Direct Tax Proposals for Federal Budget 2010 - The Institute of Chartered Accountants of Pakistan 15 March 2010 at Karachi
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Direct Tax Proposals for Federal Budget 2010 The Institute of Chartered Accountants of Pakistan 15 March 2010 at Karachi
PROPOSALS ON -
TAX POLICY
BROADENING THE TAX BASE
REMOVAL OF IRRITANTS
LABOUR LEVIES
TECHNICAL AND EDITORIAL CHANGES
Page 2 D irect Tax P roposals for FederalB udget 2010TAX POLICY
CORPORATE TAX RATE
► In recent years corporate tax rates have been substantially reduced
► However, the present rate of 35% is one of the highest in the region
► Lowering corporate tax rates will facilitate business corporatization as well as
attract FDI
► China provides ample facilities to global conglomerates to setup
manufacturing facility and taxes their income in the range of 15 to 20%
► India, Bangladesh, Malaysia, Thailand have reduced rates between 25 to
30%
Page 3 D irect Tax P roposals for FederalB udget 2010TAX POLICY
CORPORATE TAX RATE
► Presumptive taxation of certain sources of business revenue at times
increases the effective corporate tax rates
► Withholding tax regime applicable to corporate sector adds to cost of doing
business
► Previously available tax credit on industrial investment has also been
withdrawn
RECOMMENDATION
► The rate of corporate tax for public and private companies should be
gradually reduced to bring at par with competing economies
► Concept of tax credit on industrial investment through BMR should be re-
introduced
Page 4 D irect Tax P roposals for FederalB udget 2010TAX POLICY
NON CORPORATE TAX RATE
► Tax rate for individuals and AOPs doing business needs rationalization
► A salaried individual pays tax at 20% on income of exceeding 8.5 million
► A business individual pays tax at 25% on income exceeding 1.3 million
► This gap instigates individuals to understate their income
RECOMMENDATION
► The rates need to be rationalized to atleast apply 25% tax on income of
minimum 5 million
► Marginal relief concept available to salaried persons should also be available to
non-salaried persons
► Due to high inflation the NIL tax threshold should be increased to Rs.300,000 for
all non-corporate tax payers
Page 5 D irect Tax P roposals for FederalB udget 2010TAX POLICY
TAX ON SALARIED PERSON
► The tax rate of salaried individuals was reduced to 20% in lieu of removal of
several exemptions on perquisites and allowances
► This rate was revised four years ago therefore need to be reviewed as high
inflation has increased the cost of living drastically leaving no room for savings
► Taxation of notional income like benefit of lower interest rate on loans and
provision of conveyance facility add to the sorrows of the already highly taxes
class
► Limits of tax credits on house loans, investments also need to be reviewed
► Credit for personal medical expenses and children education have been
gradually removed
Page 6 D irect Tax P roposals for FederalB udget 2010TAX POLICY
TAX ON SALARIED PERSON
RECOMMENDATION
► Due to high inflation the NIL tax threshold should be increased to Rs.300,000
► To enhance savings, limits on tax credits on investments and housing loans
should be reviewed
► Tax credit for personal medical expenses and children education should be
reintroduced
► Taxation of notional income may be gradually removed and as a first step
mortgage loans given to employees may be exempted and all other loans below
Rs.2 million may be exempted
► The bench mark rate which is increasing by 1% every year should be linked to
the SBP discount rate
Page 7 D irect Tax P roposals for FederalB udget 2010TAX POLICY
TAX ON EMPLOYER PROVIDENT FUND CONTRIBUTION
► Employer contribution in excess of Rs.100,000 is deemed to be income of the
employee
► Taxing of this constructive receipt is unfair as the contribution is not available to
the employee until he retires or resigns
► This effectively requires the employee to pay tax on the excess contribution from
his own source
RECOMMENDATION
► It is suggested that this regressive taxation in the hands of employees who pay
100% of their due taxes be abolished
Page 8 D irect Tax P roposals for FederalB udget 2010TAX POLICY
GRADUAL PHASING OUT OF FINAL TAX REGIME
► All persons should be taxed on net income basis instead of being taxed on the
basis of presumption
► In the recent past steps have been taken to reduce the scope of Final Tax
Regime, as corporate sector has been removed from the Final Tax Regime to
the following extent -
Listed public companies – Sale of goods, Services and execution of
contracts
Private limited companies – rendering of services
RECOMMENDATION
► It is suggested that corporate sector may be completely removed from the
taxability under the Final Tax Regime
Page 9 D irect Tax P roposals for FederalB udget 2010TAX POLICY
GRADUAL PHASING OUT OF FINAL TAX REGIME
Services Rendered by Non Corporate sector
► The tax withheld from receipts on account of rendering of services by non-
