Karachi Tax Bar Association Pre-Budget Proposals 2015 – 16 28th April 2015 Presented by: ALI A. RAHIM Director 4 th Floor, Central Hotel Building Civil.

Karachi Tax Bar Association

Pre-Budget ProposalsPre-Budget Proposals2015 – 162015 – 16

28th April 201528th April 2015 Presented by: ALI A. RAHIM

Director

4th Floor, Central Hotel BuildingCivil Lines, Mereweather RoadKarachi - PakistanPhone: 021 - 35644872-7Fax: 021 - 35694573E-mail: [email protected]

Contact Address:

CHARTERED ACCOUNTANTS

Broadening of Tax Base, Promotion of Investment & Employment

Decision required

Other Import Items

This Presentation has been tabulated according to the following Segments:

INCOME TAX PRE-BUDGET PROPOSAL 2015-16

Amnesty Scheme for local investors

Incentive for industrialization

Cost of doing business

Improvement of Economic indicators

Tax to GDP ratio Investment to GDP Savings in Economy

Long term decision

INCOME TAX PRE-BUDGET PROPOSAL 2015-16 BROADENING OF TAX BASE, PROMOTION OF INVESTMENT & EMPLOYMENT

This segment comprises of following section:

Tax rates are reasonable Proper advertisements to be done in Print & Electronic media. Elongated period of time is provided to avail the opportunity No Restriction on assets to be declared

Provided:

Documentation of Economy Broadening of tax base

Amnesty Scheme for local investors:We welcome the recent announcement of Amnesty for Stock Exchange

Other Amnesty: Tax Rate for first time tax payer

Tax credit upto 50% of the tax liability to be provided to the tax payers filing the tax return for the first time along with wealth statement, with the condition that past years will not be probed.

The new tax payers should be given immunity for the past 5 years and their capital upto 10 times the total income offered for tax should be considered as white, for investment in productive channel.

General Amnesty to others if announced shall have positive effects for:


Corporate Tax Rates

The corporation tax rate are as follows:

Additional impact in Pakistan is WPPF 5%, WWF 2%, therefore effective rate works out to be 41%.

A low rate of corporate tax encourages investment and induces voluntary payment of taxes, This should be reduced to 20% over a period of next five years.

The rate of tax on quoted companies should be 5% lower then non-quoted companies to encourage the companies to get themselves quoted.

Pakistan 34%

Hong Kong 16.5%

China 25%

Indonesia 25%

Bangladesh 27.5%

Turkey 20%

Malaysia 25%

Incentive for industrialization:


Incentive for industrialization:

A flat rate may be levied based on geographical divide urban/rural, income capacity of the area, and covered area of entity.

It is proposed that this scheme may be introduced to enhance tax base by levy of flat rate of Rs. 5,000/- and slabed upwards upto 50,000 excluding any adjustment for taxes deducted at source, per year as income tax and sales tax if the volume of gross turnover is upto Rs.25 Million.

However, this scheme should clearly state that no documents will be asked for except CNIC and complete address of the entity to be stated, and the Entity will not be subjected to Audit.

Tax payer to be given a yearly token by FBR, which should be displayed at the premises to guarantee that in this case no questions will be asked by Federal Board of Revenue (FBR).

The tax authorities should only verify that the turnover is not more than 25 Million by applying a formula to be worked out in consultation of the Bar, Chamber, Market Associations and other stake holders.

Tax Holiday for New Industrial and Commercial Setup


Tax to GDP

Pakistan’s overall tax-to-GDP ratio has remained stagnant at around approximately 9% and, in fact, has shown a decline in recent year to below 9.0 percent. The reason behind the low tax-to-GDP collection of Pakistan in the world is rampant tax evasion and a poor collection system. Today, Pakistan has a lower tax-to-GDP ratio than other Asian countries as follows:

Sri Lanka 13%

Indonesia 15%

Thailand 17%

South Korea 16%

India 16%

Malaysia 14%

Philippines 14%

Improvement of Economics Indicators :


NADRA Date Base

NADRA date base should be used effectively including information from electricity and gas distribution companies to identify non taxpayers. FBR has a list of 2.6 Million persons who:

Owns at least one property of 500 Sq. Yards or more

Owns at least one motor vehicle of 1000 cc or more

Has taken 2 or more foreign trips

Maintains a bank account

An such persons are not even registered with the FBR.


