FOREIGN INVESTORS PLEAD FOR A BALANCED TAXATION REGIME

AMANULAH BASHAR
(feedback@pgeconomist.com)
May 16 - 22, 20
11

On the eve of the federal budget 2011-12, the corporate stakeholders in general and the foreign investors in particular are concerned about possible introduction of new or enhanced taxes in the fiscal policies of the government.

As usual, the trade and industry have an identical argument of broadening the tax base by tapping untaxed areas where income is generated but they are enjoying liberty of exemption from taxation on one account or the other especially the complexity of provincial and federal purview of levying the taxation. The income generated by the agriculture sector is commonly referred in every discussion about expansion of the tax net in the country.

A uniform GST structure also seems a valid demand of the trade and industry, which would provide a level playing field for all manufacturers and importers for developing a brand culture in the country.

It may be mentioned that during past few years an increasing reliance on the organized sector was a common factor in terms of achieving revenue targets. The practice of increasing tax rates as well as new levies on a frequent basis has increasingly dented the investment climate.

This also seems a convincing argument of the trade and industry that in addition to the increasing burden on a shrinking pool of honest taxpayers, the documented sector is subject to high levels of compliance whereas the unorganized sector appears to have an implied amnesty. This practice in vogue obviously discourages entities from coming into the tax net, hence it is the time for the policy makers to take simple and attractive steps to bring the informal economy into the tax net by suggesting them that documentation of the income generated and compliance to tax facilitates is imperative for trade and industry to grow at a massive scale. The tax evasion never helps people to become a big business house any way.

FOREIGN INVESTORS

In order to improve the taxation regime, the foreign investor or the overseas investors have pointed out certain gaps needed to be filled by the Federal Board of Revenue (FBR) and the Ministry of Finance (MoF).

In this regard, the representative body of the foreign investors i.e. Overseas Investors Chamber of Commerce & Industry (OICCI) in a communiqué to the Ministry of Finance has asserted for not only broadening of the tax base but also improving the tax collection mechanism to facilitate foreign direct investment. The report also comprises sector specific proposals directly aimed at identifying issues faced by respective industries.

In order to grow the economy and provide jobs for the youth the government must attract foreign direct investment (FDI), particularly in the manufacturing sector, which is most able to create jobs.

Through this proposal, the OICCI urges the government to broaden the tax base, make sure the already taxed sectors are not further burdened with taxation, and adopt fiscal and tax policy measures that encourage FDI, particularly in manufacturing sector.

In the backdrop of the difficult financial circumstances facing the country and as OICCI, the overseas investors stand ready to continue to contributing towards the needs of the country. Hopefully, the government will make the difficult decisions of broadening the tax base and adopting taxation policies that will encourage FDI.

The OICCI while discussing the current scenario observed that much progress has been made over the years in the tax system, thanks to initiatives taken by the FBR and the Ministry of Finance. However, there are certain gaps that need to be addressed for the greater benefit of the country.

As a representative body working to liaise between the government and foreign investors, OICCI proposed a number of concrete suggestions for review and consideration of FBR and Ministry of Finance.

1. BROADENING THE TAX BASE

To enhance revenue collected via tax receipts, OICCI recommends increasing the number of taxpayers as opposed to taxing the already taxed. This can be done by way of:

• Mandatory documentation of all sectors and incentives for registered entities

• All sectors of income including agriculture be subject to taxation so as to provide equity to all segments of the economy.

• There is a need for strong coordination between federal government departments like FBR and provincial government on exchange of data and information.

• Need for effective utilization of considerable data available with FBR especially since 2007 when e-filing was introduced.

• Introduce a system of independent monitoring of turnaround time of various application made to tax office.

• Provision of rebates and tax credits to encourage reinvestment of capital in the business.

• Reduce differential in corporate tax for Small Companies (20 per cent) and Corporations (35 per cent).

• Develop linkages between the databases of customs, excise, income and sales taxes.

• Effective use of NADRA database to identify potential taxpayers.

• Improving the timeliness of returns processing both for collection and refunds

• Allow net settlement of various direct and indirect taxes subject to company audits

• Abolish incentives to evade taxes by way of Periodic Tax Amnesty Schemes offered by the government

CORPORATE TAX

• In order to remain internationally competitive, Pakistan needs to reduce its Corporate Tax Rate to at least 30 per cent.

• Tax audit of honest tax payers should be restricted and also minimize litigation as it does not help revenue collection but adds to the cost of doing business in Pakistan.

• Incentive to be enhanced from current two per cent for good taxpayers who primarily deal with registered documented customers.

• Provide incentives to the manufacturing industry through tariff adjustment to encourage growth and employment in the economy.

