TAX NEWS APRIL 12, 2016

1.      PIAF underscores need for tax-free budget

April 12, 2016

The Pakistan Industrial and Traders Associations Front (PIAF) on Monday called for a tax-free budget for the year 2016-17 to achieve high economic growth. PIAF Chairman Irfan Iqbal Sheikh while talking to newsmen said the increase in number of taxes always encouraged people to stay out of the tax net while cut in tax rates always expand the tax base. "Therefore, the government should rationalise tax tariffs instead of making any increase in their rates," he added.

He said the government is putting in its best efforts to attract much-needed foreign investment in the country but such efforts would bear fruit only when the taxation procedures would be simple. The private sector should be facilitated to create more jobs since the government alone could hardly provide jobs to all the unemployed graduates, he added.

As the LNG arrival has curtailed the shortage of gas in the country, the government should now start giving new gas connections to the industrial consumers to ensure maximum utilisation of Re-gasified Liquid Natural Gas. Hundred of industrial consumers have applied for new connections and applications must be processed without delay, he said. The purpose is to avail the RLNG at the earliest to cut the production cost, which is proving a major hurdle in competing internationally, he added.

Irfan Iqbal Sheikh said the government would have to allocate more funds towards power generation projects as the shortage of electricity has already caused irreparable loss to the overall economy and the economic activities in the country and that it was imperative to achieve revenue targets that they are set realistically keeping in view the ground realities.

He said that new taxes meant the more burdens on the existing tax payers that would ultimately increase the cost of doing business. The PIAF chief said the government would have to curtail the size of bureaucracy to control the day-to-day running cost of the government as the concept of smart organisation well equipped with latest technology is fast gaining ground in the leading economies of the world and that the PIAF has proposed to the government to increase the rate of duties on smuggled items while the rate of taxes for the local manufacturers should be curtailed.

2.      Budget proposals: PBC against tax amnesty schemes and waivers

April 12, 2016

Pakistan Business Council (PBC) has proposed discontinuation of the permanent amnesty schemes; cap on explained remittances beyond a threshold and advance tax collection to discourage 'whitening' in upcoming budget (2017-18). According to the budget proposals of PBC for 2017-18, PBC strongly objects to any tax amnesty schemes or waivers in customs or other duties/levies on smuggled goods as the PBC believes such moves on the part of the government will penalize the formal taxpaying sector.

PBC proposed that in order to reduce cost of doing business of registered person and to promote Registration, Sales Tax Withholding (STWH) rules may be rescinded or amended to make these applicable to payment to unregistered person only. The current tax policy is leading to a reduction in investible surpluses for the corporate sector. Frequent changes in the tax laws, eg, the introduction of measures such as Super Tax, tax on undistributed reserves, Alternate Corporate Tax (ACT) and the refusal to carry forward losses under the Minimum Tax Regime may in the short-term help shore up the FBR's collections. These however in the long-run will only lead to a reduction in the FBR's collections as corporate review their investment plans. In addition the arbitrary & non-transparent implementation of tax laws by FBR functionaries in their zeal to achieve unrealistic revenue targets is severely impacting viability of the formal sector. While the PBC appreciates some of the measures taken by the Finance Minister such as bringing in the concept of filers vs. non-filers a lot more needs to be done to expand the tax base. The existing taxpayers are being subjected to what can only be defined as "tax discrimination", it said.

Pakistan's formal taxpaying sector needs to be supported to allow it to gain scale and hence to become competitive. Tax policy therefore needs to encourage the development of scale as opposed to viewing big business in a negative framework. In the absence of a large base of taxpayers, the formal and documented sector will in the foreseeable future continue to be the FBR's main source of revenue, it is therefore important that this sector be allowed to grow and tax policy and tax administration encourage this growth.

The 2016-17 budget offers the government an opportunity to finally address the structural weaknesses of the economy. Tax implementation based on a policy of "zero tolerance" needs to focus on increasing documentation of the economy and widening of the tax base, this needs to be priority number 1 of the FBR. The current strategy of "permanent and announced tax amnesties" should be "permanently" done away with and replaced with better enforcement through increased use of technology and administrative reforms in the FBR.

The PBC has specifically recommended that the FBR tap into its database for individuals and companies whose income & sales tax withholding has been done by withholding agents and who as per the law have uploaded this data on the FBR's servers. It has also called for doing away with the presumptive tax regime and in the interim period to treat presumptive tax as a minimum tax. The PBC in its letter to the Finance Minister has demanded that taxpayers should not be subject to repeated audits and that trust needs to be developed between the taxpayers and the tax department.

The PBC has proposed that the real estate sector be brought in the tax net and conditions be created to forcefully unlock the huge potential of this sector to allow it to contribute to the exchequer. The plight of the withholding tax agents has also been highlighted with the request that some compensation be provided to the withholding tax agents who in affect have been converted into the tax collection arm of the FBR.

