided to all the retailers to install real-time sales reporting system and those availing such facility should be allowed to charge reduced rate of sales tax.

Income Tax Credit for sales tax registered person:

In this regard, Section 65A of Income Tax Ordinance, 2001 is proposed to be reinstated with a higher rate of tax credit in order to encourage documentation in the economy and broadening of tax base.

Moreover, condition of 90 percent supplies to registered persons should be reduced to 75 percent. Further, the restricted benefit of this tax credit to manufacturers should be extended to all persons registered under the Sales Tax

Promoting Local Industry, Brand Made in Pakistan for import substitute:

A long term solution to reduce export-import gap, as also envisaged in the medium term economic framework, import substitution is one of the highest priorities for the government at the moment.

In this regard, some of the steps proposed here should play a key role: a trade license mechanism should be introduced with a legal onus on the supply chain member to check that the goods are not from illegal or smuggled source.

Radiography scanning of all inbound and outbound containers should be made mandatory to curb smuggling and plug revenue leakages. Import stage tax incidence on raw material should be reduced enough to provide manufacturers to bear the expense of value addition and local taxes.

This would discourage import of finished goods, which can be manufactured in Pakistan and thus can reduce country’s reliance on imports, leading to saving of precious foreign exchange.

Foreign exchange regime needs to be further strengthened to ensure that values are properly declared and taxes at import stage.

Encourage Domestic and Foreign Investment

At present, amongst other factors both the new local as well as foreign investors are reluctant to invest in manufacturing industry of Pakistan due to various impediments.

These include collection of sales tax at 17 percent and income tax at 5.5 percent at import stage on plant and machinery and spare parts.

In order to promote industrialization in the country, it is suggested that the exemption from tax collection at import stage on import of plant and machinery and spare parts by newly established manufacturing company/for expansion by the existing company should be allowed at least for five years from the date of incorporation of the new company/initiation of expansion projects by the existing company.

This amendment will encourage new much needed investment in the manufacturing sector of the country without any additional cost / burden on the government’s exchequer as tax collected at import stage is already adjustable/refundable.

Income Tax Exemption

The ICAP proposed that restriction in respect of issuance of exemption certificate for new projects/capacity expansion/formula and process changes should be removed.

Further, under the current law, tax exemption is conditional upon payment of tax on the basis of proceeding two years’ tax liability. The said condition, to meet the tax payment equal to previous tax years, is proposed to be abolished and the same should also be linked with the payment of advance tax liability for the respective period.