At present various industries are unduly suffering from a high effective tax rate due to the FTR (Final Tax Regime) and/or the Minimum Tax regime whereby tax is being levied on company revenues regardless of whether a business is in a profit or not.

The application mechanism of the FTR and Minimum Tax regimes should be adjusted to ensure that the effective rate of tax that is paid by any entity does not exceed the official corporate tax rate that is currently 35 per cent for large companies.

SALES TAX ISSUES

Delays - Sales Tax Refunds amounting to billions of rupees are deferred due to discrepancies pointed out by the STARR System. Additionally, sales tax authorities demand certain documents such as sales tax returns and invoice summaries of the suppliers duly attested by their respective sales tax collectorate. Such requests are difficult to fulfill. It is therefore requested to streamline the entire refund verification and sanctioning process.

The chamber proposes removing the following section whereby: "a registered person shall not be entitled to reclaim or deduct input tax on the goods in respect of which sales tax has not been deposited by the respective supplier into the government treasury" should be removed.

FLOOD SURCHARGE

Effective March 15, 2011, 15 percent flood surcharge on income tax is discriminatory against honest taxpayers. The government of Pakistan should introduce measures to collect additional revenue from agriculture and other non tax paying segments of the economy. OICCI strongly proposes that flood surcharge be abolished by June 30th 2011 as earlier announced by the government.

FED ON ROYALTY, FEES FOR TECHNICAL SERVICES

FED on royalty payments for imparting technology transfers and product know-how should be withdrawn. Further, the duty paid on franchise fee is not adjustable as the same is not in VAT mode, thereby enhancing the overall cost of franchise fee. It is therefore suggested that in order to reduce the cost of doing business, adjustment should be allowed.

EMPLOYEE WELFARE

The upper limit of the threshold of salary taxation should be increased to Rs 500,000.

Employer's annual contributions to the Provident Fund, deemed to be income received by employee if in excess of one-tenth of the salary or Rs100,000, whichever is lower. The threshold of Rs100,000 should be abolished.

The existing upper limit for tax credit for investment should be increased to Rs 500,000.

This investment should be allowed for life insurance as well.

Protection to Local Industry is seriously hurt due to extension of concessions / exemption of duties and taxes under SRO 575 (I) / 2006 to such items which are locally manufactured. It is proposed that the revised condition (i) of SRO 575 (I) / 2006 dated 05.06.2006 introduced through SRO 554(I)/2008 clause (b) is withdrawn and the original condition (i) of the above mentioned SRO is restored.

Workers Profit Participation Fund (5 per cent) and Workers Welfare Fund (2 per cent)

Consolidation of all labor levies with a rate of 2 to 3 per cent.

Either the companies should be allowed to utilize the excess allocation of WPPF for the benefit of their workers (instead of depositing the excess in WWF) or at least the companies should be allowed to retain a certain percentage of the excess amount for the benefit of their workers such as building schools, hospitals etc.

Tax Provisioning in Mines Act 1948 vis-a-vis Income Tax Ordinance Tax provisions in Mines Act 1948 stipulate that the aggregate of Taxes and Payments to government shall not be less than 50 per cent nor more than 55 per cent of the Profits or Gains derived by the Undertaking (Joint Operations) prior to deduction of Payments to the government. However, the subsequently introduced petroleum policies 2001 and 2009 reduced the aggregate payment of taxes to the government to 40 per cent. It is suggested that the Mines Act be updated in line with the latest provisions of ITO so that the anomaly can be rectified.

AFGHAN TRANSIT TRADE

Zero Rated Procurement: Oil marketing companies should be allowed to procure zero rated products from local refineries for exports and supplies to foreign vessels and foreign flights proceeding abroad. The procedure, similar to General Order FEGO No.1/2005 for supplies to Pakistan Navy, foreign vessels and foreign flights should be issued for sales tax.

Review of negative list to make it more logical and realistic, Quantitative ceiling for imports required by Afghanistan, Imports under ATT be subject to custom duty refundable subject to confirmation of goods actually reaching Afghanistan; or in the alternative lower duties and sales tax for category of goods affected by misuse of ATT.

AGRICULTURE

Approximately 70 per cent of Pakistan's population lives in rural areas and is linked with the agricultural sector. Agricultural income is exempt from income tax under Section 41 of the ITO 2001.

It was strongly recommended that agriculturists be encouraged to declare their income and file income tax returns, even when their income is exempt from tax. This will assist in documenting a significant portion of our economy. Accordingly, suitable provisions should be incorporated in the ITO to enable tax authorities to implement the requirement of filing of income tax returns, effectively.

One of the areas also to be considered is withholding tax or federal excise duty on agricultural produce collected at the time of procurement. OICCI recommend that no income should be exempt from taxation so as to provide level playing field to all sectors of the economy.