TAX NEWS APRIL 18, 2016

1.      FBR field formations accused of flouting provisions of FOIRA

April 18, 2016

Federal Board of Revenue (FBR) field formations are involved in flouting the provisions of Federal Ombudsmen Institutional Reforms Act, 2013 (FOIRA) and undermining the authority of Federal Tax Ombudsman (FTO).

Tax experts told Business Recorder that earlier to implement a key recommendation issued by the FTO Abdur Rauf Chaudhry, the FBR has ordered to send the Inland Revenue Audit Officer (IRAO) for compulsory training in the Directorate of Training (DOT), Lahore, however, the concerned field formation has approached the Appellate Tribunal Inland Revenue, Lahore to undo the order which was subject matter of investigation conducted by the FTO under Own Motion case No 01/2014.

It is learnt that the FBR (HRM) Wing has issued a letter to the Director General, Training & Research (IR), Lahore with the subject "Own Motion No 01/2014 - Implementation of Findings/Recommendations of the Hon'ble FTO" and directed that IRAO may be imparted compulsory training in Income Tax Law and Accounts at the earlier available course.

Earlier, the Registrar FTO had issued written instructions to the Chairman FBR that legal position needs to be communicated to all Tax Employees including those performing Appellate functions as also the Tribunals, Courts or Authorities administering/adjudicating "Relevant legislation" as defined in 2(6) of the FTO Ordinance, 2000, for strict compliance. Tax employees could not entertain matters already taken up and decided by the FTO.

Explaining the provisions of the FOIRA, a tax lawyer told Business Recorder that the Appellate Tribunal Inland Revenue and Commissioner Appeals cannot exercise jurisdiction to entertain a matter pending with or decided by the FTO. Section 18 of FOIRA shall reduce unnecessary litigation at dual/multi forums. Authorities in normal appeal hierarchy shall also be restrained from creating parallel litigation. Section 18 states no court or authority shall have jurisdiction to entertain a matter which falls within the jurisdiction of an Ombudsman nor any court or authority shall assume jurisdiction in respect of any matter pending with or decided by an ombudsman, while under Section 24 the provisions of FOIRA shall have effect notwithstanding anything contained in any other law for the time being in force. In case, there is a conflict between the provisions of this Act and the relevant legislation, the provisions of this Act to the extent of inconsistency, shall prevail.

The lawyer further said that initially office of the Federal Ombudsman was established in 1983 and at present five Ombudsmen are functioning at the Federal level in the country which includes Federal Tax Ombudsman, Wafaqi Mohtasib, Federal Insurance Mohtasib, Banking Mohtasib Pakistan and Federal Ombudsman for Protection against Harassment of Women at Work Places.

The office of any Ombudsman is one of the core institutions of the country where the grievances of the non-influential masses are addressed speedily, effectively and even free of charge without spending a single rupee on account of litigation expenses.

The FTO, in landmark order of its first kind in "Own Motion 01/2014 Waheed Shahzad Butt Versus Dr Muhammad Akram Khan, CIR Etc - 2016 PTD 247", has observed that when supervisory tax officers close their eyes to the assessing officer's acts during assessment, such officials cannot justifiably say that their actions are in good faith. The FTO directed FBR to send the IRAO to Directorate of Training and appropriate observations are recorded in the PERs of the IRAO, Commissioner-IR and Chief Commissioner-IR.

Section 2(3)(vii) of the FTO Ordinance also requires to take cognisance against FBR's officials whose conduct has been found by any appellate authority to be capricious, vindictive, biased or patently illegal. Supervisory officers in the Deptt (Addl CIR, CIR and CCIR) also bear a heavy responsibility for exercising effective oversight over the work done by the assessing officers.

They are required to inspect their work on a regular basis and comment on their work so as to guide them and also deter them from acting rashly or irresponsibly in a manner that is contrary to law. The promotion and posting of the assessing officers depend on the evaluation of their performance by the supervisory officers, the FTO order added.

