KARACHI: Pakistan Business Council (PBC) has suggested measures for reducing cost of doing business and promoting manufacturing and industrialization.
In its tax proposals for budget 20119/2020, the PBC suggested following measures for reducing cost of doing business:
Exemption from collection of Withholding tax under section 148 at import stage & exemption for manufacturing concerns under Section 153
Procedures and rules for obtaining exemption certificates for import of plant & machinery and Raw material by tax payers have serious restrictions which causes hardship.
Proposed Change
Corporate manufacturing sector should be excluded from the purview of income tax withholding at import stage under section 148 as well as from tax deduction on local supply under section 153. Similar exemption is already given to the greenfield industries through the Finance Supplementary Second Amendment Act 2019 announced in March 2019. The same exemption, however, is not available, for the brownfield expansion.
Moreover, all the companies engaged in manufacturing should be exempt from withholding of tax under section 153. Similar exemption is available for Sales Tax in the Sales Tax Special Procedure (Withholding) Rules, 2007 via SRO 586 dated July 1, 2017.
Alternatively, issuance of exemption certificate from withholding under section 148 and 153 should automatically trigger on the FBR portal based on payment of quarterly advance tax under section 147 to avoid harassment of genuine taxpayers. This will enable taxpayers to avoid creating huge tax refunds and focus on more expansion.
Rationale for Change
This would increase the investments for brownfield capacity expansion as well and would provide a meaningful relief (similar to greenfield expansion) with regard to BMR and extension/ expansion. Further, it will also attract foreign direct investment in the form of new expansion ventures as well as partnerships and hence will also result in export growth.
Estimate and Payment of Advance Tax Section 147
The time for making the estimate of income has been changed by the Finance Act, 2015 from ‘before the last installment is due’. 50 percent of the difference is required to be paid along with the 2nd installment and 50 percent of the difference with 3rd and 4th installments in two equal installments.
Furthermore; Finance Act, 2018 has required the taxpayer to submit the actual turnover of completed quarters of the tax year with estimate (submitted earlier) and reasons for variations thereto along with documentary evidences. The Commissioner is now also empowered to reject the estimate, if he is not satisfied by the reasons and evidence of such variation.
Proposal
We recommend that this sub-section be restored to its original position (before finance bill 2018-19) whereby the taxpayers can file its best judged estimate without any questioning by the tax department. Moreover; section 205 (1B) relating to default surcharge becomes redundant if inquiry is made at the end of every quarter.
Rationale
This amendment / addition to the existing provisions of advance tax estimates may lead to unnecessary harassment of the advance income Tax payers, who are usually from the organized corporate sector for the simple fact that it is totally impracticable to provide detailed documentary evidences of the ‘estimated expenses or deductions’ which are to happen in the future and have to be worked out by the tax payer based on the business forecasts and projections.
Section 147(6), as amended vide Finance Act, 2018, also empowers the Commissioner to consider rejection of the estimate, if the above information is not made available by the tax payer; which is a very harsh and authoritative provision, since the tax payer is always in the best position to make their own estimates since he /she knows their business.
Alternate Corporate Tax
Under Section 113, corporates are subject to one of three income tax regimes-Alternate Corporate Tax (ACT), Minimum Turnover Tax or Normal Tax Regime.
Proposal
ACT is a major hindrance towards capital investment as newly incorporated companies or those companies, which make huge capital investments for expansion, extension or BMR are not practically able to get the benefits of initial allowance owing to the fact that such allowance is available only against the taxable income whereas in case of huge capital investment resulting in higher initial allowance and consequently lower taxable income, tax payer usually falls under the ACT regime against which the benefit of adjustment of initial allowance is not available.
Rationale
It results in triple jeopardy (after NTR and Minimum Tax under section 113) and is most likely to be not accepted by Court as only one capacity tax is possible as per the constitution read with SCP order in case of Elahi Cotton.
Moreover, real benefit of initial allowance/ first year allowance is not available owing to the applicability of ACT.
SRO 250 dated February 26, 2019
SRO has been introduced for the electronic monitoring and tracking of the goods mentioned therein i.e. goods of tobacco, beverages, sugar, fertilizer and cement industries. Fee for the operation of this SRO will be recovered by the licensee (private firms) from the companies in the above mentioned industries.
Proposal
This SRO should be amended suitably to ensure that the Administrative cost of operation /activities in this SRO should not be borne by the manufacturers of goods.
Rationale
It is mentioned in the SRO that the cost of activities in relation to this SRO will be borne by the manufacturers of goods. This is against the main objective of the current government to provide ease of doing business for the manufacturing industries since, as per this SRO, the teams operating this electronic monitoring equipment will sit at the manufacturing premises of the companies and the cost of the operating such equipment along with licensee marking fee will be recovered from the manufacturing companies.
Rule 43, Income Tax Rule 2002
Presently the taxpayer has to deposit the withholding tax deducted fortnightly, i.e. within seven days from the end of each week ending on every Sunday.
In addition, certain WHT agents do not deposit on time and some agents do not deposit at all. This also includes agencies /govt. Organizations in respect of WHT, where CPR is not provided hence revenue leakages to government in the absence of WHT deposit.
On the other hand, where WHT is deducted by agencies /govt. Organizations but do not provide system (IRIS) generated CPR as they do not enter in the system. Therefore assesse cannot get input benefit due to non-availability of CPR from IRIS system on account of WHT in spite.
Proposal
Timeline of 7 to 13 days be extended to one week after the month. IRIS system should be applicable for all withholding agent including agencies /government organizations and CPR in respect of WHT Facing authority be available from IRIS.
