Ishaq Dar’s budget defies economic vision: Karachi Chamber of Commerce and Industry

Karachi, June 12, 2015 (PPI-OT): Although the budgetary measures for the fiscal year 2015-16 announced by the Finance Minister Mr. Ishaq Dar have major relief measures for the agricultural and corporate sectors and for the industries in Khyber Pakhtunkhwa, the budget has brought additional burden of indirect taxes and further squeeze on the compliant tax payers particularly the trade and industry which is based in Karachi and contributes 65% of total tax revenue. The budget totally lacks any measures to support the SME’s which contribute 37% to the GDP and employs nearly 1/3rd of Pakistan’s adult population.

On the positive side, FBR has been deprived of powers to issue exemptions under various provisions and these powers have been transferred to the parliament. This to some extent will plug the leakages and reduce the level of inherent corruption associated with such powers.

Section 13 of the Sales Tax Act’1990 has been amended to transfer the powers of exemption/concession from FBR to the national assembly. While also the powers of exemption in the Income Tax Ordinance 2001 have been taken away from the FBR and given to the elected representatives.

Other appreciable measures taken in the budget by the Finance Ministry to improve macro-economic indicators and achieving stability in fundamentals include:

Reduction in corporate tax rate to 32%, Tax credit for investment in shares and enhancement of tax credit from 15% to 20% on enlistment are a positive steps and encourage corporatization and creation of a broad-based capital market. The current budget indeed has focused more on the corporate sector and taken various reform measures to achieve an overall balance in facilitation and enhancement of tax revenue at the same time.

Section 8A of the Sales Tax Act has been amended to put the burden of proof on the department in case of a tax default, which earlier was placed on the registered person.

Section 13 of the STA amended to take away the powers of exemption from the FBR and transfer it to the national assembly.

Concessionary SRO’s being phased out under a program spread of 3 years. In the current budget, concessions amounting to Rs.132.0 billion have been withdrawn which would help to reduce fiscal deficit.

Since a significant percentage of vegetables and fruits are being wasted due to lack of facilities, it is a commendable measure to allow Tax Holiday for 3 years to new industrial undertakings for setting up and operating cold chain facilities, and warehousing facilities for storage of agriculture produce. Also the exemption for 4 year for Halal’ Meat Production Companies which set up ‘halal’ meat production plant and obtain ‘halal’ certification by 31st December 2016, is a step in right direction.

In order to provide relief to Rice Mills suffering from low global demand, exemption from minimum tax for the Tax Year 2015 will help the rice exporters who earn a significant amount of foreign exchange.

Exemption on Supply of Fish: Exemption from withholding tax on supply of agricultural produce is to be extended to supply of fish.

Import and Local Supply of Agricultural Machinery and Equipment: In order to promote farm mechanization and enhance productivity nonadjustable sales tax at reduced rate of 7%, instead of existing rate of 17% is being introduced, which was also recommended by the KCCI.

Major relief has been extended to Agricultural sector by a major reduction in Customs Duty, Sales Tax and With-holding Income Tax from an aggregate of 28-43% to 9% in the current budget on import of Machinery and farm equipment. WHT has been reduced to 0%. This however may not benefit the small and landless farmers who form 80% of the total number of farm workers.

Unfortunately, the recommendations of KCCI, which represents the largest number of tax payers in the country, have by and large been ignored in the budget 2015-16, particularly the most important demand of the business community to repeal or amend the draconian provisions in the Sales Tax, Income Tax and Customs laws to curtail the absolute discretionary powers of the officers of Inland Revenue, which are used as tools of harassment and extortion. Such laws are the main hurdle in broadening of tax base which remains and will continue to remain below 1% of the population.

Rather than providing relief to existing compliant tax payers, government has relied again on increasing the indirect taxes such as GST, Income Tax and FED across the board, instead of taking effective steps to broaden the tax base by netting the big fish. Existing basic rate Sales Tax of 17% has been effectively increased up to 22% by increasing the rate of additional tax from 1% to 2% on the sales made to unregistered persons.

The registered tax payer will have to pay this additional 2% because the number of unregistered persons in Pakistan is 99% and this new across the board additional Sales Tax will be passed on to the ultimate consumers and low income groups.

A new form of Income Tax (WHT) across the board has been introduced by imposition of 0.6% on all banking transactions and instruments issued by non-filers which is aimed at broadening the tax base. By virtue of this tax FBR has put the burden of netting the non-filers on registered persons which Is unlikely to bring the desired results as in the past FBR has also introduced further tax on sales to unregistered buyers but it failed to bring new tax payers in the net. It only added to the cost of doing business and passed on to the end-consumers. The new tax of 0.6% on banking transactions will have a similar fate while making accounting more complicated for the registered persons and the banks.