corporate sector is currently treated as minimum tax
► The concept of minimum tax is tilted towards the revenue and is not a fair
concept of taxation which needs to be progressively phased out
RECOMMENDATION
► It is suggested that as a first step professional service providers who by statute
cannot get themselves incorporated should be excluded from the ambit of
minimum tax concept
Page 10 D irect Tax P roposals for FederalB udget 2010TAX POLICY
GRADUAL PHASING OUT OF FINAL TAX REGIME
Property Income
► Property income was brought into the final/fixed tax regime through Finance Act,
2006
► The Institute is of the view that property income should be subjected to normal
tax regime where the net income is taxed at the applicable tax rate
RECOMMENDATION
► It is suggested that the presumptive/fixed taxation of property income may be
considered to be phased out
► As a first step such income in the hands of organized corporate sector may be
brought under normal tax regime
Page 11 D irect Tax P roposals for FederalB udget 2010TAX POLICY
TAX ON CAPITAL GAINS ON SALE OF SHARES
RECOMMENDATION
► There should not be any exemption on Capital Gains
► Separate slabs should be introduced for taxation of capital gains based on
period of holding
► On investment by non-residents, tax on capital gains should be calculated after
allowing indexation for devaluation of Pak Rupee. Such indexation has been
duly provided under the Indian Tax Law
Page 12 D irect Tax P roposals for FederalB udget 2010TAX POLICY
IMPORT OF RAW MATERIAL BY MANUFACTURERS
► Tax is being collected at import stage on raw material @ 3% of landed cost
► This tax is adjustable against the final tax liability of the manufacturer
► Due to rising cost of production several industries are facing decline in
profitability
► There is no room available for getting an exemption or reduced rate certificate
RECOMMENDATION
► To overcome difficult situation being faced by the manufacturing sector it is
suggested that the tax at the import stage should be collected at 1% of import
value instead of the current 3%
Page 13 D irect Tax P roposals for FederalB udget 2010TAX POLICY
INTERCORPORATE DIVIDEND
► It has been recommendation by the Institute in the past that dividend received by
resident companies be exempt from tax as this is dual taxation in the hands of
the holding company and then the ultimate shareholder
► This will also help mobilize group formation as unless intercorporate dividend is
exempted no group will endeavor to switch to holding company structure
RECOMMENDATION
► It is suggested that the scope of exemption granted to inter company dividends
received by companies entitled to group taxation under section 59AA be
extended to inter company dividends received by all resident companies
Page 14 D irect Tax P roposals for FederalB udget 2010TAX POLICY
SMALL COMPANY
► The perusal of the definition shows that companies registered prior to July 1,
2005 are not considered small company although they may be fulfilling the
required criteria
► Through Finance Act, 2008 small companies have been designated as
withholding agents under section 153 effectively bring in disadvantage as
compared to an individual or AOP business
RECOMMENDATION
► It is recommended that the benefit of reduced tax rate under this section be
extended to those companies also that were registered prior to July 1, 2005 and
fall within the criteria of small company as mentioned in section 2(59A)
► Small company should be brought at par within an AOP for the purpose of being
treated as withholding agent under section 153
Page 15 D irect Tax P roposals for FederalB udget 2010TAX POLICY
IMPLIED WHITENING SCHEME
► Under the scheme of taxation there is an apparent scheme of implied whitening
of untaxed money
► In the presence of a cheaper alternative at say 2% why would somebody pay tax
at the rate of 20 to 25%
► Section 111(4)(a) was brought to facilitate in flow of foreign exchange remittance
in the country but it is largely being misused by resident persons for capital
injection
RECOMMENDATION
► It is suggested that Section 111(4)(a) of the Income Tax Ordinance, 2001 should
be abolished with immediate effect
► As a matter of policy tax amnesty schemes should be discouraged in future
Page 16 D irect Tax P roposals for FederalB udget 2010TAX POLICY
EXPORT OF SERVICES PROVIDED BY RESIDENTS
► Export whether of goods or services are the back bone of any developing
economy
► At present export of IT related services is exempted
► Technical services rendered outside Pakistan by a resident person are treated at
par with export of goods
RECOMMENDATION
► The service sector has grown tremendously in the recent years and is earning
foreign exchange for the country by rendering services to foreign clients
► To promote and encourage export of services it is proposed that taxation of
income from rendering of services to foreign entities from Pakistan may be
brought at par with export of goods
Page 17 D irect Tax P roposals for FederalB udget 2010TAX POLICY