2.      Withdraws notices: FBR forms high-powered body to address problems being faced by steel sector

April 18, 2016

The Federal Board of Revenue has withdrawn notices issued to ship-breakers and steel re-rolling mills and formed a high-powered committee comprising FBR member and FPCCI nominees to hammer out problems of the steel sector, President Federation of Pakistan Chambers of Commerce and Industry (FPCCI) Abdul Rauf Alam said on Sunday.

The committee has been asked to furnish their findings within one week so that a proper decision could be taken, he added.

Rauf Alam said that the taxation system in Pakistan needed mega reforms and hoped that release of refunds and improved working will settle concerns of exporters and reduce cost of doing business which will help make our products competitive in the international market.

Speaking to the business community he termed Prime Minister Nawaz Sharif's decision to appoint Haroon Akhtar Khan as his special assistant on revenue a good step in the right direction as he has initiated meaningful reforms in the Federal Board of Revenue (FBR).

He said Haroon Akhtar has not only improved working of the Apex tax body but also taken business community on board in the major decisions which has infused confidence among investors.

The FPCCI President lauded the pace of phasing out concessionary SROs which will help government save billions in revenue while removing distortions in the overall system.

He added that promotion of tax culture and elimination of concessions and exemptions aimed at strengthening the national economy were very positive signs. Prime Minister Nawaz Sharif had undertaken a series of reforms to achieve macro-economic stability and now he wishes to consolidate the gains it has made for which business community will fully cooperate.

3.      Demurrages piling up: manufacturers irked by slow process of ST Registration

April 17, 2016

A number of genuine manufacturers are suffering huge demurrages at port to get their machinery/equipment cleared because of inordinate delays in obtaining sales tax registration since January 2016 which is hampering their imports and affecting the manufacturing activities across Pakistan. Tax practitioners told Business Recorder that the slow process of the sales tax registration during the last 4 months is creating serious difficulties for manufacturers in carrying out business processes including buying and selling. Major problems being faced by the taxpayers is during the process of seeking sales tax registration.

The Federal Board of Revenue (FBR) must immediately take steps to expedite the process of sales tax registration within the category of ''manufacturers'' to avoid demurrages being paid by the importers due to delay in sales tax registrations. Tax authorities particularly FBR Member IR Operations must take notice of the situation and co-ordinate with the PRAL authorities to check reasons for prolonged delays in sales tax registrations. Manufactures, who have already imported machinery, are now paying demurrages, due to fault at the level of FBR. Apparently, changes in the sales tax registration software have resulted in standstill like situation in issuance of registrations to the manufacturers.

It is also responsibility of Nadeem Dar Member Facilitation and Taxpayer Education (FATE) to bring the issue to the notice of all relevant authorities and issue guidelines for the manufacturers for speedy processing of sales tax registration process. FBR FATE Wing should also co-ordinate with PRAL remove bottleneck in issuance of registrations to the genuine manufactures.

Details revealed that FBR again revised the Sales Tax Registration procedure vide SRO 227(I)/2016 dated 21.03.2016 and issued standing operating procedure (SOP) to field offices. However, registration procedure has not been properly handled at the level of Pakistan Revenue Automation Limited (PRAL) as well as in field office due to lack of information or training of new system of Sales Tax Registration. The staff deputed at registration facilitation counters of field formations was also contacted and they were unable to provide any satisfactory guidance or reply to the queries raised by taxpayers on this issue. The telephonic calls were also made to FBR helpline but those were also not responded. The taxpayers are unable get any relief from General Manager PRAL and other relevant officers who had been approached for help in Sales Tax Registration.

According to Rule (7A) of the Sales Tax Registration in the revised procedure vide SRO 227(I)/2016 dated 21.03.2016., "the process leading to determination of risk score shall be completed within one working day of submission of complete application and biometric verification, whereas the scrutiny, including physical verification of premises to be carried out by an officer not below the rank of Assistant Commissioner-IR in high risk cases shall be completed within three working days in case of manufacturers and within seven working days in case of non-manufacturers". But unfortunately the registrations applied in January 2016 have been pending since a while and no response from PRAL as well as field offices, tax experts said.