The repercussions of this measure may be negative for economy because major transactions of commodities and consumer goods could be shifted to cash and hundi system. In most transactions of bulk commodities and other consumable goods, margin of profit is very thin, ranging from 0.5% to 1.0% hence it is not possible for the registered persons to pay 0.6% WHT on banking transactions and instruments which are used not just for sales but various other type of transactions.

The KCCI therefore suggests that stake holders should be consulted before implementation of 0.6% of this new tax on banking transactions and instruments, in order to clarify various queries and implications arising out of the new taxation measure.

Introduction of Section 165B in the Income Tax Ordinance is in sharp contrast with the economic vision of the present government. The measure provides authority and access to the FBR to the foreign currency accounts of Non-Resident Pakistanis and pursue them for information on sources of such funds and to recover tax revenue where applicable.

This provision is likely to cause greater damage than achieve any significant recovery of tax revenue. Rather it will cause panic among the account holders and result in flight of capital. KCCI therefore suggests to withdraw the new provisions under 165B as well as section 165A inserted last year.

Penalty on the import consignments has been increased from maximum of Rs.25,000 to Rs.50,000 if the copies of Invoice and Packing list are missing from containers. This issue had been resolved last year with customs and penalty was being charged at Rs.5000 in case invoice and packing list were not provided in containers. By increasing the maximum penalty to Rs.50,000 another avenue for corruption and extortion has been opened and importers are being penalized.

KCCI strongly protests on this provision in the budget and demands reversal of this increase in the penal charge. In case the condition is mentioned in the LC for provision of invoices and packing list in containers, the importer should not be penalized if the document is not provided in the containers due to mistake or omission by shipper.

Exemption of Income Tax granted to new industries set up in the KP will undoubtedly affect the industries and imports of raw material in other parts of the country which pays up to 6.5% in With-holding Tax and up to 22% in GST. This is a major exemption and will certainly cause of leakage in revenues because FBR does not have the capacity or effective monitoring mechanism to prevent sales of raw materials imported ostensibly for consumption in KP but sold in the spot markets of Karachi and Lahore. KCCI is therefore of the view that this exemption be extended to the industries and trade based in Karachi which has suffered as much from the militancy in the last few years as KP.

Exemption in WHT under Section 148 (2nd Schedule, Part IV, Clause 72B) continues despite major leakage of revenue to the tune of Rs.15 to 20 Billion annually. No relief has been provided on duty and taxes on Tea which is an essential item of consumption by the common man. The high rates of Custom Duty, Sales Tax and WHT are only benefiting the smugglers and those importing it under the guise of Afghan Transit.

Paper trade has been ruined due to anomaly in tariff structure and taxes. Printed books and materials are under zero rates regime and duty and tax free, while the paper used in printing industry is subject to 20% Customs Duty, 20% Sales Tax and 6% WHT, making it impossible for the industry to survive. Despite repeated appeals by the paper merchants and the KCCI, no heed is paid to a genuine complaint.

Ironically, a Sales Tax of 2% has been imposed on local procurement of edible oil which is going to cause increase in an essential consumer item while export quota under DTRE for Edible Oil has been increased from 1000 Metric Tons in 3 months to 3000 metric tons in 3 months to the exporters in KP.

This is undoubtedly a damaging measure for revenue collection and also for the local producers of oil seeds who are not able to compete with imported edible oil. The measures should therefore be withdrawn.

Despite a massive exercise undertaken for reforms of the tax system through the Tax Reforms Commission formed last year and major contributions made by chambers, trade bodies, professionals and association, the recommendations have been set aside and ignored for inexplicable reasons in the current Budget 2015-16. The interim report and recommendations submitted by the commission has strongly emphasized on removal of such discretionary powers from the FBR and the subordinate departments, which are not only the major cause of corruption and harassment but also the main deterrent to broadening of tax base.

This sums up the entire Budget 2015-16, which is in the same template as we have seen in the last 2 decades. Entire additional tax revenue of Rs.253.0 Billion has been mobilized through indirect taxes with a new name while the rural economy has been left untaxed. Undoubtedly, the trade and industry of Karachi as usual has been left to bear the brunt of new taxes.

The government has heavily relied again on indirect taxes and avoided the difficult and bold decisions to support the Economic Vision of the leadership. The plan to develop China Pakistan Economic Corridor is indeed a far-sighted geo-strategic move, but ironically it is not supported by the current taxation regime which is still decades behind. It remains to be seen how the parliament debates these measures and comes up with the necessary changes to make it more people friendly.

For more information, contact:
Aamir Hassan
Director Press/Electronic Media and Public Relations
Karachi Chamber of Commerce and Industry (KCCI)
Aiwan-e-Tijarat Road, Off Shahrah-e-Liaquat,
Phone: +92-21-99218001-09
Fax: +92-21-99218040