Low investment and capital formation is recorded as one of the biggest impediment tosustainable GDP growth in Pakistan. Following table provides status in the regionalcountries .

Pakistan 15%, it is down from 17% in 2002 India 35%, it increased from 25% in 2002 to 35% in 2012 Vietnam 39% Sri Lanka 28%

In Pakistan Gross capital formation to GDP is declining, in contrast average gross asset formation in other countries are showing an increasing trend.

Investment to GDP

Improvement of Economic indicators:

INCOME TAX PRE-BUDGET PROPOSAL 2015-16BROADENING OF TAX BASE, PROMOTION OF INVESTMENT & EMPLOYMENT

According to world Bank, savings to GDP in Pakistan is the lowest in the region,comparable ratios for other countries are as follows:

Pakistan 22% it is down from 26% in 2002

India 34%

Bangladesh 35%

Sri Lanka 32% it has overtaken Pakistan during last 6 years

Status of Saving in Economy



Average banking deposit rate in Pakistan stood at 8% in 2013 while inflation has been ranging at 11-13% reflecting negative return of 3-5% on banking deposits.

This saving rate is also disproportionate when compared to the region and their respective inflation, discount rate and lending rate.

This discourages the masses from saving and fosters un-documented channels and flight of capital.

On the flip side, banks enjoy hefty return on lending and investments, thereby yielding the sector an average spread of around 8-9% in 2013, which is even higher than what the actual deposit holder earns.

Recently, the banking sector in Pakistan has been posting unmatched return on equity and growth in profitability.

Low deposit rates discourage savings and foster illegal channels



Markup Rates

Markup rates in Pakistan and in other regional countries are as follows:

Pakistan 14.15%

India 6.25%

Bangladesh 6.00%

China 6.31%

Incentive for Economic indicators:

The rates in Pakistan are more than twice that of the other countries which results in higher cost of Production and cost of inflation, besides restricting exports, encouraging imports and putting pressure on foreign exchange and reducing the Pak Rupee value against major currencies of the world.


Infrastructure Planning

Reduction in markup rates for industrial credits

Large scale manufacturing, Small and Medium Enterprises

One window operation for labour related levies

INCOME TAX PRE-BUDGET PROPOSAL 2015-16 DECISION REQUIRED

The presentation consists of following segments:

Efficient Infrastructure Planning is always a neglected sector in our country. We stronglyUrge GOP to trigger long-term strategic plan for infrastructure development. We proposeFollowing measures to be taken on war footing:

New Industrial estates and parks to be made and existing ones to be upgraded.

Expediting Thar Coal Projects and other such avenues of cheap production of electricity.

Identification of Hydel Power Projects and allow private sector to invest on BOT basis and on open bidding method.

Lease unfarmed land to investors on Private Public Partnership basis and encourage corporate farming.

Use of drip irrigation and provide interest free loans to farmers for using this technology.

Explore deep sea exploration and desalination of water for domestic and industrial use.

Infrastructure Planning

INCOME TAX PRE-BUDGET PROPOSAL 2015-16DECISION REQUIRED

We believe that curbing growth now will dent Pakistan’s Economy further. Unless we achieve a reasonable growth of about 4% to 5%, our economy will face stagnation and our problems will compound further. We propose lower mark-up rates for industrial credits, which will go a long way in poverty alleviation.

Reduction in Mark-up Rate for Industrial Credit

LSM should be provided all facilities as they are one of the major employment providers. In fact our core assets are Agriculture Land and Human Resource – Skilled and Un-skilled. Solution to our future growth is based on using them efficiently. We strongly feel that a concrete plan on these accounts should be a part of our next year’s fiscal measures backed by Sovereign Guarantees.

