TAX NEWS APRIL 14, 2016

1.      New IMF benchmark: Audit of 25 HNWIs, large taxpayer companies begin

April 14, 2016

The government has initiated the process of audit of 25 high net worth individuals (HNWIs) and large taxpayer companies under a new structural benchmark agreed with the International Monetary Fund (IMF); however recent revelations in the Panama leaks of over 250 high profile individuals/families with offshore accounts do not fall in the agreed categories.

Official sources told Business Recorder here on Wednesday that the structural benchmark and its parameters were agreed during the tenth review of EFF that concluded on February 4, 2016, much before the episode of the ''''Panama documents'''' that led to exposure of reportedly a large number of Pakistanis offshore accounts. They added that Pakistani tax authorities would be unable to seek information with respect to offshore accounts of their citizens as there is an absence of Avoidance of Double Taxation agreement between Pakistan and Panama.

As per criteria, it was agreed that those who own luxury vehicles or make huge investments in real estate sector as well as certain big corporate entities would be selected for the audit in the first phase. Additionally, the data of the Broadening of the Tax-Base Units in the Regional Tax Offices (RTOs) would also be utilised for selection of cases for audit. A total of 4 to 5 criteria were applied for selection of cases of high net worth individuals and large taxpayer companies for audit. Sources in Federal Board of Revenue (FBR) told Business Recorder that the tax authorities have undertaken a number of measures to increase the tax base and revenue collection including issuance of notices to the potential taxpayers as well as imposition of withholding tax on banking transactions of non-filers.

This exercise, sources said, was aimed at improving compliance by high net worth individuals and thereby increase the total taxes paid by them. The FBR is also engaged in developing a communication platform (phone hotline and website) to facilitate public reporting of corrupt practices in tax administration - another new structural benchmark in the tenth IMF review report. In this regard, a scheme of whistleblowers would be announced to report corrupt practices of tax officers.

2.      PSX clarifies FBR notices to brokers

April 14, 2016

There have been reports regarding the FBR issuing notices to some TREC Holders (brokers) of the Pakistan Stock Exchange (PSX) with regard to payment of Federal Excise Duty (FED). It is clarified that at the time of passing the 18th Amendment in the Constitution and the Budget for FY beginning July 01, 2011, the brokers of PSX paid FED in the sales tax mode to FBR with the understanding that the funds so collected would be transferred to the Province in line with the said Amendment.

The Sindh Revenue Board (SRB) was constituted in the year 2010 and the Government of Sindh promulgated the Sindh Sales Tax on Services Act, 2011 (the Act). The Act introduced tax on the "Stock Brokers Services" under PCT 9819.000. The FBR official visited the Exchange and advised the TREC holders (brokers) that in future they should deposit the FED in sales tax mode to the SRB and the only change they would have to make in the registration was the addition of letter "S".

Ever since, the TREC holders of the Exchange have been depositing the FED in this manner. After the lapse of four years the FBR issued notices of payment of arrears which is tantamount to double taxation to the tune of 33 percent. It is pertinent to mention here that when the FBR first issued such notices, the affected brokers of PSX sought relief from Sindh High Court which granted a stay order in this respect to stay the proceeding.

In spirit of the said "Amendment" and in view of the fact that FBR's demand for FED constitutes double taxation, PSX took up the matter with the FBR and the Ministry of Finance at the highest levels. All parties are generally agreed that FBR's demand for FED in effect constitutes double taxation and the SRB is also supportive of this stance of brokers and the PSX.

Despite this, some field officer of FBR again issued similar notice with regard to FED. The brokers took up the matter with FBR and it is understood that the said notice has now been withdrawn. As far as PSX is concerned this matter of the said FBR notice stands resolved. This clarification is being issued to allay the confusion in the market which was created by some media outlet to sensationalise the matter which has negatively impacted investor confidence.

3.      Tractor manufacturers: FBR urged to reduce input tax rate on components' purchase

April 14, 2016

The Federal Board of Revenue has been urged to reduce the rate of input tax on purchase of components (local and imported) by tractor manufacturers to match the output rate in its budget proposal. The demand came from the Pakistan Automotive Manufacturers Association (PAMA) which gave its proposal on Wednesday that said agricultural tractors were subjected to a reduced rate of sales tax at the rate of 10 percent.

"As against it, imported components required for manufacturing of tractors are subjected to the sales tax at the rate of 17 percent. Also, components purchased locally from vendors are also charged at a rate of 17 percent. Since the input tax is at a much higher rate as against the output tax, refunds are consistently accruing and increasing on a regular basis," the proposal said.

"This will help the industry to reduce yearly refunds Rs 400 million to Rs 500 million. As the sales tax on imports is directly collected by the government at the import stage and no other intermediaries are involved, therefore, it is sensible for the authorities to implement it."

PAMA official said, "The industry was already badly hit by imposition of the general sales tax in 2011 as the rise in prices badly affected sales of tractors. The industry has never been able to recover from that blow and now blockage of its huge refunds makes it almost impossible for the industry to continue smooth operations following the cash crunch.

"The general sales tax rates revisions have been a major issue for the tractor industry. The Government of Pakistan for the first time in 2011 levied a general sales tax of 17 percent on tractor sales. On industry's requests, this was revised to five percent in 2012, but raised again to 10 percent in 2013 and 17 percent in 2014. The rate was again decreased in 2015 to 10 percent and that rate is still applicable. Since the imposition of the general sales tax, Pakistan has witnessed negative growth in terms of sales of tractors in the past five years in the world, which is quite worrisome and needs immediate attention of the authorities concerned," he added.

He also said Pakistan had registered negative 51 percent growth in the sales among the main players of the world in the past five years and in 2010 the sales in the country were 70,646.

"This went down to 49,125 in 2011 and 64,502 in 2012. The figures were 41,547 in 2013 and 34,796 in 2014. Pakistan with 51 percent growth was the only country with above 50 percent negative growth. The government needs to rethink about its priorities and bail the tractor industry out from the situation which is on the verge of collapse due to decline in sales," he added.

4.      Punjab government to expand tax net in budget 2016-17: Ayesha Pasha

April 14, 2016

Provincial Minister for Finance, Dr Ayesha Ghaus Pasha has said that budget 2016-17 would be prepared keeping in view the problems and needs of the people. Efforts will be made to expand tax net instead of putting burden on the poor masses and tax will be recovered from those who are not discharging their national obligation she added.

Talking to media-men at the conclusion of Assembly session here on Wednesday, the Minister said 107 members have given their proposals in pre-budget discussion in the assembly; education, health and law & order are first, second and third priority of assembly members.

She said members of the provincial assembly have stressed the need for provision of primary and technical education in educational sector, availability of medicines and equipment in THQs and BHUs and ensuring attendance of doctors through monitoring, increase in human resources for improvement of law & order, provision of modern technology and increase in the salaries.

She said several members including leader of opposition have pointed out a number of new problems which include training of teachers of government schools on modern lines and identification of children not going to school. Dr Pasha said attention will also be paid to energy and agriculture sectors which are already among the priorities of the government.

Replying to a question, she said that focus will be laid on completion of ongoing schemes in next year's development programme, those schemes which are near completion will be given preference. She said the schemes which were not included in ADP last year will be included in the budget of current fiscal year.