ISLAMABAD: Under the Structural Reforms during the last Five Years, in a bid to accelerate economic growth, Prime Minister Shahid Khakaan Abbasi has lately announced 5-point economic reform package through which taxes have been lowered. Therefore, the Federal Government, Friday, declared tge lowering of taxes as the biggest tax-cuts in the history of Pakistan.
In the federal budget for the fiscal year 2018-19, the government announced that tax rates on individuals had been lowered. Complete tax exemption had been given to people who earn up to Rs.1.2 million per year or Rs.0.1 million per month. This exemption limit, which was previously Rs. 0.4 million per year has been increased three times to Rs.1.2 million per year.
Tax will be levied at the rate of 5%t for income between two and four lakhs monthly. People earning above four lakh monthly will be taxed at the rate of 15%. In Pakistan highest tax burden was on the salaried middle-class which include teachers, doctors, lawyers, nurses, accountants. Reduced tax rates will significantly lower tax burden on this class.
Now that tax rates have been reduced and data-mining methods have been introduced to identify assets, we are providing last chance to declare undeclared assets held inside the country. Undeclared incomes earned before 30th June 2017 and held as local assets (gold, bonds, property etc.) can be regularized on payment of 5% of the value of the asset. Dollar account holders in Pakistan who have purchased dollars through undeclared money can regularize them on a payment of 2%.
The law has been amended and now only the filers can make cash deposit in their foreign currency accounts. However, all inflows up to $100,000/year/person will continue without any questions from any agency about the source and enjoy tax exemptions. The FBR will have the right to ask for source of income from people bringing in more than $100,000/year/person.
People have been allowed to declare their foreign undeclared assets at 3% and undeclared liquid assets at 5%. To check under-declaration of land and property, the state is being given the power to purchase land and property at 100% of the declared value within six-months of its registration.
Non-filers will be barred from procuring property above Rs.4 million. FBR rate on property is being abolished from 1st July 2018 and provinces have been advised to abolish DC rates. There will be a reduced tax incidence on property registration, with a maximum of 1% tax for filers. This reform measure is unprecedented and will help in documentation of the economy.
Priority has been accorded to reducing losses in the public-sector enterprises and expanding tax base. To achieve these goals, the following budget strategy is being proposed: a. FBR tax revenue target is proposed to be fixed at Rs.4,435 billion which is to be achieved through tax administration and compliance and not through any new tax measures. Tax base will be enhanced while tax rates are being lowered.
Considering fertilizer as the critical farm input government reduced the sales tax on fertilizer from a high of 17% to 4% on DAP, 5% on Urea and 9-11% on others. From 1st July there will be a reduced uniform GST rate of 2% on all fertilizers..
Tariffs on various lines, which are mainly industrial raw materials, are proposed to be reduced. Tariff Restructuring shall increase competitiveness of exports and help in reducing the current account deficit.
The following measures are proposed to overcome the issue of refunds of exporters: zero rating of import materials for export sector which will significantly reduce creation of new refund claims. Refund claims currently pending will be cleared in a phased manner over the next 12 months starting 1st July 2018.
After 1st July 2018 all new refund claims will be paid as per the time stipulated in law and regulations on monthly basis and there will be no delay. In order to facilitate exports, the government is working on a new package. Keeping in view the prevailing circumstances, this package will focus on increase non-traditional and value-added exports.
The package will provide an enabling environment for film industry to flourish, and to project Pakistani culture. Reduction in custom duty to 3% percent on the import of film & drama production equipment and sales tax to 5%t. b. Rebate of 50% in Income tax to companies investing in film projects will be given for 5years. 50% tax rebate to income derived by foreign film makers from films made in Pakistan..
The Federal gross revenue is estimated at Rs.5,661 billion. As compared to revised estimates of Rs.4,992 billion in 2017-18, this is higher by 13.4%. This includes FBR tax estimate of Rs.4,435 billion as compared to revised estimate of Rs.3,935 billion.
In order to encourage compliant tax payers, selection for audit in respect of all three taxes; Income Tax, Sales Tax and Federal Excise Duty, has been made risk based and a case shall not be audited more than once in three years for each tax. This limitation will apply to selection of audit by the commissioner as well as FBR.
The concept of composite audit will also be introduced to ensure that audit of tax affairs under all tax laws is undertaken simultaneously to avoid inconvenience to the tax payers. This approach shall serve as an encouragement for compliant taxpayers, and decrease the cost of compliance with tax laws. Previously grant of stay by the Commissioner (Appeals) was subject to payment of 25% of tax liability.
The condition has now been relaxed, and the payment is proposed to be reduced to 10%. It is expected that this will provide substantial relief to taxpayers who are sometimes burdened with unrealistic tax demands.
Under the current law the decision of the ADRC is neither binding upon the FBR nor upon the taxpayer. It is proposed that composition of the members of ADRC maybe changed so that retired judge of a High Court and tax professionals may be included in the Committee in addition to representatives from FBR.
