ISLAMABAD: The government is likely to cut maximum income tax rate from 35 to 30 per cent, with a new procedure on taxation of perks being considered.

According to the senior official sources, the planned reforms in the income tax rates would also coincide with increase in pay and pensions by about 15 per cent, but the implementation of the various recommendations of Pay and Pensions Committee headed by Moeen Afzal, is most likely to be deferred.

The final round of discussions between the taxmen, finance managers and other stakeholders has started to fine tune the budgetary proposals to be presented on June 6 in the National Assembly. There are many popular expectations associated with the budget.

However, talks between the Ministry of Finance and multilateral donors have focused so far on prudent fiscal management, which could ensure further reduction in the budget deficit, as well as debt-to-GDP ratio.

Donors have not opposed reduction in tax rates, but demand such measures be linked with broad basing of the tax net. There is also a strong support for liberalisation of trade and rationalisation of customs duty to be more competitive in the region.

Background interviews with senior officials on the budgetary proposals indicate that the government is so far determined to broaden the tax net to retail, wholesale, financial services, housing sector, real estate transactions and the property dealers. Some of the professional services may be engulfed in the provincial budgets, which are out of the purview of the federal government. The donors’ community has also encouraged the government to target Rs 700 billion tax revenue target for the next fiscal year to ensure that tax-to-GDP ratio does not go down further, which is already one of the lowest.

In this regard, the ongoing administrative reforms of the Central Board of Revenue (CBR) will also be pursued more vigorously, as a large chunk of revenues is being lost due to corruption and systematic leakages. During the current fiscal year, officials reckon that tax authorities have failed to match their revenue collection with the nominal growth of the economy, in addition to a quantum jump in imports.

Next year, even if the current tax-to-GDP ratio is maintained, the CBR should be able to collect Rs 100 billion extra, the officials maintained. Taxing of the informal sector, including the real estate, small businesses and retailers is the key for success.

Many international donors, and the State Bank of Pakistan, have proposed the government to exploit the real estate sector. All indications suggest that billions of dollars are flowing in the real estate business, which are leading to a speculative run in the market, but there is no effort to regulate this business. Many influential personalities in the government and a large number of retired army officials are associated with this business. It is high time to save the public from this mafia.

On the overall reforms of the income tax, the officials said that the main objective is to move towards a self-assessment system, with simplified procedures. While authorities have shown reluctance to the initial proposal of increasing the minimum taxable limit, they have decided to bring down the tax rates for all categories of taxpayers. For the basic category, the incidence of tax is likely to be reduced from 7.5 per cent to 4 per cent, and the maximum rate would be brought down to 30 per cent from 35 per cent at the moment.

The real problem for the budget-makers is the narrow tax base. Almost 40 per cent of the less than 1.2 million taxpayers in the country consist of salaried class. If the government allows increase in the minimum threshold of the taxable income, total number of taxpayers would shrink even further.

No one is willing to pay taxes, except those where the deduction is made at source. The CBR has failed to strengthen its ability to detect tax evaders and non-filers. It has not been able to produce any significant result over the last few years, which could be attributed to its reforms or modernisation. Either the taxmen are too illiterate to use the computers and modern IT techniques, or they do not have the honest desire to do so.

What they actually do is punish those who are already paying tax and not oiling the palms of the system. Sending frequent notices to such taxpayers is a routine, as it is assumed that they are the real tax evaders. While most of the potential taxpayers try to remain out of the loop, fearing maltreatment from the tax collectors. It is such a wide gap of mistrust and suspicion that has not been bridged over the years.

The Ministry of Finance now says that they want to introduce a system of self-assessment, which would allow acceptance of whatever is being declared. Only selected few would be subjected to the detailed audit, under clear and well-defined parameters. The system is being conceived to entail minimum documentation requirements, and more use of the technology. The multi-million dollar reform programme funded by the World Bank is expected to assist the officials in this regard.

On the issue of pay raise, which is the most important issue for the fixed income groups, the Ministry of Finance has shown its inability to implement all the proposals of Moeen Afzal committee. Even on Friday, a meeting took place between Moeen Afzal and Dr Salman Shah, Advisor to Prime Minister on Finance and Revenues. The ministry maintains that it does not have the resource to offer monetisation of all the perks, neither it finds itself in a position to offer a lumpy increase in house rent and pays.

The most likely option appears to be a several year programme to gradually incorporate the measures. To begin with, the government is said to have allowed a 15 per cent increase in pay and pensions.


