OICCI recommends broadening tax base

The Overseas Investors and Chamber of Commerce and Industry (OICCI) has once again stressed the need to document and tax all sectors of the economy to broaden the tax base and eradicate tax evasion. In order to ensure documentation of all segments of the economy OICCI has recommended that all legal entities including individuals, association of persons, corporate and NGOs/NPOs should file annual tax returns, as well as wealth statements, irrespective of their source of income, if the total income for the year is in excess of the Government approved threshold which currently is Rs350,000. In case the earned income falls under the exempt category then exemption may be claimed separately.
Furthermore all such individuals and legal entities should get themselves registered and obtain their NTN (National Tax Number) and tax authorities should ensure that all NTN holders file tax returns.
Some of the measures suggested by OICCI to increase the documentation and reduce tax evasion/avoidance include:
-Subject to legal provisions, FBR should obtain details of all customers of financial institutions whose investments exceed a certain threshold during the year.
-Art exhibition halls, hospitals, hotels holding large receptions for catwalks & sale of branded/designer dresses, airlines, travel agencies, etc should be asked to provide names and addresses of their customers beyond a minimum threshold to the FBR.
-FBR to regularly interact with leading tax and administrative experts to determine additional measures required for enlarging the number of tax payers and taxable entities.
“OICCI’s Budget Proposals are balanced and aim at broadening the tax base, providing incentive to the honest tax payers and above all enhancing the documentation of the economy. The proposals also recommend certain structural and procedural changes to improve the overall taxation framework in the country” said by Mr Humayun Bashir, President OICCI.
Humayun Bashir added that to build confidence the result of FBR’s efforts on the 700,000 affluent people who were identified in 2011 as potential tax evaders/assessees should also be shared with public. He also suggested that people declaring income above Rs10 million annually or paying taxes in excess of Rs2 million annually be given special privileges and recognition cards and special counters at immigration etc. Highlights of the OICCI Taxation Proposals for 2012-13 are identified in the following four sections:
I. Rationalising and Broadening tax Base Concrete measures on the part of the government are needed to enhance revenue collected via tax receipts. OICCI recommends doing so by increasing the number of taxpayers as opposed to taxing the already taxed.
II. Improving Tax Collection and Investment Environment
A country’s tax system and its hassle free implementation are key determinants of its investment environment. In Pakistan, the organised sector is subject to high levels of compliance whereas the unorganised sector appears to have an implied amnesty.
To overcome these gaps, several mechanisms, structural and procedural recommendations have been outlined in this segment. These proposals will not only assist in reducing the burden on the already taxed segment, it will aid in improving the tax culture in the short run and increase the tax base in the long run.
Income Tax
i. Uniform tax rate of 30% should be introduced for all businesses irrespective of their legal status in order to encourage corporatization and expansion of companies.
ii. Abolishment of discriminatory practices like Final Tax Regime (FTR), as well as Minimum Tax Regime, which should not be applicable for companies who should be taxed only under the Normal Tax Regime(MTR). As a transitory phase the FTR or MTR should be made more reasonable and applicable in a standard manner across industries, to help increase collections while providing greater equitability among tax payers.
iii. Clarity and re-phrasing needed in section 65 D & E, for encouraging reinvestment of capital and retained earnings in new manufacturing facility.
Sales Tax
i. Improving the timelines of returns processing both for collection and refunds.
ii. The disparity in Rule 12(5) should be removed, to bring in line with the provision of newly inserted Sub-section 3 of section 21 of Sales Tax Act 1990, to ensure that the buyers are not restricted from their legitimate claim, if requirements of section 73 are duly fulfilled.
iii. The requirement for withholding Sales Tax at one percent of the value of taxable supplies with respect to goods purchased from registered persons, other than registered in LTU, should be withdrawn.
Custom Duty
i. The value determined under the Customs Act, 1969 should be used as the basis for valuing imported goods by the Commissioner of Income tax.
ii. The proof that goods exported from Pakistan have reached Afghanistan should be verified on the basis of documentation by Pakistan Custom Authorities instead of Afghan Authorities.
Federal Excise Duty
i. FED on Royalty payments for technology transfers and product know-how should be withdrawn. Further, the adjustment of the duty paid on franchise fee should be allowed as in VAT mode.
ii. Adjustment of input FED should be on the basis of purchase invoices or the Goods Declaration forms in case of imported goods as allowed under section 7 of the Sales Tax Act, 1990.
Procedural/ Structural Suggestions
i. Allow net settlement of various direct and indirect taxes subject to company audit.
ii. Develop linkages between the databases of Customs, Excise, Income and Sales Tax so that the tax payer can adjust/ offset his tax liabilities against refund of these levies and vice versa.
iii. To effectively reinstate the concept of taxing global income, the restriction of set off of foreign losses against only subsequent foreign income needs to be removed.
iv. A separate ‘Research and Analysis Unit’ should be setup, within the FBR.
v. Large Tax Unit initiative was introduced in 2002 for facilitating large tax payers. However, over the years , under pressure to generate more revenue from the same source, it appears, that the objective of LTU facilitation has been lost There is an urgent need to re-store the LTU facilitation concept in real terms.
III. Facilitation of Foreign Direct Investment In order to contribute to the growth of the economy and provide jobs for the youth of the country the government must attract foreign direct investment (FDI), particularly in the manufacturing sector which is most able to create jobs.