Tax regime for the elite: Big sectors may enjoy lower tax rates next year as well

The Federal Board of Revenue has proposed to only nominally increase withholding tax rates in the next fiscal year 2013-14. PHOTO: CREATIVE COMMONS

The Federal Board of Revenue has proposed to only nominally increase withholding tax rates in the next fiscal year 2013-14. PHOTO: CREATIVE COMMONS

ISLAMABAD: Concessionary tax rates for some big sectors are expected to stay in place for yet another year, as authorities have decided to continue with the presumptive tax, which will give benefits of low rates to the wealthy at the expense of a narrow income tax base.

The Federal Board of Revenue has proposed to only nominally increase withholding tax rates in the next fiscal year 2013-14. The move is aimed at maintaining the status quo. Beneficiaries of presumptive tax pass it on to consumers by adding it to prices of goods.

Originally, the proposal called for converting the presumptive tax regime into minimum tax regime where taxes deducted at source would be treated as minimum liability and taxpayers would file income tax returns to provide complete information. At present, less than 800,000 people pay income tax.

Currently, withholding tax at varying rates is imposed on importers, exporters, contractors, real estate owners, dividend income, bank interest and telephone and electricity bills. Furthermore, to get easy money the FBR also imposes this tax on cash withdrawals and the salaried class.

The importers, retailers, exporters and contractors benefit from the system as they pass the cost of taxation on to consumers and at the end of the day their personal liabilities remain nil.

FBR’s reliance on presumptive tax is causing billions of rupees worth of loss to the public exchequer. By bringing these sectors into the normal income tax regime, the FBR can get billions of rupees in additional taxes, experts say.

Instead of abolishing the presumptive tax, the FBR has proposed to increase the tax rate for exporters from 1% to 1.5%, for registered importers from 5% to 6%, for unregistered importers at 6.5%, for contractors from 3% to 3.5%, on cash withdrawals from 0.2% to 0.3% and on electricity consumption above 1,000 units per month a 10% additional withholding tax.

The FBR treats collection under the head of withholding tax as direct tax, which according to experts is not a direct tax in real terms. In the first half of the current fiscal year, the FBR collected Rs190 billion in withholding tax, which is 55% of the total income tax collected from July to December 2012, according to the FBR.

From contractors, Rs49.5 billion was collected in six months, Rs44.5 billion from importers, Rs21.5 billion from salaried class, Rs16.3 billion from bank interests, Rs10.8 billion from exporters, Rs9.2 billion from telephone bills, Rs8.6 billion from dividend income and Rs5.6 billion from cash withdrawals.

The presumptive tax regime has kept documentation at a low level and resulted in lower tax rates, said Ashfaq Tola, Senior Partner at Naveed Zafar Ashfaq Jaferry & Co.

He suggested that instead of moving straightaway to the minimum tax regime, the FBR as a first step could implement a maximum tax regime for a period of three years. Under this system, he proposed that presumptive tax should be treated as final liability but with a requirement to file income tax return.

Through this system, he said, the FBR could achieve the desired level of documentation and at the same time would allow the taxpayers to make proper systems and gradually align to documentation.

About the author: Shahbaz Rana is a journalist/economic correspondent at The Express Tribune.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s