Uneven tax net holes out the big boys

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Avoiding influential businesses with new taxes could have further added fuel to fire in the ongoing street protests against power outages. The government is left only with the administrative measures to collect the ambitious revenue collection target of Rs 2.381 trillion during the next fiscal year.

Contradictory to the Finance Ministerís claims before the budget that all the sectors will be taxed uniformly, the government has retained the sales tax collection slab for the five exports oriented sector and agriculture machinery at 5 percent while the telecom sector will continue to pay a high sales tax of 19.5 percent. This means no relief for over 111 million mobile phone subscribers.

The total revenue impact of the new measures is estimated at Rs 63 billion which will actually turn out to be Rs 31.7 billion after deducting relief measures of Rs 31.2 billion during the next fiscal year, said Member Inland Revenue Shahid Hussain Asad. He said the main thrust for meeting the revenue target will be on simplification, enforcement, facilitation and recovery of arrears of Rs 136 billion. The government has proposed relief for big businesses. Instead of netting completely the highly profitable banks that are evading income tax (IT) by investing in the capital market as return on dividend is taxed at the rate of 10 percent as compared to corporate IT rate of 35 percent. It is proposed that their dividends earned from money market and income funds should be taxed progressively over two year period at the rate of 25 percent in FY 2013 and at 35 percent in FY2014.

Custom duty on scrap of rubber, shredded tyres is recommended to be reduced from 20 to 10 percent to encourage its use as an alternate fuel in the cement industry. It may cause some environment issues in future. The cement industry is also provided relief of Rs 100 per ton in federal excise duty by lowering it from Rs 500 per ton to Rs 400 per ton. It will cause a revenue loss of Rs 2 billion next fiscal year. Despite these relief measures, the cement sector has recently increased their product prices.

A glaring example of tax evasion culture was given by Shahid Hussain Asad who said the fridge market in Pakistan is estimated to be of Rs 120 billion per annum but the dealerís returns show a market of Rs 30 billion. In 300 yearly working days, a dealer sells at least one fridge per day that shows an annual turnover of Rs 9 billion. The manufacturers are asked to collect one percent withholding tax from dealers which they can reclaim when they file return. A futuristic incentive on the profit and gains to the Venture Capital Company and Venture Capital Fund is proposed to be extended for 10 years upto 2024. The limit expires in 2014. Most of the highly profitable brokerage companies have opted in this sector but no venture funded company has emerged due to the stringent investment requirements.

Income Tax Measures: The exemption for income tax (IT) is proposed to be enhanced to income of Rs 400,000 per annum for salaried and business individuals as well as association of persons. Any further income will be taxed at 7.5 percent till the next slap of 750,000. It has been proposed that the existing IT rate slabs of 17 should be reduced to 5 rate slabs. It will cause a cumulative revenue loss of Rs 8.5 billion during the next fiscal year. The minimum gross turnover IT tax levied at 1 percent for business community is proposed to be reduced to 0.5 percent. It will lead to Rs 11 billion less revenue generation next fiscal year. The advance tax of 0.2 percent on cash withdrawal of Rs 25,000 from banks is proposed to be enhanced to Rs 50,000.

Provident funds if managed by pension fund will be exempt from the tax. Pension funds are also exempted from with holding tax. The monthly installment received form pension funds of ten year period is also proposed to be exempt from tax. The income of workers profit participation fund is also proposed to be exempt from IT. Low rate of IT will be offered to commercial importers, exporters and suppliers if they come out of the presumptive tax regime. Employees availing small loan upto Rs 500,000 are proposed to exempt from IT, with a benchmark interest rate of 10 percent instead of progressively increasing interest rate. Taxpayers paying taxes for the last five years will be given a taxpayer honor card that will provide some incentives at airports, NADRA, PIA and passport offices. The limit of investment eligible for tax credit in securities and insurance sectors is proposed to be enhanced from 15 to 20 percent. The existing limit for investment of Rs 500,000 in securities and insurance premium is enhanced to Rs 1 million. The rate of initial depreciation on new buildings is proposed to be reduced from 50 percent to 25 percent. Real estate business in federal capital is proposed to be brought under capital gains tax at the rate of 2 percent and capital value tax at the rate of 2 percent. Incase a property is sold within 12 months it will taxed at 10 percent and incase within 24 months at 5 percent. It will help generate Rs 5 billion per annum.

Customs: Pharmaceutical, construction and cement sectors have remained the biggest beneficiaries of government largess, as the custom duty on 88 pharmaceutical raw materials and other input goods are proposed to be further reduced from 10 percent to 5 percent. It will cause a revenue loss of Rs 100 million next fiscal year. Reduction in custom duty on raw materials and components for printing and stationery will cause a revenue loss of Rs 78 million while the reduction in custom duty to 10 percent for self copy papers and self adhesive papers will cause a revenue loss of Rs 50 million during the next fiscal year. Under the legislative measures it is proposed the punishment of whipping in case of smuggling, possession of smuggled goods and armed intimidation of persons engaged in discharged of duty under the custom act should be removed.

Sales Tax and Federal Excise Duty (FED): Even though FED was planned to be phased out with gradual reduction in three years, it is increased on cigarettes. Every pack will be costlier by Rs 5. It will be generating Rs 10 billion more next fiscal year. Ten items of lubricating oils, cosmetics and cigarette filter rods are proposed to be phased out from FED next fiscal. The sales tax on electricity consumption for steel sector is proposed to be enhanced from Rs 6 to Rs 8 per Kwh. It will increase the revenue by Rs 4b.

Courtesy: Pakistan Today

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