Large Scale Manufacturing - LSM

SME’s are equally important players in the country and all efforts to be made for its promotions as well, including setting up of separate industrial estates.

Small and Medium Enterprises - SME


We propose to merge all labour related departments like EOBI, Social Security (all provinces) into one and funds collected for labour related levies shall be utilized through a professionally constituted board. We also propose that their Investments in safe securities, instead of investing a portion in risk oriented propositions.

One Window Operation for Labour Related Levies and Effective use of collected funds

Loans on machinery should be given at lower interest rate (say 5%) for establishment of the industries in the country.

The work on maintenance of existing infrastructure and its further development and shortage of electricity and gas should be overcome on war footings, and in the meantime, industry be facilitated to import generators free of taxes and duties.

Other Important Areas


Sectorial Revenue Contribution

Real Estate Valuation

NADRA Data Base

Austerity Measures

Curbing Discretionary Powers of Officials

INCOME TAX PRE-BUDGET PROPOSAL 2015-16 OTHER IMPORTANT ITEMS

The presentation consists of following segments:

Sectorial Revenue Contribution

The contribution of tax to GDP as compared to the tax to GDP contribution is very lopsided.


SectionShare

inGDP

Tax toGDP

- Agriculture 21% 1%

- Manufacture 19% 51%

- Electricity, Gas, Mining & Construction

7% 14%

- Transport, Storage & Communication 10% 7%

- Wholesaler & Retailer 18% 6%

- Finance & Insurance 7% 5%

- Other Services 18% 16%

100% 100%Review of the collection of tax also reveals that the direct to indirect taxes are 1/3 : 2/3which primarily is reverse of what it should be.

Real Estate Valuation and Consequent Reduction in Stamp Fees

A formula for determination of market value of real estate has to be evolved through market surveys

Incentive to owners should be given by bringing Collector Value in close proximate to market value

NADRA Database

To curb Parallel Economy and to promote tax culture, effective use of NADRA database by FBR is indispensable to apprehend alleged tax evaders without discrimination.

Identification of CNIC must be done before executing major transactions including buying and selling of properties, valuable assets of more than Rs.500,000/-, we are proud to mention here that the GOP has recently announced that CNIC (for individuals) will replace NTN which will go a long way towards documentation of the economy, this was being demanded by our BAR for a number of years.


Austerity Measures

We understand that the GOP is working to reduce expenses, we would like to highlight couple of key items as follows:

Rationalizing size of cabinet, management & staff of Government Public Companies Capping of Administrative expenses End of VIP culture

Curbing Discretionary Powers of Officials

Using Discretionary Power is one of the biggest avenue of corruption and indirectly triggers black economy. We, at KTBA strongly, believe that GOP must put safety valves on use of discretionary powers especially in fiscal laws

Further incase of detecting wrong decisions or miss declaration, fine is levied by tax official on taxpayers, therefore, justice and equity demand that it should be equally applicable to the concerned officials for wrong decisions as well, where tax payers are proved to be right.


Selection Of Persons or Classes of Persons For Audit [Section 177 & 214(c)]

Cases of taxpayers filed are considered as finalized under self assessment.

However, cases were being selected for audit under section 214(c) by FBR through computer balloting.

Powers have been given to commissions to select cases for audit under section 177, which has now been started to be misused, and this is creating harassment for the taxpayers.

This is in addition to cases being selected under section 122(1)/122(5)/122(5A) etc.

It is suggested that there should be some restriction put on the commissioner before selecting a case under section 177 or using the power under section 122.


Recovery Of Taxes

It has been noticed that the past few years, frivolous demands are created and the recovery starts immediately after the expiry of the time limit of 15 days.

It is therefore, proposed that to avoid harassment, tax demand of only 15% should be recovered upto the first appeal and an additional 35% upto the tribunal level. This measure will go a long way in reducing harassment and also corruption. (This was prevalent in the past and had reduced the corruption to a considerable level.