FBR also introduced the temporary registration in budget 2015-16 vide SRO S.R.O. 494(I)/2015 dated 30.06.2015 5A. It said that: Temporary registration. (1) Where a person files application for sales tax registration as a manufacturer without having installed machinery, for the purpose of import of machinery to be installed by him, temporary registration as manufacturer shall be allowed to him for a period of sixty days subject to furnishing of the complete list of machinery to be imported along with Bill of Lading (BL) or Goods Declaration (GDs) in lieu of the requirements prescribed in clause (h) of sub-rule (1A) and sub-rule (1B) of rule 5.

(2) The temporary registration shall be issued by the computerised system within seventy-two hours of filing of the complete application.

(3) After receiving temporary registration, the person shall be allowed to import plant, machinery and raw materials, etc. as a manufacturer, it added.

Till today no temporary registration process started and taxpayer submitted various applications and all the manufacturers applied for sales tax registration are badly affected as they are unable to clear the imported plant and machinery at the port and bearing the heavy demurrages and other levies till the imported consignments are cleared.

The question arises whether the FBR''s exercise of expanding the tax net does not cover the area of sales tax registration?. If the sales tax registration process is delayed it would ultimately affect the broadening the tax base exercise as well.

There is a panic like situation among the new applications (manufacturers) who were applied for the sales tax registration and their imports are stuck up at port just due to sales tax number not yet allowed since last four months, are already facing very much difficulties to import the important raw materials, accessories, packing materials on time in short orders which ultimately increase cost of purchase, increase the cost of sales in shape of delays in preparation of export consignment, shipment sent through Air.

The taxpayers demanded intervention of FBR Chairman on urgent basis to take immediate action to identify the problems in issuance of sales tax registration numbers. The taxpayers also stressed the need for increasing the momentum of confidence level and facilities to be availed in easy way for registration process to achieve the revenue target. Taxpayers are confident that Chairman, FBR should immediately issue instructions to PRAL as well as field offices to clear the pendency of sales tax registration on emergency basis, they added.

4.      FBR urged to give telecom sector status of industry

April 17, 2016

The Overseas Investors Chamber of Commerce and Industry (OICCI) has proposed Federal Board of Revenue (FBR) to give industrial status to the telecom sector with abolition of SIM taxes, sales tax on import of handsets and IMEI tax, reduction in advance tax rate to five percent and FED rate be aligned with other services at 16 percent in budget (2016-17). OICCI has submitted several proposals to FBR regarding telecom sector, a copy of which is available with Business Recorder. It states that [Income tax Ordinance, 2001: Section 148]: Telecom companies have not been declared industrial undertaking under income tax law.

The tax paid at the time of import of telecom equipment at 5.5 percent is considered as final tax rendering it is un-adjustable against final tax liability. This issue has arisen because telecom companies have not been declared as industrial undertaking as per income tax law. The telecom companies are industrial undertaking under telecom policy but not under income tax law. Federal Finance Minister has verbally agreed with all the mobile operators regarding grant of industry status in his various meetings during 3G auction. Ministry of IT and Ministry of Industries both have granted the status of industry to mobile operators still FBR has not granted the status of industrial undertaking to Cellular Mobile operators.

Telecom companies should be declared as industrial undertaking as the telecom companies are not commercial importers and telecom equipment imported is used in the network to provide telecom services rather than for further sale. Therefore, tax paid under section 148 should be considered as advance income tax rather than final tax. Fixed tax on import of telecom equipment increases the cost of network, an additional barrier to mobile network coverage in Pakistan. The roll out of 3G network is still very much at the early stages and it is the key to development of the market that operators are able to sustain the necessary investment.

