May 25 - 31, 2009

Presentation of Federal Budget on annual basis is a regular feature. Before presentation of the budget, hopes emerge amongst stakeholders because salaried class and pensioners expect a rise in their emoluments to combat the adverse impact of inflation.

Business community usually expects incentives and rebates/concessions in taxes. Unemployed people want job openings. People associated with agriculture, industry and services sectors expect that Federal Government will announce supportive and favourable policies to keep the economic wheel of the country smoothly moving to ensure not only economic development but also social justice. However, in view of difficult economic and country's internal situation, people have no hope with the federal budget 2009-10. Load shedding is on rise while inflation and escalating price hike rendered the lives of people miserable.

All Pakistan Textile Mills Association (Aptma) in its budget proposals has proposed to the Federal Board of Revenue (FBR) to introduce the concept of "deemed duty drawback" where duty drawback be given without payment of customs duty on the import of raw materials consumed in export products. A spokesman of Aptma said the association seeks repayment of customs duty on the import of raw materials used in the manufacturing of export goods should be given to the textile units. The duty drawback should be paid to the exporters to compensate the textile units by reducing cost of doing business.

According to the budget proposals of the Aptma, it has been proposed to allow duty drawback on yarn at the rate of 3-5pc, Greig Fabric @ 4.5pc of the turnover value and to the downstream sector on cascading basis. The following taxes, duties and other levies are being charged from the industry and exporters, which has multiplier effect on the textile value chain, and further add to the cost of doing business to the extent of 3 to 5 percent of the turnover across the textile value chain. The textile industry be compensated this impact of taxes and levies on cascading basis.

In case of federal taxes, industry is liable to pay withholding tax @ 1pc; customs duty on machinery and spares varies from 5 to 25pc; 4.5pc customs duty on polyester staple fiber and import duty/surcharge on consumption of diesel/furnace oil. The provincial taxes included 0.2pc stamp duty on local sales/exports/import bill of exchange and Sindh infrastructure tax on import @ 0.825pc. Besides, professional tax, market committee tax etc.

The Institute of Chartered Accountants of Pakistan (ICAP) in its budget proposals for the 2009-10 submitted that abolition of any discrimination between taxpayer with penalties for the delinquents is considered necessary for improving the tax base in the country.

The proposals have been submitted to the Federal Board of Revenue (FBR) and Government of Pakistan for consideration while formulating budget and the financial bill. Major irritants in the way of increasing the tax base have been highlighted by ICAP as follows:

-- Possibility of whitening the untaxed money by abusing various provisions of law such as 'inward foreign remittances'. This represents abuse of exchange regulations for evasion of taxes of the Income Tax Ordinance, 2001, and;

-- A regular and persistent system of official whitening of money by way of 'Tax Amnesty Schemes' (TAS). Such schemes provide complete amnesty for all defaulted liabilities on payment of a very nominal sum. In case of indirect taxes, there are almost regular amnesty schemes for delinquents. This places the taxpayer community in an embarrassing position.

These policies encourage the unorganised sectors to continue with the present set-up. In this situation, the documented and organised sector suffers both in financial terms and culturally for the reason that such measures reflect a sign that the system would continue to prevail, and there is no need for a positive shift.

The 39-page document contains proposals and suggestions to bring about improvements in the taxation system. It covers corporate tax, corporate tax policy, labour levies, personal taxation, major irritants in increasing the tax base, specific industry issues, indirect taxes-policy issues, sales tax-legislative issues, specific amendments in Sales Tax Act, 1990, sales tax rules, 2006, Federal Excise Act, customs duty, and specific industry issues.

According to Asad Ali Shah, President of ICAP, the proposals and recommendations have been prepared with a view to bring tax reforms, including broadening the tax base, which affect measures for under-declaration and tax evasion. These proposals also include suggestions to simplify the law and remove ambiguities in the taxation regulations, particularly with reference to corporate tax policies and providing incentives for corporatisation and promoting investment in the country.

ICAP is committed to working with the Government of Pakistan in public interest, to share its expertise, especially in the area of building a competitive tax framework that would help Pakistan's businesses achieve sustained success. "We believe that implementation of the proposals will help in accomplishing the aforementioned objectives," he said.

The Lahore Chamber of Commerce and Industry in its 2009-10 budget proposals, has sought withdrawal of activation tax of Rs 500, being charged at the time of sale of SIM card, saying reduction in taxes duty will help further penetration of telecom services to the under-served people of Pakistan, besides giving a boost to government revenue.

The cellular mobile industry is of the view that taxes are inequitable and hinder the mobile penetration in the country. The mobile companies in many regions of the world have not enjoyed the phenomenal subscriber growth that was witnessed in Pakistan, propelling the telecom sector to the stature of a powerhouse in a short span of time. After subsequent deregulation and investor-friendly policies of the government, the country is now witnessing a highly competitive market, where telecom services are accessible to all. Despite mobile penetration of 55 percent, there is still great potential to be capitalised upon in this market.

It must be noted that the overall environment has changed significantly during the last five years where aggressive competition within the industry has translated into benefits for the overall consumers and economy of Pakistan. Coupled with the positive financial contributions that the industry is making towards the economy as a whole, no doubt, have come a long way in connecting the unconnected people of Pakistan.

With 89 million people connected to date and tele-density at 60 percent Pakistan stands well above other regional markets. Total of Rs 278,459 million in revenue was generated by the telecom industry in 2007-08, which had a major impact on the economy of Pakistan. The industry has urged the government to keep up its investor-friendly policies to sustain this tremendous rate of progress. It is worth mentioning that the rapid increase in penetration and tax revenues has been made possible to a large extent by the subsidisation of activation charges by the cellular operators.