Increasing The Threshold For Withholding Tax [Section 153]

In 1999 through SRO 586(1)/91 dated June 30, 1991 the threshold for deduction of tax was fixed at

Rs. 25,000/- For Goods Rs. 10,000/- For Services

Since these were fixed about 15 years ago it is proposed that the threshold should be increased to Rs. 200,000/- and Rs. 100,000/- respectively.


Taxability Of Provident Fund Contribution

Sub-rule (a) of Rule 3 of the Sixth Schedule provides that any contribution made by an employer to a provident fund in excess of 10% of the salary or Rs. 100,000/-, whichever is lower, shall be deemed to be income of the employee.

Proposal

We suggest that the deeming of income of an employee may be restricted to 10% of salary only and the restriction of monetary amount of Rs. 100,000/- per annum may be removed.

INCOME TAX PRE-BUDGET PROPOSAL 2015-16OTHER IMPORTANT ITEMS

Computation Of Capital Gains On Disposal Of Securities By The Non-Residents

• Non residents invest money in foreign currency converted to Pakistani Rupees.

• When sold, capital gain is calculated in historical terms (Pakistani Rupees).

• Profit arises, however there could be actually a loss.

• India Income Tax Act, 1961 – Section 48.

Proposal

Similar amendment be made in Section 76 of the Ordinance.


Separation Of Tax Judicial System From Collection machinery

The present scheme of tax appellate authorities being under the control of the executive side of the tax machinery has been an obvious impediment in providing quick justice to the taxpayers and as such it has been time and again proposed that the judicial side should be made independent of the executive side with no cross border movement from one side to the other; being also a constitutional requirement. This aspect needs immediate attention so that the system be brought in line with the provision of the Constitution of the Islamic Republic of Pakistan. We feel that adjudicating officers may be removed from subordination of FBR. Appellate Forums should work under the respective High Courts Instead of FBR.

Proposal

It is proposed that the tax judicial system should be given under the control of a Chief (placed in every province), who may be a Judge of the High Court or Supreme Court of Pakistan and the hierarchy can be created under the said Chief.


Default Surcharge / Penalty

The basic intention of the law to impose any penalty or additional tax was to educate the taxpayers and to discourage the taxpayer from delaying the payment. However, the rates of the charge have become so unreasonable as the GOP has now made it a source of revenue. In a recent case reported as CIT Karachi V. Messrs General Tyre and Rubber Co. 108TAX359 & 2013PTD387, it was held that the imposition of penalty/additional tax should not be made a source of revenue for the government.

It is therefore suggested that the default surcharge should be brought down to reasonable limits.


Revision Of Return By Taxpayers [Section 114(6)]

Now revision of return/wealth statement can not be done without the permission of the Commissioner.

Approval of Commissioner is not accorded for a long period, hence revision of returns is not possible.

It is hence proposed that a time limit (say 15 days) should be incorporated and after the said period the computer access should be automatically available.


Credit For Deduction Of Tax

When the deducting authority deducts tax and deposits the same to the government treasury, the person from whom the deduction is made has to run from pillar to post to get the credit.

It is proposed that since the NTN/CNIC of the said person is mandatory, credit should automatically to available to the said persons e-portal account


Active Taxpayers

The new section introduced for active taxpayers is not available for

i.) Taxpayers who file manual returnii.) New taxpayers

It is therefore, suggested that all returns filed should be immediately incorporated in the said list and for those who take the NTN for the first time, they should be on the said list till the next date of filing of returns.


Thank

You

Karachi Tax Bar Association Pre-Budget Proposals 2015 – 16 28th April 2015 Presented by: ALI A. RAHIM Director 4 th Floor, Central Hotel Building Civil.

Documents

rate of tax

sales tax

tax return

tax liability

broadening of tax base

corporation tax rate

time tax payer tax credit

tax base amnesty scheme