There are multiple taxes on SIMs and handsets in the form of sales tax on import of local supply, sales tax on supply of SIMs and IMEI tax. In Finance Act 2014, FBR has imposed sales tax at Rs 250 per SIM card on supply of SIM cards. Also FBR has imposed sales tax on import of local supply and IMEI tax on handsets ranging from Rs 300-1000 per mobile. The imposition of multiple taxes on SIMs and handsets directly restrict the investment in telecom sector. Especially after auction of 3G license heavy taxation is restricting the investment in infrastructure. Therefore, we recommend that taxes like SIM taxes, sales tax on import of handsets and IMEI tax should be abolished. The Ministry of Finance has already seen some of the benefits of rebalancing mobile specific taxes. The SIM activation tax was reduced from Rs 2,000 to Rs 1,000 in 2004, then again to Rs 500 in 2005 and to Rs 250 in 2009. Finally, it was abolished in 2005. During the same period, mobile penetration increased notably since 2004, together with government tax revenues from mobile.

By reducing taxes on mobile sector, the MoF cannot only increase digital and financial inclusion and economic growth, but also recover higher tax revenue through more efficient and broad-based taxation in coming years. Telecom industry is one of the highly taxed industries in Pakistan. Pakistan is fourth among the heavily taxed telecom industries in the world. In Pakistan taxes on telecom industry account for over 30 percent of the total cost of mobile ownership, significantly above the regional average. This additional cost is a barrier to affordability of mobile services and limiting access to the mobile services for many Pakistanis.

Several taxes are currently applied on telecom subscribers including, 18.5 percent FED on telecom customers and 14 percent advance tax on consumption of telecom services. OICCI has recommended that FED rate should be aligned with other services at 16 percent while advance tax rate should be reduced to five percent. By reducing taxes on mobile sector, the Pakistani government cannot only increase digital and financial inclusion and economic growth, but also recover higher tax revenue through more efficient and broad-based taxation.

5.      Government in contact with Swiss authorities: Dar

April 16, 2016

Finance Minister Ishaq Dar on Friday informed Senate that the government is in contact with Swiss authorities to get access to the money stashed in Swiss banks by Pakistanis. Speaking in Senate on the Panama leaks, he said the government has fully authorised the Federal Board of Revenue (FBR) to hold negotiations with Swiss authorities after getting approval from the Cabinet.

He said he stood by his statement and assure the house that $200 billion in Swiss banks would be brought back. He added: "don''''t suspect our intentions of the government as it is making sincere efforts for the uplift of the country." In the continued fallout after the release of the Panama Papers, Prime Minister Nawaz Sharif faced a barrage of criticism from Upper House of Parliament over revelations that his three children - Maryam, Hussain and Hassan - had set up offshore companies abroad.

Recalling the past track record which shows that no big fish ever faced the wrath of law, the enraged opposition lawmakers said that there is no hope that the handful rich, involved in holding offshore accounts, would ever be taken to task by the state. The MPs went on to say that it would a be a miracle if any rich or an influential is taken to task especially in the instant case. Referring to commission set up in the past to probe corruption scandals such as OGRA scam, Hajj and Ephedrine scandals, they maintained that it is useless to expect that the government would make any sincere effort to bring the culprits to book.

The senators belonging to Pakistan Tehreek-e-Insaf (PTI) and Pakistan People''''s Party (PPP) who seemed quite aggressive said that the fate of any commission to investigate Panama leaks, would be no different from the fates of numerous other commissions''''. Senator Noman Wazir Khattak of PTI said that the legislators sitting in both houses of parliament had no will at all to bring the ''''big fish'''' involved in the Panama leaks. "There is a need to make joint efforts against plunderers of national wealth who are not ready to invest their money in this country, but they leave no stone unturned to rule over the poor nation at any cost," he maintained.

He said that the Finance Minister Ishaq Dar claimed in 2014 that a huge amount of money had been stashed away in foreign banks and it would be brought back to the country but nothing has been done in this regard. He asked the government to take Panama issue seriously or people will take to the streets against the political elite of the country. About the PPP leader whose names have also surfaced in the Panama leaks, he suggested that they too must present themselves for accountability. He reiterated the stance of his party to form a judicial commission headed by chief justice of Pakistan to hold a thorough probe into the matter through forensic experts.