The industry believes that further reduction in activation charges will drive tax revenues higher in part due to greater mobile penetration and use, but more significantly due to the multiplier effect on the GDP. The Deloitte survey of a significant sample of the international markets suggests that 10 percent increase in mobile penetration can increase GDP by 1.2 percent.

This is attributed to supply side impact, productivity increases and intangible benefits to the economy. Taking necessary steps that would increase mobile penetration should, therefore, be a cornerstone of the government economic policy.

The analysis based on projections suggests that elimination of activation tax will keep tax revenues on a growing path. It will also align telecom taxation in Pakistan with the best international practices. In its study, Deloitte states that proportion of tax in the Total Cost of Mobile Ownership (TCMO) in Pakistan is higher in comparison with the regional benchmarks.

In case the activation charges are not subsidised by the operators, the cellular consumer in Pakistan would pay the highest in taxes as a percentage of TCMO in comparisons with others in the Asia Pacific region. This becomes particularly vivid, given that Pakistan is among only 16 countries out of 102 surveyed that impose mobile-specific taxation as at the time of new subscription.

The general sales tax and federal excise duty levied on various cellular services were also enhanced from 15 percent to 21 percent, instead of 16 percent for other sectors. These taxes are applied on all services--phone calls, Short Massaging Services (SMS), Multi Media Message (MMS), Internet, and mobile TV.

It is also pertinent to mention that the government is also thinking to impose additional FED from 3 to 5 percent on import of mobiles, which would also affect the growth of the cellular industry in Pakistan. Pakistan is among the countries where the mobile phone users are paying the highest taxes on the use of telecommunication services in the region.

According to a recently published report covering the Saarc countries, Pakistani consumers are paying 33 percent taxes, whereas Indian consumers are paying 12.40 percent. The report says that tax ratio is 15 percent in Bangladesh, 17.50 percent in Sri Lanka and 23 percent in Nepal

Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has recommended reduction in import duty on cars. In its proposals for the 2009-10 budget, which would be sent to the government for consideration, the FPCCI has suggested that since the locally manufactured cars are priced highly, regulatory duty on cars should be abolished.

In its proposals relating to sales tax, the LCCI has sought abolishment of input sales tax on packaging materials, and exemption from sales tax on utilities. For the textile sector, zero sales tax rate has been proposed on use of sulphur black, hydrosulphite, sodiumhydro oxide/caustic soda, sodium sulphate, maize starch, lube oil for captive generator, paper tube, and LDPE shrink film rolls used in textile industry.

It said that there should be zero percent sales tax on Part II tariff of fixed charges of energy supplied by utilities, and put a time limit for the sanction of refund claims filed u/s 66. The registered persons should be allowed self-correction in the sales tax return where they later find an omission in sales, and the present rates of sales tax of 21 percent, 18.5 percent, 16 percent be merged into a single slab rate of sales tax.

Certain exemptions in chemical industry from sales tax have been asked on local manufactured goods, which are made out of imports, which are exempted from sales tax to generate cost competence against similar imports. Tax credits have been recommended to be allowed in the mode and manner in sections 61-64 of Income Tax Ordinance so that it increases the incentive to grow the number of policy holders and also helps in growth of life insurance industry.

The Commissioner of Income Tax may be directed to issue exemption certificate within seven days from deduction of taxes under sub-section (4) read with sub-section (6A0 of section 153 of Income Tax Ordinance 2001. The rates of income tax are too high, and should be reduced to five percent across the board to broaden the tax net. Income tax being charged on gas bills must be charged in slabs in proportion to volume of the gas used by CNG stations.

Withholding tax on export of goods should be reduced from one percent to 0.25 percent. Withholding tax on imports and supplies should be at par for industrial under takings registered with sales tax and income tax departments. Deduction of withholding tax on utility bills should be abolished and on demand drafts of local banks may be abolished.

Income tax refunds be allowed within 90 days of application, and taxable limit for salaried and non-salaried classes may be increased to Rs 0.2 million due to high cost of living. A refund claim generated under section 143b should be paid within 30 days and time for adjustment of input tax may be extended to one year.

With government eagerly wanting to increase the tax base amid the IMF agreement and economic slowdown, stock market people are not appropriate to expect any major relief for any listed company, experts believe.

The market is trading at attractive levels as it has partially incorporated the budgetary measures, hence, investors should focus on dividend yielding stocks. The government doubled the tax on buying and selling of listed shares three years back to 0.02 percent on purchase and 0.01 percent on sale value of shares, they added.

Although the increase in turnover tax may not enhance the absolute collection of tax due to low volumes, but the final verdict in this regard would be announced in the budget speech, which market players are anxiously waiting for, according to Sohail. The government has already exempted the capital gain tax on sale of shares till June 2010, they added.

With limited fiscal space there are hardly any chances of reduction in corporate tax rate of 35 percent and general sales tax of 16 percent. Moreover, they believe that tax on dividend of 10 percent would likely to remain same. Compared to populist and relief-based budgets presented in the last few years, this time the economic managers are facing a challenging task. "The upcoming budget would most probably eliminate subsidies and try to broaden the tax net in order to curtail fiscal deficit and increase the tax-to-GDP ratio as agreed with the IMF," they said.

Some experts expect that the cement and fertiliser sectors may be the beneficiaries of the upcoming budget. The cement demand that remained depressed last year may increase due to higher allocation on development expenditure.