Unjust taxes levied on private security providers is a huge tax anomaly
Through Finance Act, 2015, the federal government has introduced a new section (236P) which relates to collection of 0.6 per cent advance tax on non-cash debit transactions on Non Filers only. The withholding tax on cash withdrawal exceeding Rs50,000 a day will be 0.3 per cent for Filers and 0.6 per cent for Non Filers. However, this is not strictly true. If one has a joint account with an offspring 18-plus but student and the parent is a taxpayer, it will still be levied since the offspring is not a taxpayer. The law does not take into cognisance such details. Dr Ikram, lawyer and partner in a law firm and member Adjunct Faculty LUMS, says: “Income tax should be tax on “income”. Taxing savings and transactions within Income Tax Law is undesirable, when we have 17 per cent sales tax as well.”
Majyd Aziz, former President Karachi Chamber of Commerce and Industry, has this to say, “The traditional ritual performed by the Finance Minister of Pakistan is to present the federal budget in the National Assembly. The budget is, in many ways, an agenda of the government’s plans to find revenue for development projects, debt servicing, defence requirements, and non-development expenditures. Due to the limited visionary intellect of budget planners and due to the entrenched system of inserting loopholes in taxation policies to perpetuate corruption, and due to appeasing the international financial institutions, the budget planners devise hare-brained schemes to collect revenue. However, in the process, these bureaucrats also achieve the dual purpose of discrediting the government and creating a wedge between the government and the stakeholders, primarily the business community.
“Budget 2016 is another such exercise. The problem with FBR and Finance Ministery over the past many decades is that their deep-rooted mindset of being adamant and coercive has had a negative impact on workable and pragmatic initiatives. The 0.6 per cent tax should have been introduced in a practical mode, by first ascertaining how it would affect the genuine and real tax filers, before trying to bring into the net those account holders who are non-tax filers. It would also affect remittances through banking channels, as people would now use the Hawala and Hundi modes rather than sending it officially. It would doubly tax those who are beneficiaries of remittances and would be disastrous on pensioners and those with limited or fixed incomes. Housewives and small traders would not be using banking facilities and would prefer to keep cash or invest in prize bonds, gold, or jewelry.
“The 0.6 per cent is a multiple stage tax with lot of complications. Each business sector has been affected in a different manner. It is necessary to discuss with all stakeholders before implementation of such draconian measures. Why did the Finance Ministry withdraw the excellent proposal of making CNIC as NTN number and making it mandatory to present it in every mode of transaction? There are other ways in which the non-filers could be brought into the tax net without much complications and without hurting genuine filers.
“Trade and industry is also perturbed that the agriculture sector and certain other holy cows have again managed to stay away from the tax net. This is another reason why more than one tax system running in tandem has resulted in such a low tax to GDP ratio, which is less than 9 per cent. Millions of dollars have been spent on FBR reforms and nearly all this money has gone to waste because there has been no improvement as FBR is still in this same rigmarole. The government is still fixated on revenue collection instead of revenue generation. Any country that is depending on external loans and grants because it has defective and corrupt tax machinery, is seldom going to enjoy economic prosperity.”
True the government has decided to reduce the withholding tax to 3 per cent for three months until tax returns are filed. An Ordinance too has been passed effective until 30th September. However, is this the solution to the dilemma as pointed out by Majyd Aziz? Unless this relief is to be treated as “a short-term amnesty and then the screws should have been tightened”, says Majyd Aziz. One can only hope the government sees the damage of a sweeping approach and work out a better one in the interim period.
One of the sectors already badly affected and will be crushed under too much taxation is the private security sector. Let us take a look at how. Security companies bill the company they provide service to in two amounts: one is a sum of services; the other is sales tax by the company being provided the services which is a good percentage of the amount billed. The total is payable by the company to a security service provider. Now the security company pays 8 per cent tax deductible at source, then the sales tax is levied on the total amount billed i.e., the services of security and the sales tax payable by company enjoying the service though the security company makes not one rupee from amount billed in total. The security service provider ends up paying 16 per cent tax on amount billed. Add to this the withholding tax. In addition, the security service provider pays EOBI, Social Security and Education Cess. What effectively has happened is that the security companies have been pushed to a corner. Most in likelihood either go out of business or resort to working without paperwork.
The All Pakistan Security Services Association held a meeting on July 8, 2015, in Karachi. Through a unanimous resolution, letters have been sent out to the Prime Minister of Pakistan, Mr Ishaq Dar and to Mr Chaudhry Nisar, signed by Col Tauqeer Ul Islam, Acting Chairman of APSSA. I share an excerpt of the letter, “Recent amendments made in the Finance Act 2015 have declared withholding tax deducted at 8 per cent at source as “Minimum Tax” with effect from 1st July, 2015, which is very high, unrealistic, unjustified and brutal in nature. For every Rs100 of gross receipt of security services 90 per cent is spent on cost of services leaving behind a margin of Rs10 only which is used by us for administrative expenditure and profit. Subjecting this Rs10 to 8 per cent tax would amount to charging tax on security industry at the rate of 80 per cent. The aforesaid 90 per cent cost of services comprises salaries of security guards, their uniforms, their overtime and their EOBI, SESSI/PESSI/BESSI, insurance, staff welfare, and transportation obligations. In sum and substance, this 8 per cent WHT on our services will become 80 per cent tax on our leftover business income after bearing direct costs and resultantly the PSA’s will face “Sudden Death”. We are constrained to request Your Honour to kindly intervene immediately and instruct the Ministry of Finance/FBR officially to rectify this tax anomaly with respect to security services sector which relies heavily on manpower. We request that the proposed WHT may be declared as “Adjustable Tax” rather than the impugned “Minimum Tax”. This will also save the livelihood of over 100,000 ex-forces and civilian security guards.”
Brig (retd) Rashid Ali, former Chairman APSSA and owner of a leading security company, states, “Pakistani private security companies fill adequately the growing shortages of police. Today it grossly outnumbers police. It performs all tasks the police cannot perform. Someone needs to provide those services. We do it with a very large trained workforce. However, the new finance bill unless repealed will make sure that security company operations will cease for the tax structure imposed will put 300,000 men out of job. This will in turn seriously put at risk many businesses.”
I am reminded here of Plato, “When there is an income tax, the just man will pay more, and the unjust less on the same amount of income.”