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Rs 690 billion tax target likely for next year
SOHAIL SARFRAZ

ISLAMBAD (June 06 2005): The federal government is likely to set revenue target of Rs 690 billion for the next fiscal (2005-06) and take a number of measures to broaden the tax base along with comprehensive amendments to Sales Tax Act, 1990, Income Tax Ordinance 2001 and promulgation of Federal Excise Act, 2005. The CBR will levy new central excise duty structure on the pay phone industry by withdrawing partial CED exemption available to the sector. It is expected that central excise duty on certain brands of cigarettes will be enhanced, while CED may be withdrawn on some of the existing excisable commodities.

Legal amendments will be introduced to improve the existing adjudication system and SROs pertaining to powers of adjudication will be revised.

The CBR has also drafted budget instructions for the collectors of sales tax and Customs and regional commissioners of income tax, so that the amendments made through Finance Bill (2005-2006) could be enforced at the collectorates, ports and tax offices after promulgation of the amendments to various tax laws.

The primary emphasis of the budget would be on sustaining growth rate in the range of 7-8 percent for next several years. For this purpose, Rs 690 billion revenue target appeared to be achievable. The budget will be growth-oriented, with focus on broad-basing the tax system, simplification of procedures and new schemes to encourage voluntary compliance and a number of incentives for exporters.

The budget will provide tax incentives to the corporate sector, including Small and Medium Enterprises (SMEs), Single Member Companies (SMCs) and ensure tax-free environment for the export-oriented textile industry.

The Securities and Exchange Commission of Pakistan (SECP) and CBR have jointly finalised to reduce tax rates for the corporate sector, single member companies with the objective to reduce tax burden on the private sector. The government is gradually reducing the tax rates for the corporate sector to 30 percent in different phases by fiscal 2007.

The CBR will announce a number of concessions or extension in time period of concessionary SROs in budget. Sales tax audit will be restored from fiscal 2005-06 with the implementation of new audit policy.

The new Federal Excise (FE) Act 2005 will replace Central Excise Act, 1944, which would be based on self-clearance. Apart from simplification and elimination of a number of documents, the condition of obtaining excise license by the companies dealing in excisable items would be abolished.

The CBR will amend SRO 38(I)/98 to extend exemption of duties and taxes on the import of different types of CNG kits, cylinders, machinery and compressors for one year.

The CBR is likely to further extend the temporary importation scheme allowed under SRO 410 on the persistent demand of importers. The facility, which will expire on June 30, is now expected to be extended indefinitely. The decision would be announced through a Customs notification in the next budget.

The CBR will bring a number of service providers including professionals and non-banking financial institutions and leasing companies into the tax net by imposing central excise duty in VAT mode. Two new amnesty schemes for the business community will be announced for giving exemption of additional sales tax and penalty provided the registered taxpayers are willing to deposit the principal amount of sales tax.

Secondly, 100 percent waiver of penal surcharge on the imported goods overstayed in the bonded warehouses will be extended.

The CBR has drafted " Sales Tax Special Procedure Rules 2005" for the non-banking financial institutions and contractors/property developers, dealers, architects and interior decorators.

The rules will be issued after approval from the government. Last year, the CBR issued special procedures for service providers, nil-filers of sales tax, steel-melters, re-rollers, ship-breaking industry and other sectors.

Major changes will be made in the procedure regarding collection of "additional tax" from the taxpayers from 2005-06. In this regard, the Sales Tax Act, 1990 will be amended.

Other proposed amendments in the Sales Tax Act, 1990 include simplification of laid down definitions, amendments to check tax frauds and facilitation measures for the persons registered with the sales tax department. However, no major change is likely to be made in the Sixth Schedule of the Sales Tax Act, 1990.

The CBR has also decided to revise the rate of penalty to distinguish between the unintentional default and willful defaulters or tax evaders through an amendment in the Sales Tax Act, 1990.

The CBR will take steps to minimise the accumulative effects of the 'additional tax' and take into account the practical difficulties being faced by the business community while making payment of this tax.

Levy of "Service Tax" on the commission earned by the stock brokers and increase in capital value tax (CVT) on the purchase and selling of shares at the stock exchanges are under consideration by the competent authorities.

The government is considering reducing duties on import of tyres, especially those of trucks, buses and tractors, which are smuggled into the country.

Duty will be reduced on a number of other smuggled items through tariff rationalisation. A tax relief package would be introduced for the auto industry, which would also benefit the customers. The relief to the customers would be provided through reduction in customs duties on vehicles' import.

The existing STREAMS programme for speedy payment of sales tax refund will be further improved to facilitate the exporters.

The real estate sector is expected to be one of the important sectors for revenue generation and broadening of the tax base in the next fiscal year, as the tax authorities are considering different options for taxing this potential sector in the budget.

The CBR has drafted a proposal to make it mandatory for the sellers and purchasers of plots and other property to obtain a National Tax Number (NTN). There is another proposal to levy adjustable withholding tax at the rate of 5 percent of the purchase price on plots and houses measuring more than 250 square yards in the urban areas.