The PBC has noted with concern the steady deterioration in competitiveness of Pakistan's manufacturing sector especially pointed out to the loss of domestic markets for Pakistani companies. The PBC has suggested a moratorium on the signing of new trade agreements and a review of the existing ones with the aim to rectifying the shortcomings; these in the view of the PBC have led to dumping of cheap products. Smuggling, massive under-invoicing and misuse of the Afghan Transit Trade have also been identified as major causes of the erosion of competitiveness of domestic manufacturing. The Council suggested that import values be determined in consultation with industry and original brand owners.

The PBC has also called on the government to allow companies to grow in size and become more competitive globally by not penalising capital accumulation. On declining exports the PBC has called for a long-term national export vision which has buy-in from all stakeholders including provincial governments, implementation of which is held accountable to the Prime Minister. In the interim the PBC has recommended that the government clear all refunds since these are impacting cash flows. Since Pakistani exporters continue to have higher input costs as opposed to those faced by competitors, the PBC has suggested a rebate of up to 5% depending on level of value addition.

The PBC has called for ensuring that Pakistani industry fully benefits from the CPEC opportunity. It has called for a determined effort on the part of the government to relocate at least 1.0 million out of the 8.0 million manufacturing jobs that China is planning to exit in the coming decade.

The specific recommendations of the PBC revealed that the Minimum Turnover Tax revert to 0.5 percent and in the interest of tax equity, corporates in the Service Sector be subject to the same rules as applicable to other corporates. This will help companies to better manage liquidity and also allow investments in the services sector.

Business/investment decisions were made on the assumption that tax incidence will be based on taxable income or minimum tax on turnover. Taxpayers made investment decisions resulting in adjustable tax depreciation against subsequent years' tax liability as per prevalent law. In addition the current regime will discourage/penalize investment in the manufacturing sector, it added.

3.      Government urged to withdraw three percent hike in GST on HSFO

April 12, 2016

The Ministry of Water and Power has reportedly recommended to the government to withdraw three percent increase in General Sales Tax (GST) on High Sulpher Furnace Oil (HSFO) being consumed by Independent Power Producers (IPPs), sources close to the Managing Director PPIB told Business Recorder. According to sources, many IPPs are generating HSFO. Previously, under the Sales Tax 1990 (STA), HSFO was subject to a levy of 17 percent GST which is adjustable against the GST payable on the sale of electricity, while any excess balance is recoverable from the FBR under the STA.

However, on September 30, 2015 the FBR issued a new SRO according to which the import and supplies of furnace oil would now be subject to the increased levy of 20 percent GST. This increase in GST will result in an increased amount of cash to be paid to the fuel supplier, thereby affecting the cash flow of the IPPs adversely and will also result in sufficient amount of refund claim from the FBR. The settlement of refunds in the FBR takes a long time and the IPPs are agitating the matter as their working capital requirement would be significantly enhanced.

The sources further stated that Ministry of Water and Power understands that the enhanced rate of 20 per cent GST on supply of HSFO being an important input will result in increase in tariff for the end consumers and general price hike. The Central Power Purchasing Agency (CCPA- guarantee) Limited has also not supported the enhancement in the rate of GST on HSFO. The matter was also discussed by the Ministry of Water and Power with the FBR prior to submission of summary to the ECC.

Hub Power Company (Hubco) had also approached the FBR seeking reduction in sales tax rate from 20 to 17 percent on supply of imported HSFO or enhancing sales tax on electricity from 17 to 20 percent to deal with problems of accumulated refunds and cash flows of the IPP. Hubco was of the view that the company is generating electricity (both at Hub and at Narowal) by using HSFO falling under PCT Code 2710.1941. Under the Sales Tax Act, 1990 (STA) HSFO is subject to levy of GST at 17 percent. This GST paid by the company is adjustable against the GST payable on sale of electricity. Any excess balance is recoverable from FBR under the Sales Tax Act.

Hubco further argued that by virtue of the SRO now the supply of imported HSFO by fuel suppliers would be subject to 20 percent GST instead of 17 percent while the GST rate payable on electricity remains at 17 percent. This will create serious problems as the enhanced rate will increase the amount of cash to be paid to fuel supplier thus affecting the cash flow adversely. Water and Power Ministry has requested the ECC to restore the original rate of GST on HSFO and the SRO regarding enhancement of GST may be withdrawn. Board of Investment (BoI) has supported the proposal of Water and Power Ministry.

4.      PATA, Malakand region: KP CM for withdrawal of Customs Act

April 12, 2016

Chief Minister Khyber Pakhtunkhwa Pervez Khattak has proposed to the Governor, Khyber Pakhtunkhwa to advise the President of Pakistan for withdrawal of the Custom Act, 1969 recently extended to PATA and Malakand Region. This was revealed in summary sent by the Chief Minister to Governor for onward submission to the President on Monday.