Rationale
Ease of doing business and facilitate withholding tax agents. Control Revenue leakage as well assesse can claim input tax properly thus neither it is loss to authority nor the assesse. In the absence of non-availiblity of CPR, this is an extra cost for doing business.
Section 8(1)(j)
introduced through Finance Act, 2015, where in a restriction has been imposed on claiming input on services which are not allowed in provincial sales tax on services Act(s).
Proposal
Section 8(1)(j)of the Sales Tax Act, 1990 should be deleted.
Rationale
Since input tax sales tax on reduced rate services is not available for adjustment, this increases the cost of doing business. Currently there are more than 25 services under respective provincial sales tax on services Act(s).
PBC is pursuing this matter with the provincial authorities also.
Section 156-Prizes and winnings:
Section 156 of the ITO 2001 requires a Company to deduct 20 percent tax on “prize offered by companies for promotion of sale”
Prize and winnings-(1) Every person paying of prize bonds, or winning from a raffle, lottery, prize on winning a quiz, prize offered by companies for promotion of sale to end consumers, or cross-word puzzle shall deduct tax…………..
The clear intention of this section is to capture tax through withholding at source from persons who are recipients of these prizes or winnings; the intention is not to tax any person who belongs to the supply chain of the companies who offer prize for promotion of sales. The income of the supply chain i.e. dealers, distributors is subjected to withholding tax in the shape of withholding taxes imposed under separate withholding regimes. It is therefore suggested that to clear any ambiguity in law regarding application of this section, it may be amended to add the term “end consumers” to oust any person in the supply chain from the ambit of this section.
Section 153(1)(a)
Section 153(1)(a) withholding income tax on supplies by distributors of FMCG products is two percent for companies and 2.5 percent for others. This rate is quite high for industries dealing in bulk commodities/large volume but low margin products.
Proposal
Rate for withholding tax on FMCG distributors should be aligned with section 113 of the Income Tax Ordinance, 2001 i.e. Minimum tax on FMCG distributor is 0.2 percent.
Rationale
Current situation is leading to build up huge refunds / blockage of funds for the distributors since minimum tax charging rate is 0.2 percent whereas withholding is up to 2.5 percent.
Due to amendments in the definition of withholding agents the tax withheld on the receipts of the distributors has increased significantly.
Section 8B
(1)Not withstanding anything contained in this Act, in relation to a tax period, a registered person shall not be allowed to adjust input tax in excess of ninety percent of the output tax for that period.
Proposal
(1) Not withstanding anything contained in this Act, in relation to a tax period, a registered person shall not be allowed to adjust input tax in excess of ninety-five percent of the output tax for that period.
Rationale
Will allow better management of cash flows
Clause 18B of Part ii of the Second Schedule-Tax credit for Shariah Complaint Companies.
Income Tax Ordinance on the one hand requires the corporate sector to fulfill the prescribed Shariah compliance criteria approved by SECP (as per Clause 18B of Part ii of the second schedule to the Tax Ordinance) whereas, on the other hand, Income Tax Rules, as prescribed by FBR (via Rule 231H )still remain applicable and are in conflict with the SECP Regulations.
Further, Clause 18B of Part ii of the Second Schedule is reproduced below:
The rate of tax as specified in Division II of Part I of the First Schedule shall be reduced by 2 percent in case of a company whose shares are traded on Stock Exchange if :
(a)it fulfils prescribed Shariah compliant criteria approved by State Bank of Pakistan, Securities and Exchange Commission of Pakistan and the Board;
(b)derives income from manufacturing activities only.
(c)has declared taxable income for the last three consecutive tax years.
(d)has issued dividend for the last five consecutive tax years.
Proposal
Since the SECP has notified Regulations for Shariah Compliant Companies, Rule 231H should be deleted.
Further, Clause 18B be amended as below :The rate of tax as specified in Division ii of Part I of the first Schedule shall be reduced by 2 percent in case of a company whose shares are traded on stock exchange if:
(a) it fulfils prescribed Shariah compliant criteria approved by Securities and Exchange Commission of Pakistan.
(b) derives majority or more than 50 percent income from manufacturing activities.
Rationale
SECP being the Regulatory Authority for legislation and promulgation of Companies governance laws in Pakistan, holds the right infrastructure including a Shariah Compliance Department and the expertise to determine and regulate compliance with Shariah governance regulations, 2018.
Reduced Rate of WHT on Export Proceeds
At present, rate of tax deduction on export proceeds under section 154 is 1 percent which is same as for five export oriented sectors as well as for other than five sectors.
Proposal
In order to promote diversification of exports instead of relying on only five specified sectors, rate of tax on export proceeds should be reduced to 0.5 percent from 1 percent for sectors which are not covered under the five specified export oriented sectors.
Rationale
At present, sales tax 0 rating is available to five specified export oriented sectors on their input materials whereas such benefit is not available to other potential export sectors. Moreover, gas supply is also available to five specified sectors @ 600/MMBtu whereas rate of gas per MMBTU for non -conventional sector is Rs. 780 in addition to GIDC, which make potential export uncompetitive and consequently, Pakistan is unable to diversify export markets. In order to compensate such exporters and to promote export of other than five sectors, rate should be decreased to 0.5 percent for such sectors.
Manufacturing Bond /DTRE rules are cumbersome and in certain cases lack clarity whereby many potential exporters can not avail them. Consequently, it results in LOST EXPORTS.
Proposal
Manufacturing bond/ DTRE rules need to be modified to make it easily accessible and lend full clarity to allow exporters to fulfill potential export orders.
Rationale
To increase exports by facilitating existing and potential exporters.