FEDERAL BUDGET 2009-2010
May 25 - 31, 2009
Institute of Cost & Management Accounts of Pakistan, Karachi Branch Council in its proposals for the federal budget 2009-10 has strongly recommended a vigil on import of luxury items and prodigal spending of the government departments.
Attaullah A. Rasheed, Chairman Karachi Branch Council Institute of Cost and Management Accountants of Pakistan has submitted the proposals to the Ministry of Finance and the Federal Board of Revenue, pin pointing following areas for economizing the national resources.
a. Ban on import of expensive cars and jeeps over 1600 CC
b. Ban on purchase of new cars for Government Departments for 5 years
c. Defense expertise to be utilized for the uplift of civil society in respect of health, engineering, and agriculture sector to boost the economy.
d. Increase dependency on agriculture sector, un-utilized agricultural land to be given on short period lease to group of people with agriculture background for cultivations.
e. Government run schools should be developed on modern lines to improve the education system and the standards.
f. Manufacturing should be encouraged instead of trading business based on imports. All support should be given to the industrial sector to avoid slowdown and complete halt in the sector. In addition to catering high cost of production, provision of utilities (gas, electricity) should be made efficient and uninterrupted.
g. A medium to long-term policy framework for the development of the manufacturing sector should be prepared. For proper identification of industries, the country should and can concentrate, based on its economic fundamentals and then a facilitation process be implemented through cascading of duties to be levied for the same.
h. Documentation of economy by compulsory issue of receipt for every transaction made by any business.
i. Tax net to be broadened, no new tax should be levied on the existing tax payers; rather taxing those who are earning well and are still out of tax net.
j. Industrial Development Banks must be encouraged to support the industrial sector instead of commercial banks that are focused in consumer finance.
k. Trade development Authority to be given targets to find out new avenues for boosting our exports, curb smuggling of Tyres & Tubes, Electronic items etc., by various measures including reduction in high tariffs.
l. Do not allow Pakistan to become dumping market for exporters from different countries; and antidumping duties to be imposed as and when required.
m. Under the Concurrent List of the Constitution, Sales Tax on Goods is a Federal subject whereas sales tax on Services is a Provincial subject, which needs to be decided.
n. In case of Afghan Transit Trade, like all other land locked countries, the agreement [treaty] for facilitation of imports with Afghanistan should be revised. There has to be quantitative ceiling for imports required for Afghanistan.
o. Exchange control mechanism to be streamlined so that economic barriers are placed for financing of under invoiced goods. At present, liberation of exchange controls are abused to finance such under invoiced imports.
p. Automation is the only answer for maladministration. Unfortunately, the urge for automation has dropped down. Perception is built to demonstrate that solution lies somewhere else. This perception needs to be removed with a conviction that the only answer is automation. There is a need to make a policy change for the same and automate the processes as soon as possible.
q. The fiscal reforms and policies must have wide support of the society. For this, tax policy and administration must be based on sound principles of (i) Equity, fairness and facilitation to tax payers (ii) No harassment to tax payers under any circumstance, but zero tolerance for tax fraud and tax evaders & (iii) Risk based audits and use of IT to identify potential tax revenue. It would require a major effort by FBR and Provincial Governments and the will and commitment of the Federal and the Provincial Governments. It is essential that the tax policy and administration reforms are conceived and implemented as a National Tax Policy Reforms and not just confined to the Federal Government.
r. It is essential that Federal and Provincial Governments come together to formulate such a policy so that it is implemented with effective coordination of both tiers of government.
s. There has to be a clear and a standard policy that every person is required to file the return be it income tax or sales tax and claim exemption or zero rating where ever required. Issue of return filling should be separated from taxability. There can be zero rated or exempted person and sectors but no person having business operation to be outside the requirement of filing the return in one form or other for all taxes.
t. The requirement of Annual Sales Tax Return should be made mandatory across the board along with an inbuilt reconciliation between Sales Tax & Federal Excise returns and Income Tax return, which should be introduced and filed along with the Income Tax Return. Income tax and Sales Tax / Federal Excise audits should be integrated. There is also a need to integrate the database of SECP, FBR, and Banks.