PAYMENT TO NON RESIDENT
► Payments to non-resident for royalty, fees for technical services, contract etc. are
taxed at various rates ranging from 6 to 15%
► All other payments not specifically dealt in section 152 are liable to withholding
tax at 30% of the gross amount
► This effectively means that the net income margin being envisaged is between
85 to 120% depending on the status of the non-resident, which is unrealistic
► This creates problems to the non-resident in case of a refund situation and often
add to the cost of doing business of the resident person acquiring the services of
the non-resident person
RECOMMENDATION
► It is suggested that this rate of withholding may atleast be reduced to 20%
Page 18 D irect Tax P roposals for FederalB udget 2010TAX POLICY
AUDIT
► Finance (Amendment) Ordinance, 2009 has amended section 177 to give
unconditional powers to the Commissioner to call for record and conduct audit of
any person
► The law in its present form does not regulate the selection of person for audit
► It is the Institute’s view that calling for the books and records before proper
selection of case by the Commissioner may trigger misuse of powers by the field
officers and create harassment of the taxpayers
► Selection of case before calling the taxpayer will mitigate corruption
Page 19 D irect Tax P roposals for FederalB udget 2010TAX POLICY
AUDIT
RECOMMENDATION
► Rules for selection of cases may be introduced in the Income Tax Rules, 2002
► Section 177 be suitably amended to require selection of case for audit before
calling the taxpayer to provide books and records for audit
► Board should also be empowered to make selection of cases for tax audit
Page 20 D irect Tax P roposals for FederalB udget 2010TAX POLICY
INTEREST INCOME OF NON-RESIDENT INVESTORS
► The present rate of interest on government securities/bonds/treasury bills in
Pakistan is significantly high when compared to return prevailing in many regions
of the world
RECOMMENDATION
► In order to encourage foreign investment in Pakistan’s money market, the rate of
withholding from payment of profit on debt to a non-resident person provided at
10% under clause (5A) of Part II of Second Schedule should be declared full and
final discharge of liability
► Similarly any capital gains on sale of government securities/other money market
instruments may also be subjected to final tax at 10%
► For investment beyond 12 months in order to provide mitigation from exchange
fluctuation, either indexation may be provided or rate may be further reduced
Page 21 D irect Tax P roposals for FederalB udget 2010TAX POLICY
COMPENSATION AND FACILITATION OF WITHHOLDING AGENT
► Withholding agents mainly the corporate sector has been collecting a very large
portion of revenue on behalf of the Federal Government
► To carry out the task they are incurring huge cost on human resource, legal
advisory, updation, training, retention of record etc.
RECOMMENDATION
► It is recommended that at the first place the FBR should undertake a programe
to train and update the withholding agents on a regular basis through regular
guidance and training sessions
► To compensate the withholding agents a suitable percentage of the revenue
collected by them may be given as service charge
Page 22 D irect Tax P roposals for FederalB udget 2010BROADENING THE TAX BASE
COMMON TAX IDENTIFICATION
► Multiple registration for different taxes be substituted by Common Tax
Identification Number (CTI) for companies and firms and CNIC for individual
► Provision of CTI and CNIC should be made mandatory for the following –
(a) Transfer of Properties
(b) Transfer of Shares
(c) Transfer of Vehicles any model or cc
(d) Bank Documents
(e) Travel Documents
(f) Sizeable expenses
Page 23 D irect Tax P roposals for FederalB udget 2010BROADENING THE TAX BASE
TAX CREDIT TO SALES TAX REGISTERED PERSON
► A tax credit @ 2.5% of tax payable is available to a manufacturer who is
registered under the Sales Tax Act and makes 90% of sales to registered
persons
RECOMMENDATION
► It is recommended that this tax credit should be available to all sales tax
registered persons
Page 24 D irect Tax P roposals for FederalB udget 2010BROADENING THE TAX BASE
COLLECTION OF TAX ON CASH WITHDRAWAL
► Parallel cash economy is a challenge to tax revenue collection
► To discourage cash transactions, levy of tax should be enhanced
► At the same time genuine cash withdrawals need to be safeguarded from
unnecessary tax withholdings
RECOMMENDATION
► Rate of withholding tax on cash withdrawal should be increased to 0.5% from
0.3%
► The per day exemption from withholding should be increased to Rs.50,000 from
Rs.25,000
Page 25 D irect Tax P roposals for FederalB udget 2010REMOVAL OF IRRITANTS
PAYMENTS THROUGH NON BANKING CHANNEL DISALLOWED
► To promote documentation of economy Section 21(l) disallows any payment
exceeding Rs.10,000 paid otherwise than through banking channel
► It has however been noticed that in certain cases like agro based industries