If any purchaser does not want to disclose the source of investment in property, the said tax should be a final discharge of tax liability. And those who want to adjust it should be given an option. However, it is not clear that how the CBR will levy withholding tax on real estate without devising a methodology in consultation with the provinces.

The government is considering a proposal of textile industry to fix less than 5 percent sales tax on retailers of textile-related products, having a sale above the threshold of Rs 5 million, to bring more retailers in the tax net.

The CBR is also considering to levy zero-rate of sales tax on the supply and import of raw materials and other products used in the manufacturing of the textile-related products in the budget of 2005-06 to make them competitive in the international market.

The CBR is also considering levying zero-percent custom duty on the import of machinery, equipment and apparatus used in the export-oriented industries besides large-scale tariff rationalisation in Pakistan Customs Tariff (2005-06).

The new tariff will not only reduce import duty on a large number of raw materials and inputs used by the export industries, but will also ensure protection to the domestic industry.

It is also proposed to abolish withholding tax and sales tax on import of the machinery and raw materials. Special focus will be given to the developmental sectors like marble, gems, jewellery, pharmaceutical products, particularly for life threatening diseases, and poultry products.

The CBR will combine two concessionary notifications ie SRO 456(I) 2004 and SRO 453(I)/2005 to simplify the procedure for the import of machinery and equipment at concessional rate of custom duty.

The authorities will make it mandatory for the customs agents to pay the evaded amount of duties and taxes in cases where the evasion took place due to negligence of these agents.

Under the new "Customs Agent Licensing Rules 2005" to be issued in budget 2005-06, the agents will pay the evaded amount of duties and taxes in case it is established that evasion has taken place because of their negligence/failure.

The tax authorities will amend the baggage rules, procedure for operating Duty Free Shops and rules dealing with the tax exemptions for the diplomats/privileged persons in budget 2005-06 to control large-scale smuggling of foreign goods.

The CBR is considering minimising the concessions in duties for persons who have stayed abroad for less than 90 days.

Following rationalisation of tariff structure in the budget, the CBR will revise duty drawback rates on a number of items used in the manufacture of finished products to be exported.

Subsequently, amendments would be made to the standard SRO 412(I) 2001, SRO 413(I)/2001, SRO 414(I)/2001 and SRO 415(I)/2001.

The CBR will issue revised Duty and Tax Remission of Export (DTRE) scheme in line with the Pakistan Customs Computerised System (PACCS).

The CBR has completed another 'budget exercise' to determine the locally manufactured or not locally manufactured items and finalised a new list for the purpose of levying duty.

It is proposed that all those raw materials, which are not produced locally, should be charged to duty at the flat rate of 5 percent and those produced locally should be kept at the rate of 10 percent.

Pakistan Customs Tariff (PCT) 2005-06 will give information about the anti-dumping duty and banned/restricted items. A new export tariff rate will also be issued amending the previous one.

The CBR will amend existing Customs Rules notified vide SRO 450(I)/2001 and the relevant parts may be made computer compatible.

There are around 40 operative customs notifications. Those notifications, which have become redundant, would be rescinded.

The Volume 1 of the new 'Pakistan Customs Tariff' will include columns for inclusion of WHT, CE duty, banned/restricted items for import, concessionary/exemption rate of duty indication of international conventions/protocol, as well as the information about the anti-dumping duty etc.

The existing export tariff will be unified with the import tariff. There should be no difference in classification of items for import or export purposes.

The CBR may revise the income tax exemption threshold keeping in view the proposed increase in the pay scales for government employees from grade 1 to 22.

Another proposal is to reduce income tax rate across the board to facilitate the taxpayers, particularly lowering the burden on the fixed-income groups.

It is also expected that the CBR may give tax incentives in the new voluntary pension system (VPS), the rules for which were framed in January.

The CBR has also identified income tax exemptions to be withdrawn from the income tax ordinance 2001. The Income Tax Rules 2002 will be amended through legal changes to be announced in budget.

From fiscal 2005-06, the CBR will launch computerised systems for e-filing of sales tax returns, income tax returns and returns by the manufacturers of excisable commodities.

Legal amendment will be introduced in the Income Tax Ordinance 2001 to permit the lawyers to use 'digital signatures' for filing income tax returns on the behalf of their clients so that returns could be electronically filed reducing interaction between the taxpayers and tax officials.

Commercial banks are expecting from the CBR to issue Income Tax Bonds for the settlement of income tax refunds payable to banks.

Copyright Business Recorder, 2005

Any form of tax retrieval which is efficient is required. In the overall picture the Inland Revenue dept should have powerful rights to oversee its generation rights across the nation.

i agree. pakistans short term goal should be to double the number of tax payers and reach 1 trillion rupees as a tax target. that should be the goal for the next six to seven years.