Senator Sherry Rehman of PPP said that the way the UK prime minister has presented himself before parliament in the Panama matter, Nawaz Sharif should also take parliament into confidence on the issue. "We don''''t believe in politicising the issue or staging a sit-in on the Panama leaks. If you want to take the issue to its logical end, there should be a transparent probe into it," she maintained.

Senator Sherry also claimed that today there was no suo moto because there was no PPP government, saying there should be an across the board accountability as under the law we all are equal. She proposed an investigation into Panama leaks under a World Bank team. Senator Mushahid Hussain Sayed of Pakistan Muslim League-Quaid (PML-Q) called for formation of a joint parliamentary commission (JPC) to investigate the Panama leaks scandal.

He said the National Accountability Bureau (NAB) and Federal Investigation Agency (FIA) would assist the proposed commission, which should be delegated full judicial powers. "The government should come clean on the matter," he added. If government avoids formation of a JPC, the Senate''''s ethics committee should be given the gigantic task to probe the matter. No judge or general or bureaucrat can decide it, he said, adding the time has come that parliament should go for self-accountability.

Panama leaks pose no threat to democracy or government, he said, adding that the government must not resort to stubbornness and come forward with a clear solution to the issue. He said that political point scoring and attempts to destabilise the government should be avoided. Taking part in the debate, ruling Senator Chaudhry Tanvir Khan said that offshore accounts and companies operate throughout the world, which is not illegal. But a situation is being created in the country to destabilise the government, he said.

"What was done during the tenure of former president [Zardari] is all before us. The Sharif family has made progress through hard work. We should decorate such people with gold medals who have raised monumental empires through hard work," he added.

6.      Malakand Div, FATA: Custom Act to be withdrawn after law ministry's opinion: Dar

April 16, 2016

Finance Minister Ishaq Dar Friday said the extension of Custom Act 1969 to Malakand Division and Federally Administered Tribal Areas (FATA) would be withdrawn after the opinion of law ministry. While responding to the members, the Finance Minister informed the National Assembly that wetting to extension of Custom Act 1969 is necessary. "If we withdraw this Act the opinion of Law Ministry is very necessary. We will take final decision on the withdrawal of Custom Act, 1969 in Malakand and FATA after the legal opinion of Law Ministry," he said.

Earlier, Sahibzada Tariq Ullah said that Khyber Pakhtunkhawa (KP) Chief Minister has sent summary to the federal government through K.P Governor and now the federal government should withdraw Custom Act, 1969 in Malakand Division and FATA. He said that there is serious concern among the people on the Act. He said that people have also demonstrated strong protest and strike against the Act. Aftab Ahmed Sherpao said the Finance Minister had committed to give Rs 26 billion for power projects out of Rs 70 billion in this year but he did not fulfil the commitment.

Dar said that it was 20 years old issue which was resolved. He said an agreement with the Khyber Pakhtunkhawa government regarding payment of tariff would be implemented in letter and spirit. He said that Ministry of Water and Power is relating to it. He said that Minster of Water and Power Khawaja Asif would implement the process. I would personally peruse this matter, he said.

On a point of order, Finance Minister Ishaq Dar also assured the House that the government would get Anti-Honour Killing Bill passed at the earliest after developing consensus on the issue. Two reports of Standing Committees on Information Technology and Telecommunication and Interior and Narcotics Control were also presented in the House. On a point of order, Shah Jee Gul Afridi and Ghalib Khan demanded early formulation of FATA Reforms to streamline the system in the area.

7.      DGI&I IR Faisalabad seizes: 1.2 million non-duty paid cigarettes

April 16, 2016

The Directorate of Intelligence and Investigation Inland Revenue (IR) Faisalabad has seized 1.2 million (120 CBCs) cigarettes on which excise duty has not been properly paid under the law. It is learnt that the cigarettes were seized from a godown near Millat Chowk, Faisalabad and belong to a local cigarette company. Amongst the brands seized are Omega, Relax and Captain. The company has been directed to produce invoices and prove that taxes and duties have been paid on the cigarettes but so far there has been no response.

