Tax authorities have proposed the abolition of a distortive final income tax regime for both exporters and importers in a bid to capture their real income – a move, if proved successful, may help the government document the economy.
There is also a proposal to cut the withholding tax on imported mobile phones, subject to the condition that no tax-free mobile handset is allowed to be imported against the current limit of one tax-free import of mobile phone by one person in a year.
The presumptive income tax regimes are against the principles of fair and equitable taxation. Unlike a salaried person who pays tax on his gross salary, the beneficiaries of the final taxation system pay a paltry percentage of their sales or income as income tax.
But Prime Minister Imran Khan will have to show a lot of political courage for approving this proposal, which has the potential of hitting almost every important business. The proposal is the brainchild of Federal Board of Revenue (FBR) Chairman Shabbar Zaidi, who wants to tap highly under-taxed areas in the new budget.
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Zaidi faces a difficult task of generating Rs5.550 trillion in tax revenues at a minimum 36% annual growth rate in the next fiscal year – a task, if could not be achieved, may jeopardise the recently concluded $6-billion bailout package with the International Monetary Fund (IMF).
Exporters pay 1% of their export proceeds as their final tax liability and also do not file income tax return. Instead they file a statement under Section 115 of the Income Tax Ordinance.
Any person who is not obliged to furnish a return for a tax year, because all the person’s income is subject to final taxation under Sections 5, 6, 7, 148, 151 and 152, sub-Section (3) of Section 153, sections 154, 156 and 156A, sub-Section (3) of Section 233 or sub-Section (3) of Section 234A, shall furnish to the commissioner a statement showing such particulars relating to the person’s income for the tax year in such form and verified in such manner as may be prescribed, according to the present law.
The FBR collects Rs32 billion from the exporters and the FBR wants to abolish this rate and has proposed that the exporters should file income tax return and fully disclose their expenditures and incomes.
The importers pay up to 6% of their import value as final tax. The FBR wants to abolish it. During the first nine months of the ongoing fiscal year, the FBR collected Rs168 billion at the import stage. The FBR has also proposed to cut WHT rates on mobile phones subject to a complete ban on import of tax-free mobile handsets. It wants that every handset should be taxed at the import stage.
According to another proposal, the FBR wants sales at the restaurants to be declared as goods as against current status of services, which pushes it in the domain of the provinces. However, the provinces believe that under the constitution it is the right of the provinces to collect sales tax on services.
The FBR’s proposal is that after declaring it a good, the current sales tax on restaurants should be reduced to 8% as an incentive to register with the FBR.
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According to another major proposal, the tax authorities have recommended that the dealers and distributors must have income tax registration with the FBR for doing business. Currently, it is not binding for the manufacturers to sell their goods to only income tax registered dealers.
If this proposal is accepted, it can also help document the highly undocumented sector.
The FBR is also seeking details of Benami accounts from the banks, which they are reluctant to provide at this stage. A meeting between the FBR and the Pakistan Banking Association will take place this week to resolve the dispute. Under the law, banks are bound to provide this information.
There are 50 million bank accounts in Pakistan and about 10% of them are income tax return filers, according to Adviser to PM on Finance Dr Abdul Hafeez Shaikh.
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