The summary says that the Government of Khyber Pakhtunkhwa due to the fragile economic situation of the region due to man-made and natural disasters has asked Federal government to withdraw Custom Act, 1969 introduced in the area in the larger interest of Malakand Region. The provincial government of Khyber Pakhtunkhwa also recommended duty free import of vehicles for Malakand Division, so that the illegal business of motor vehicles could be stopped.

The Custom Act, 1969 recently notified under Article 247 of the constitution of Pakistan, had perturbed and created unrest amongst the common people of Malakand Region, including 08 Districts namely Malakand, Swat, Dir upper, Dir Lower, Chitral, Buner, Shangla and Kohistan. The summary says that the Malakand Region is militancy hit area and the economic situation had further deteriorated due to flash floods of 2010 & 2015, Earth Quake of 2016.

5.      Rs 12 million amphetamine seized from two passengers at airport

April 12, 2016

Model Collectorate of Customs (MCC), Preventive on Monday claimed to have seized 1,200 grams of amphetamine crystal from two passengers at the departure hall of Jinnah International Airport (JIAP). Speaking at a press conference held at Air Freight Unit (AFU), Karachi, Additional Collector of Customs Syed Assad Raza Rizvi along with Ali Raza Turabi, Deputy Collector said that the department had made two seizures of amphetamine crystal worth Rs 12 million.

He said that staff posted at Drug Enforcement Cell (DEC) intercepted a passenger Zaman Sher son of Gul Fazal, who was holding Pakistani Passport No HW5125031 and leaving for Saudi Arabia en route to Sharjah by Air Arabian flight G9548 from Karachi. On his refusal to have anything suspicious in his possession, his suitcase was examined that led the recovery of 500 grams (net) Amphetamine Crystal which was cleverly and artfully concealed in the back walls of the fiber made suit case.

The scrutiny of his travel documents revealed that his passport was issued in the month of February, 2016 from Mardan (KPK) and he was travelling for the first time with contraband Amphetamine Crystal. The market value of the seized drugs is around Rs 5 million. The accused passenger has been arrested and prosecution case registered in the Court of Special Judge (Narcotics), Karachi.

Similarly, another passenger namely Ibrar Hussain son of Hussain Fazal, who was holding Pakistani passport KR-6890773 and also leaving for Saudi Arabia via Sharjah by Air Arabian flight G9540 from Karachi on the same day. He said that DEC staff had recovered 700 grams of crystal from his suitcase during examination. The scrutiny of his travel documents also revealed similar facts that he was also travelling for the first time with contraband Amphetamine Crystal. The market value of the seized drugs is around Rs 7 million. The accused passenger has also been arrested and prosecution case was registered in the Court of Special Judge (Narcotics), Karachi. Further investigation is in progress.

6.      LTU crosses collection target by Rs 9.26 billion

April 12, 2016

Lahore's Large Taxpayer Unit (LTU) of the Federal Board of Revenue has crossed a revenue collection target fixed for the first nine months of the current financial year by Rs 9.26 billion as it collected Rs 151.53 billion against the target of Rs 142.27 billion, claimed unit sources on Monday. The sources said LTU registered a phenomenal growth of 75 percent in income tax and 18 percent in sales tax and federal excise duty collections as compared with the collection figures of the corresponding period of the financial year 2014-15.

The unit collected Rs 50.63 billion in income tax during 2015-16, Rs 87.42 billion under the head of sales tax and Rs 13.49 billion as federal excise duty in nine months of fiscal year 2015-16 as compared to the corresponding period of the last year income tax collection which was Rs 30.45 billion, sales tax Rs 74.55 billion and federal excise duty Rs 11.45 billion.

The unit's field officers headed by Chief Commissioner Chaudhry Safdar Hussain were assigned by the FBR headquarters to handle the tax matters of major companies which resulted in collection of Rs 151.53 billion. The unit has registered an unprecedented revenue growth of Rs 40 percent alone in March, which was appreciated by Special Assistant to the Prime Minister for Revenue, Senator Haroon Akhtar Khan, who in a letter praised the chief commissioner for his efforts and his team and the unit team for achieving the growth of around 40 percent in March alone, the sources said.

Chief Commissioner Hussain also praised the unit team for putting in maximum efforts for revenue collection without compromising on taxpayers' facilitation. "Optimum monitoring of withholding taxes, creation and collection of current demand and frequent stock taking and premises' visits under section 40B of the Sales Tax Act 1990 have contributed towards over-all performance of the unit," the sources said.

