Good bye tax concessions, it’s time for development

• Income Tax exemption will be enhanced to Rs 500,000 while Rs 120b worth of tax exemptions will be withdrawn
• Discontinuation of prize bond of Rs 25,000 or Rs 40,000 likely while real estate is likely to be taxed

The government will announce its third federal budget on Friday which focuses more on ending tax exemptions, tapping the available revenue resources and spending heavily on infrastructure and energy projects during the next financial year 2015-16.

Finance Minister Ishaq Dar will unveil a budget having a likely size of Rs 4.3 trillion, with a tax collection target of Rs 3.1 trillion, development outlay of Rs 700 billion, defence spending of Rs 770 billion, export target of $ 25.5 billion, GDP growth target of 5.5 percent, fiscal deficit target of 4.3 percent and inflation target of 6 percent.

The general feeling in the official and business circles remains that the government is maintaining the trend of last two fiscal years, consolidating the economic stabilisation in drafting the budget for the next fiscal. They point out that the increase in electricity and natural gas prices will adversely affect the agriculture and manufacturing sectors. The decrease in the interest rate to 7 percent will not be beneficial with increase in utility prices.

Sources said the minimum threshold for the income to be taxable under Income Tax Ordinance 2001, considering the inflation, is likely to be revised to Rs 500,000 for next fiscal year. Measures will be introduced to reduce the outflow of un-taxed funds, bonus shares will be excluded from the definition of income and the rate of taxation could be 1 percent, they added.

To meet the financial needs on combating war on terrorism, the concept of Higher Income Contribution is likely to be introduced whereby individual and association of persons earning taxable income of more than Rs 100 million and in case of corporate tax payers earning taxable income of more than Rs 200 million should be liable to surcharge of 1 percent.

The government is likely to prescribe tax rates for the Land Developers and Builders provided under sections 113A and 113B of the Income Tax Ordinance 2001. It is important to mention that TRC has expressed concern as to why the tax rates for these two sections have not been prescribed by the Federal Board of Revenue (FBR) for the past two years. The minimum threshold for tax withholding for services and supplies which were fixed in 1990s at Rs 10,000 and Rs 50,000 are likely to be enhanced to Rs 25,000 and Rs 100,000 respectively.

Moreover, the government is likely to introduce Benami Transaction Act to discourage tax evasion and non-reporting, whereby any person enters into benami transaction should be liable to tax at the rate of 25 percent of the fair market value of the property held in benami.

The federal government, in coordination with provincial governments, will design the valuation mechanism for immoveable properties in various categories. The value will be revised at a level every year through independent evaluators. The value so determined would be at minimum 75 percent of the current market value.

The government may discontinue issuance of prize bond of Rs 25,000 or Rs 40,000 as these high denomination bearer instruments fuel corruption and tax evasion. Prize bonds of these denominations would be allowed to be deposited in bank accounts till December 31, 2015 with a tax withholding of 0.1 percent. After December 31, 2015, the said prize bonds can be deposited in the bank accounts till June 30, 2016 with tax deduction of 10 percent.

Furthermore, a new provision is proposed to be inserted in the seventh schedule whereby banks are required to submit the information of taxpayers to FBR in terms of name of the taxpayer, NTN/CNIC number, amount on which tax is deducted and amount of tax. The income generated by the banking companies in respect of investment made in excess of the minimum liquidity reserve under Section 29 of the Banking Companies Ordinance 1962 in PIB and T bills shall be subject to High Income Contribution.

To curb the menace of under invoicing, the government will take measures to notify minimum import value for different goods/products on periodic basis. Federal Excise Duty (FED) would be computed on the retail price of the product.

It has also been proposed that the customs duty rates be restored to the rates agreed with foreign donors i.e. 5 percent minimum rate on raw materials not locally produced, 10 percent ad-valorem on locally produced raw materials and on locally non manufactured intermediaries, 15 percent ad-valorem on assemblies and sub-assemblies/intermediaries, 25 percent on consumer finished goods and 35 percent ad-valorem on luxury goods. This will make the customs tariff a progressive tax.

Presently 62 percent of the total imports are exempt imports which do not attract any customs duties. It is proposed that all exempt imports including imports by diplomats etc should be subjected to a service charge at 1 percent ad-valorem under Section 18-D of the Customs Act, 1969, to recover the cost incurred by the government on clearance of imported goods.

The import of costly wood like teak wood would be subject to customs duty rates as applicable in 1999-2000. The FED on beverages and cigarettes will be enhanced. Imports by air, including accompanied and unaccompanied baggage, would be cleared through computerised assessments without allowing any abatement in value or taxes. Presently, imports by air are neither manifested nor electronically transferred to warehouses at the airports. A colossal amount of revenue is siphoned off through manipulation.

It has also been proposed that all circulars, SROs etc should be issued both in English and Urdu. Simultaneously, and if any amendment is made in existing SRO, the SRO with amendment should be issue highlighting the amendments made. The tax form will be simplified for small business tax filers.

Moreover, a Whistle Blower Policy will be introduced and FBR would work towards establishing a toll-free line. Each LTU/RTO/Customs House also should have a secure complaint/suggestion box, where any citizen or FBR staff can offer a suggestion or register a complaint of mal-practice and evasion of tax or duty without fear of any retaliation.

Personal remittances from overseas non-resident Pakistani to a relative and remittance by others with a threshold of $25,000 in a tax year are likely to be subjected to adjustable withholding tax of at least one percent.