INDUSTRY SUPPORT PROPOSALS
a. To be at par with the international practices, like China, India etc, the Government should resume support for our garment industry. China has Export tax rebates on textiles and garments to 16%, which increased for the fifth consecutive time in the last eight months. The same support will help Pakistani exporters who are facing stiff competition from China, India, Bangladesh, and Indonesia etc.
b. For the protection of local industry and save the foreign exchange of US$30 Million per year the duty on Alkyle Benzene Sulphonic Acid (H.S.code 3402.1110) should be increased from 10% to 20%.
c. Vegetable (cooked or uncooked by steaming of boiling in water) frozen falling under H.S.Code 0710. Current 15% custom duty should be reduced to 10%.
d. The chemicals and dyes, and raw materials not produced locally should be subject to 5% custom duty instead of the existing.
e. As the current recession in world badly affected country's exports, therefore, it is suggested that settlement of duty drawback claims under SRO 450(1) 2001 be immediately solved to avoid any negative thought in the exporters mind.
f. Kitchen equipments (PCT Code 8419.8990). It is proposed that rate of duty be reduced to 5% from 20% under SRO 575 as quality product is not manufactured locally.
g. Food Items (Beef, Fish, Chicken, Fries) under PCT (Codes1602.3900, 0304.9900, 0207.1400 and 2004.1400). It is proposed that the rate duty, which is already 10%-30%, be reduced to 0% - 5 %, as quality food products are not produced locally according to the international standards.
h. In order to reduce cost of production, duty on fabrics raw material (polyester yarn) be reduced to 7%.
i. In PCT 85.04 a separate head should be allotted for Current Transformer, Instrument Transformer, Voltage Transformer and Potential Transformer so as they do mix-up with the description of Distribution Transformer and Power Transformers and creates problem.
j. Import of Plant & Machinery with spares should be allowed to be imported at zero % duty.
k. Income of new Industries, starting production until December 2012 should be free of tax for five years from the start of production.
l. Export Industries should be zero-rated.
m. No withholding tax on utility bills of industrial sector.
n. New Energy supplies up to 4,000 MW to be added to the National Grid as soon as possible.
o. Simple procedures for Audit of Sales Tax & Income Tax should be adopted.
INCOME TAX ACT
PROPOSAL FOR DIRECT TAXES INCOME TAX ACT 2001 AND RULES
a. The existing base of tax assessee, which is very nominal in relation to the population and overall size of the country's economy, should be broadened. In this context, information from certain sources can be collected to determine if a person is an existing assessee or not. Some sources of information are particulars of the parents from all schools, which are charging Rs. 4000 or more to students per month. In addition, survey of commercial markets in the posh areas of different cities.
b. The coverage of withholding tax may be extended in order to increase the tax revenues and bring more assessees into the tax net. Accordingly, the provision of withholding tax with different slab rates be imposed on the Tuition fees of private schools, where monthly fee is more than Rs. 4,000.
c. Keeping in view the tremendous increase in the general price level and high inflation, it is recommended that income up to Rs. 250,000 be exempted from the income tax.
d. In order to expand the tax base and number of assessees, it is proposed that a general amnesty be granted for a period of one year to the new assessee to declare their hidden assets/wealth at a very low rate of tax. Afterwards, if anybody is caught with the concealed income/wealth he shall be liable to the imposition of heavy penalties.
e. The exemptions for industrialization which were available earlier but withdrawn later on should be reinstated.
f. Section 153 and Section 169: Tax Collected and Deducted as a Final Tax: FBR has been making efforts to document the economy whereas on the other side the FBR is increasing the purview of Presumptive Tax Regime (PTR), which discourages the documentation. Under PTR, the taxpayer is not required to assess their tax payable on the basis of what they have earned during the year but merely the tax deducted at source is considered as full and final tax liability. By definition, the Income tax is a direct tax based on the quantum of income earned by a taxpayer during an income year. PTR is clear contradiction to the basic principle of the income tax. Further, there is an anomaly in the tax law for treatment of withholding taxes for the transport services as the tax deducted at source under Section 153 (1) b is full and final liability of the transporter whereas the transporter is also liable to pay advance tax u/s 236 at the time of renewal of the token by Excise & Taxation Officer which is again the final liability of the transporter. In this way, the transporters are taxed twice. In same way, Private limited companies are liable to adjust the tax paid on services u/s 153. Therefore, the treatment of tax withheld against transport services for private limited companies should also be reclassified.