As per the Sales Tax Act, any commissioner or chief commission has authority to appoint staff at the premises of taxpayer, and monitor sales and production. Complaints have been received on the misusage of this authority.
Therefore, this authority is being withdrawn from commissioners and chief commissioners. Now only FBR will use this authority based on evidence of variations in sectoral averages. It is widely recognized that a substantial portion of untaxed money is parked in the real estate sector. Furthermore, the practice of under declaring the value of properties viz-a-viz their actual market value is rampant.
The property transactions are proposed to be recorded on the value declared by the buyer and the seller b. The FBR notified rates are proposed to be abolished . At the Federal level, a one percent adjustable advance tax from the purchaser on the declared value is proposed to replace the existing withholding tax on sellers and purchasers. It is proposed that the non filers may not be permitted to purchase property having declared value exceeding four million rupees.
The provinces have been requested to abolish the provincial rates for the collection of stamp duty and to collect a total of one percent tax under stamp duty and capital value tax on the value declared by the buyer and the seller.
In order to deter under-declaration and consequent loss of revenue, it is proposed that FBR may hold a right to purchase any property within six months of registration by paying a certain amount over and above the declared value which may be 100 percent in the fiscal year 2018- 2019, 75 percent in the fiscal year 2019-2020 and 50 percent in the fiscal year 2020-2021 and thereafter. In order to implement the above measures enabling provisions are proposed to be incorporated in the Income Tax Ordinance, 2001. Detailed procedure and the date of coming into force of the above measures are proposed to be notified later.
Super tax was imposed in 2015 for rehabilitation of internally displaced persons. It was continued in 2016 & 2017. Various organizations have demanded its abolition to reduce the effective tax rate. It is currently being charged @ 4% on banking companies & 3% on non-banking companies having income greater than 500 M. It is proposed that Super tax may be continued for the financial year 2017-18 but the rate may be reduced by 1% per year from financial year 2018-19 for both banking and non-banking companies.
In consonance with the policy to reduce tax rates for individuals and AOPs, the Government has decided to likewise reduce corporate tax rates from 30% in tax year 2018 to 25% in tax year 2023. The corporate tax rate will be 29% in tax year 2019 and will be reduced by 1% each year up to tax year 2023.
Tax on undistributed profits is charged @ 7.5% on accounting profit if at least 40% of after-tax profits are not distributed within 6 months of the end of the year. Various professional bodies have insisted on relaxing the requirements to facilitate businesses in retaining earnings for investments. Therefore it is proposed that tax may be reduced from 7.5% to 5% and the condition of distributing 40% after-tax profits may be reduced to 20%.
In order to promote Real Estate Investment Trust, the rate of tax on dividends .issued to the unit holders by REIT is proposed to be reduced from 12.5% to 7.5%. Tax @ 0.6% is charged on non-cash banking transactions from non-filers. The rate is proposed to be reduced from 0.6% to 0.4% on a permanent basis.
Under the existing law, tax is required to be deducted on payment for services exceeding Rs.10,000 and on goods exceeding Rs.25,000. Considering inflation over the years it is proposed that the threshold for tax deduction be enhanced to Rs.30,000 on payment for services and to Rs.75,000 on payment for goods.
Currently tax credits are allowed under sections 65B, 65C, 65D and 65E for establishing a new industrial undertaking, purchase of machinery through equity and extension, expansion and BMR of machinery. However, in order to give an impetus to investments the cut-off date for being eligible for these tax credits is proposed to be extended up to 30.06.2021.
In order to promote setting up of deep conversion refineries it is proposed that such refineries with a capacity of minimum 100,000 barrels per day to be installed anywhere in Pakistan may be exempted from income tax for a period of 10 years. Further, such exemption may also be extended to existing refineries in cases where capacity is expanded by installing deep conversion units with capacity of at least 100,000 barrels per day.
Currently tax on import of coal is payable at the rate of, 5.5% for companies and 6% for persons other than companies. In order to decrease cost of production it is proposed that the rate of tax maybe reduced to 4%.In recognition of the meritorious services being performed by welfare institutions exemption is proposed to be granted to society for the welfare of suit, Aziz Tabba Foundation, Saylani welfare international trust and Al-Shifa eye hospital.
In order to increase the cost of doing business higher for non-filers higher rates of tax withholding for non compliant taxpayers are being proposed. The withholding tax rates on sale of goods for non filers are proposed to be increased from existing 7% to 8% in the case of a company, and from existing 7.75% to 9% in non-corporate cases.
Due to enhancement of the taxable limit of income to Rs.1.2 million, the number of filers will be substantially reduced. This will also result in loss of revenue. A nominal income tax may be imposed @ of Rs.1000 for income between Rs.400,000 to Rs.800,000 and @ of Rs.2000 for income between Rs.800,000 to Rs.1,200,000.