there is no alternative but to pay cash when purchases are made directly from
grower/farmers in rural areas where dealing through banking channel is not
possible
RECOMMENDATION
► It is recommended that exemption may be provided to transactions for purchase
of agricultural produce directly from growers/farmers
Page 26 D irect Tax P roposals for FederalB udget 2010REMOVAL OF IRRITANTS
GROUP TAXATION
► Section 59B provides group relief in the form of adjustment of losses between
holding and subsidiary or between two subsidiaries on fulfillment of certain
conditions
► The qualifying holding requirement is 55% if one of the companies in the group is
listed or 75% if non of the companies in the group is listed within three years
► One of the condition that is required to be fulfilled is that in case of private limited
company, the holding company should get itself listed
RECOMMENDATION
► The requirement for the holding company to get itself listed appears to be
erroneous and instead the condition should be of getting one of the companies in
the group listed. It is therefore suggested that suitable amendment may be
made to this effect
Page 27 D irect Tax P roposals for FederalB udget 2010REMOVAL OF IRRITANTS
UNLIMITED LIABILITY OF DIRECTORS/ SHAREHOLDERS
► One of the advantages of corporatization is that the liability of a shareholder or
director gets limited to the extent of his share in the company
► Section 139 override this limitation and creates a unlimited liability on the
directors and shareholders in respect of collection of tax of the company
RECOMMENDATION
► It is suggested that the sanctity of limited liability provided under the company
law may not be disturbed in normal course as in case of a fraud the company
law also does not protect a directors liability
Page 28 D irect Tax P roposals for FederalB udget 2010REMOVAL OF IRRITANTS
EXECUTION OF CONTRACT
► The term execution of contract is unique in Pakistan and does not exist in any
regional or international fiscal law
► Either there is a supply of goods or rendering of services or a composite
agreement for both
► On the other hand a view can be taken that any supply of goods or rendering of
services under agreed terms of contract can be termed as “execution of contract”
RECOMMENDATION
► It is therefore suggested that the term “execution of contract” may be defined for
the purpose of section 153
Page 29 D irect Tax P roposals for FederalB udget 2010REMOVAL OF IRRITANTS
COMPUTATION OF EXPORT PROFITS
► Rule 231 which provides a mechanism to compute attributable profit from
exports requires the taxpayer to maintain separate accounts of business of
export of goods manufactured in Pakistan
► There is lack of clarity with regard to keeping separate accounts of business
either it means separate books of accounts or separate account of the export
business of the person
RECOMMENDATION
► The Institute is of the view that a person engaged in local as well as export
activity cannot be required to keep separate books of account rather he may be
asked to keep separate account of both activities within his books of account
Page 30 D irect Tax P roposals for FederalB udget 2010PROPOSALS ON LABOUR LEVIES
WORKERS WELFARE FUND
RECOMMENDATION
► The Workers Welfare Fund may be charged on a consistent basis based on
taxable profit as under the old scheme
► Employers should be allowed to retain certain portion of the contribution enabling
them to make investments for welfare of workers
► The extended scope of levy to establishments covered under the Shops and
Establishment Act, 1969 may be abolished
Page 31 D irect Tax P roposals for FederalB udget 2010PROPOSALS ON LABOUR LEVIES
EXEMPTION OF INCOME OF WORKERS PROFIT PARTICIPATION FUND
► The income the Fund is exempt under the WPPF Act
► This exemption was acceptable under the Income Tax Ordinance, 2001 until
amendment introduced in Finance Act, 2008
► WPPF Fund is not a profit earning entity, however, interest income may arise
during the intermediate time for which company’s contribution may be available
with the Fund before passing on to the government treasury
RECOMMENDATION
► It is suggested that exemption may be allowed to WPPF by inserting suitable
clause in clause (66) of Part I of Second Schedule
Page 32 D irect Tax P roposals for FederalB udget 2010SUGGESTED TECHNICAL AND EDITORIAL CHANGES
► The Taxation Committee of the Institute during its deliberations for formulating
budget proposals for 2010-11 has Identified several technical and editorial
corrections required in the various provisions of the Ordinance
► There are also several Rules in the Income Tax Rules that require alignment
with the present law and also require certain correction
RECOMMENDATION
► It is suggested that FBR may undertake a detailed study of these proposals so
that appropriate amendments can be introduced in the forth coming budget.
Page 33 D irect Tax P roposals for FederalB udget 2010TH A N K Y O U
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