Our recommendation is that the concept PTR may be eliminated or be reduced gradually to promote documentation of the economy as the FBR is in transition phase of the automation of the data of the taxpayers. This would help a lot in overall broadening the tax base of the economy of Pakistan and the anomaly as mentioned above be removed.
g. Definition of Small Company Section 2(59) a: The concept of small company was introduced in 2005 and the tax rates for these companies are lower than the other companies. Through Finance Act 2008, the progressive tax rates in the First Schedule have been introduced for small companies whereas the definitions of the small company have not been amended. Our Recommendation is that the definition of small company should be amended accordingly.
Moreover, the companies incorporated before 2005 should also be taken under the definition of Small Company so they may also take advantage of the facilities available to the companies incorporated after 2005 and all the Private Limited companies should be classified as Small Company or non-Small Company.
h. Rates of Taxes on Income from Property -Section 15 and Section 155: The rates on property income under section 15 and 155 have been amended through Finance Act 2008. Four tables have been inserted for income from property. It creates confusion between the taxpayers. Our recommendation is that only one table of rates should be introduced to avoid confusions.
i. Limitation of Selection for Audit / Amendment of Assessment: Time limit for selection of audit by Commissioner of Income Tax should be prescribed. No such limit has been specified in the Income Tax Ordinance, 2001 (ITO 2001). Currently, time limitation for amendment of assessment/ further amendment is five years from filing of return/revised return. It should be reduced to 3 years.
j. Reduction in advance income tax under section 236: Currently, telephone usage is subject to advance income tax @ 10% under section 236 of the ITO 2001. A recent international survey has shown that telecom taxation in Pakistan is much higher than other countries in the region. It is proposed that the advance tax under section 236 be reduced to 5%. This will increase the tax collection under section 236 by helping telecom operators tap lower income population of Pakistan.
k. Foreign payment without deduction of tax: Non-resident companies not having a PE in Pakistan are already exempt from tax on their business income in Pakistan under the provisions of their respective DTT. This should also be included in the ITO 2001. Along with this, exemptions should also be given from withholding provisions.
l. Tax deduction on software payments, International Roaming/ Termination: ITO 2001 should address issue of E commerce (esp. taxation of software payments), and payments against International Roaming /Termination.
m. Filing of returns by non-resident companies: Non-resident companies not having a PE in Pakistan should not be required to file their tax returns where the payer is filing his annual statements. No non-resident will come back to Pakistan only to file a return.
n. Relief to Salaried Tax Payers: Due to increase in cost of living/inflation, relief in tax should be given to the salaried taxpayers.
o. Incentive to taxation officers: Incentive should be given to the taxation officer who brings new tax payer into the tax base.
p. Abolish activation tax (Rs. 500): Activation Tax as levied under SRO 542(I)/2008 dated June 11, 2008 is being paid by the operators on each new connection sold. It is usually borne by the operators and is one of the factors hampering growth of the telecom sector. Beside Activation Tax of Rs. 500, Custom duty and regulatory duty of Rs. 500 and Rs. 250 respectively were also levied last year. If activation tax is abolished, it can be retained and used for infrastructure expansion resulting in increase in subscriber base. This will enhance the revenue for GOP because of all taxes.
q. Cost and Management Accountants are imparting a very important role in the development of economy of Pakistan. Cost and Management Accountants have been given equal status with the Chartered Accountants by the Federal Government through a number of legal provisions. ICMAP and ICAP are members of equal status in a number of international accounting bodies such as IFAC, SAFA, CAPA, etc. However, unfortunately a number of legal provisions were amended continuously during a period of time which adversely affected the role of Cost and Management Accountants. Our proposal is that these provisions should be reinstated as these were made part of the law after a critical review and deleted without any justification. Following are the proposed sections of Income Tax law which were amended/deleted and should be inserted back in the law:
(i) Sub Section 8 of Section 177 of the Income Tax Ordinance, 2001 should be amended to include a firm of Cost and Management Accountants under the Cost and Management Accountants Act, 1966. This will also become inline with the Sales Tax Act, 1990.