7.      Government urged to withdraw key tax avoidance provisions from law

April 12, 2016

The government should immediately withdraw key tax avoidance provisions from the income tax law and investigate sources of foreign remittances under section 111(4) of the Income Tax Ordinance 2001 and other blanket amnesty/immunity clauses in the tax laws through Statutory Regulatory Orders (SROs).

A tax lawyer Waheed Shahzad Butt told Business Recorder here on Monday that there are many instances in the income tax law which are used for tax avoidance. For instance, Section 111(4) of the Income Tax Ordinance, 2001 provides inbuilt life time tax amnesty scheme to tax evaders under the umbrella of tax avoidance. Section 111 is related to unexplained income or assets, a provision that does not apply to an unlimited amount of foreign exchange remitted from outside Pakistan through normal banking channels that is encashed in rupees by a scheduled bank and a certificate from such bank is produced to that effect. The Federal Board of Revenue (FBR) has tried to propose amendments to Section 111(4) pertaining to the un-explained assets or income of the Ordinance 2001, but the policy makers are not ready to accept it.

He said that tax avoidance schemes offer not only negligible or even zero taxes, but also provides facilities to avoid tax within the legal framework. Tax avoidance schemes help already resourceful persons to keep their untaxed money away from the tax man that should be spent on schools, hospitals, roads and other public services activities. Tax avoidance schemes force the poor citizens to pay taxes that should have been due from the influential.

He said that various SRO(s) issued by the Government also provide blanket exemption if investment in business is shown in the latest version of SRO 1065/2013. Under this notification, the source of investment would not be probed under section 111 of the Ordinance if (i) the money is used to invest in greenfield industrial undertaking directly or as an original allottee in the purchase of shares of a company establishing an industrial undertaking or capital contribution in an association of persons establishing an industrial undertaking; (ii) investment made by an association of persons in an industrial undertaking and investment made by a company in an industrial undertaking if the said investment is made on or after the 1st day of January, 2014, and commercial production commences on or before the 30th day of June, 2016; and (iii) investment in construction industry, corporate sector, low cost housing construction in the corporate sector, livestock development projects in the corporate sector, new captive power plants and mining and quarrying in Thar coal, Balochistan and Khyber Pakhtunkhawa.

Tax avoidance is available in legal form in SRO1065(I)/2013 which allows tax exemption on investment in business. Black money can be used for investment by taking benefit of the legal clause available in the law. Tax avoidance is the state sponsored legalised form of immorality, Butt added. Instead of paying statutory rate of 35 percent tax, avoidance is available through state sponsored SRO, where tax officer cannot question the source of investment. Such kind of tax avoidance in legal form is an evasion, he added.

An income tax provision also relates to exemption from income tax in export related software services.

He said trusts are also a source of tax avoidance. He further said that the income tax exemption is available on profits and gains derived by a taxpayer, from a fruit processing or preservation unit set up in Balochistan Province, Malakand Division, Gilgit-Baltistan and FATA between the first day of July, 2014 to the thirtieth day of June, 2017, both days inclusive, engaged in processing of locally grown fruits for a period of five years beginning with the month in which the industrial undertaking is set up or commercial production is commenced, whichever is later. This exemption is also available for avoiding tax.

He further revealed that the income tax exemption is available on the profits and gains derived by a taxpayer, from an industrial undertaking set up by 31st day of December, 2016 and engaged in the manufacture of plant, machinery, equipment and items with dedicated use (no multiple uses) for generation of renewable energy from sources like solar and wind, for a period of five years beginning from first day of July, 2015. This exemption is also available for avoiding tax.

The tax exemption is available on profits and gains derived by a taxpayer, from an industrial undertaking set up between 1st day of July, 2015 and 30th day of June, 2016 engaged in operating warehousing or cold chain facilities for storage of agriculture produce for a period of three years beginning with the month in which the industrial undertaking is set up or commercial operations are commenced, whichever is later. This exemption can be used to avoid tax.

Income tax exemption is available on profits and gains derived by a taxpayer, from an industrial undertaking set up between the first day of July, 2015 and the 30th day of June, 2017 for establishing and operating a Halal meat production unit, for a period of four years beginning with the month in which the industrial undertaking commences commercial production. The exemption under this clause shall apply if the industrial undertaking is owned and managed by a company formed for operating the said Halal meat production unit and registered under the Companies Ordinance, 1984 and having its registered office in Pakistan. This kind of exemption can be used to avoid tax.

Under the income tax law exemption has been granted to profits and gains derived by a taxpayer, from an industrial undertaking set up in the Provinces of Khyber Pakhtunkhawa and Balochistan between July 1, 2015 and June 30, 2018 for a period of five years beginning with the month in which the industrial undertaking is set up or commercial production is commenced, whichever is later. Such kind of exemption may be used to avoid tax, he added.