(ii) Section 32A was inserted in the Income Tax Ordinance, 1979 through Finance Ordinance, 1981 but after a useful practice of 22 years was altogether not included in the Income Tax Ordinance, 2001. We propose that the Income Tax Ordinance, 2001 should be amended to include the same.
r. The rate of income tax for corporate/non-corporate sector should be reduced by 5% from the current tax slabs.
s. Up to 5% taxpayers should be selected for audit through random ballot only.
t. No deduction shall be allowed for any expenditure incurred on account of insurance premium or reinsurance premium paid to an overseas insurance or re-insurance company or a local agent of an overseas insurance company, registered in a country where double taxation treaty does not exist, until tax at the rate of 5% is withheld on the gross amount of insurance or re-insurance premium.
u. Substantial funds are blocked either due to late assessment or pending refunds, thus putting undue pressure on the liquidity of the respective companies. Special directives to the concerned authorities are required for early determination and disbursement of refunds. Income tax refunds shall be allowed within 90 days of application.
CUSTOMS & TARIFF RATES
PROPOSAL FOR INDIRECT TAXES CUSTOMS & TARIFF RATES
a. Customs Duty @ 100-150 % on all the luxury items like chocolates, luxury cars, household items, electronic gadgets, having no productive use, should be imposed.
b. The Government of Pakistan (GOP) may not use Regulatory duty as a permanent feature of increasing GOP revenues and/or reducing imports of items also produced locally. Reason being, by regularly resorting to such duties, a message will be conveyed to other countries that Pakistan is making use of higher tariffs to unduly protect their domestic industry. Hence, liberalization is denied which may have a negative effect in future free trade negotiations. On the other hand, GOP may use trade remedy measures available under the WTO framework for the protection of the domestic industry. In addition to the above, we suggest that custom duty on raw material imports may be made Zero rated, if the production of a particular industrial raw material is not made in Pakistan. Similarly, applicable maximum tariff rate of 25% may not be reduced without the consent of domestic industry producing that particular product. As a precautionary measure of having too much pressure on the GOP by international donor agencies to further reduce the applicable tariff of 25% to the level of 20% or below, the GOP may give a timeframe to the domestic industry to improve its performance (efficiency and effectiveness) to cater to any such contingency demands by other trading partners/donor agencies.
c. Federal Excise Duty on Insurance premium has been increased to 10% in table II, serial 7 of the Federal Excise Duty Act, 2005. Federal Excise Duty on Insurance premium should be reduced to 5% in table II, serial 7 of the Federal Excise Duty Act, 2005. The increase in FED from 5% to 10% by Finance Act 2008, amongst other factors, has retarded the growth of non-life insurance industry from a compound average growth of 15% in last four years to 6% in 2008. This has also caused reduction in the insurance GDP penetration from 0.4% in 2007 to 0.33% in 2008.
d. Reduction in FED on telecom services: Currently, telephone usage is subject to FED @ 21%. It is proposed that the FED be reduced to 15%. This will increase the tax collection by helping telecom operators tap lower income population of Pakistan.
e. A reduction of FED to 5% will increase the insurance GDP penetration and promote the growth of Insurance Industry.
f. One percent Special Excise Duty (SED) must be removed on imports and local manufacturers, as at the time of finalizing last year's budget, FBR proposed to impose one percent SED and FPCCI suggested them to increase sales tax from 15% to 16% instead of imposing one percent SED. Therefore, it is demanded to withdraw this SED.
g. Excise Duty Transformer Oil is subject to Federal Excise Duty as provided in serial 28 of First Schedule of Federal Excise Act, the details of which are as following:
PCT Description of goods Rate of Duty 2710. 1997 Transformer Oil Ten per cent of the retail price or seven rupees and fifteen paisa per litre whichever is higher Transformer Oil is also subject to sales tax @ 16%. In order to give some relief to the electric transformer industry, we request you to abolish central excise duty on transformer oil. All users of transformer oil, i.e. transformer manufacturers, are in the organized sector.
PAKISTAN'S LIQUID FOREIGN RESERVES POSITION
The total liquid foreign reserves held by the country stood at $ 11,140.5 million on 16th May, 2009. The break-up of the foreign reserves position is as under:-