Experts said that the sale of Local Tax Evaded (LTE) cigarettes continues to be on the rise with statistics pointing at the prevalence of locally manufactured cigarettes in the market, priced at an average of Rs 27 per packet - an amount that is below the minimum tax per packet amount set by the government of Rs 33.80.

Low segment tax-paid brands are priced at an average of Rs 57 per pack, whereas high segment tax-paid segments are priced at around Rs 110 per pack. These brands face serious unfair competition from LTE brands that sell at prices which are priced at less than even half of the tax-paid segment due to the evasion of taxes. Certain local manufacturers evade these taxes by under declaring their production so that they can sell their illegal cigarettes at prices lower than that printed on the pack, they maintained.

The price gap between the two segments continues to increase annually and is fuelling the growth of LTE cigarettes in Pakistan. Furthermore, in the last 4 years, taxes have seen a 100 percent increase which has resulted in tax-paid cigarettes becoming more expensive for the Pakistani household to afford.

The consequences of the rise in illegal cigarettes have been multifold and can affect the Government, the society, the consumers, and the tax compliant industry. In 2014, over Rs 24 Billion in government revenue was lost due to the illegal sale of cigarettes. This lack of domestic revenue generation means that the Pakistani government must fulfil its public sector development agenda by seeking foreign aid and loans. While the foreign loans help to finance development projects, the attached terms and conditions limit the Government's power to devise and implement autonomous economic policies.

Furthermore, the Government may seek to increase taxes on the tax compliant industry to make up for the loss in taxes. This increased tax burden makes the products of those tax compliant companies less competitive in the market leading to less foreign investment in the company.

As for the consumers, the massive price differential between LTE cigarettes and tax-paid cigarettes only serves to push consumers; especially the youth with lesser purchasing power, towards black market of cheap duty evade brands. Illegal cigarettes are on the growth with more than 1 billion cigarettes added to the segment annually. Although the Government has empowered 13 agencies in Pakistan, there is a need to prioritize the importance to curtail the sale of illegal cigarettes. Capacity constraints and the lack of co-ordination between different law enforcement agencies have also created a lax law enforcement environment for LTE cigarettes.

Since retail is the final stage where these illegal cigarettes are being sold to consumers without any check, there is a need for retail enforcement. When a manufacturer supplies a pack to retailers priced at Rs 12 to Rs 15, illegal cigarette retailers are able to gain a more than 100 percent profit margin by selling that same pack at Rs 25 to Rs 35. In comparison, the margin on a duty paid pack is not more that Rs 3 to Rs 5 per pack.

By amending existing measures and creating new regulatory measures, the Government can curtail the sale of LTE cigarettes. Currently, retailers are absolved from criminal liability for selling tax-evaded cigarettes. Existing regulations such as the 'Federal Excise Act and Rules' should be amended to hold retailers responsible for selling cigarettes below the printed price. In addition to amendments, new regulatory measures criminalizing the sale of LTE cigarettes with harsh consequences and fines shall also become a source of deterrence for many retailers to engage in the retail of illegal cigarettes.

The rise in illegal cigarettes has serious implications for multiple actors in society including consumers, the tax compliant industry, and the Government. There is a need for a holistic approach with stronger regulations to criminalize the retail of Local Tax-Evaded cigarettes, experts added.

 

 

 

 

 

8.      50 percent duty rebate allowed on imports: lithium batteries in hybrid cars creating environmental hazards: experts

April 16, 2016

The decision to allow 50 percent duty rebate up to around Rs 1 million per vehicle on the imports of hybrid cars and Sport-Utility Vehicles (SUVs) is creating serious environmental hazards related to the disposal of lithium batteries used in hybrid vehicles, industry experts said here. According to industry experts, the federal government has announced several budgetary measures (2013-2014) vide SRO 499(1) 2013, allowing a 50 percent duty rebate to encourage sales of hybrid vehicles in Pakistan and control balance of payment deficit by reducing oil imports.

They said that 50 percent duty rebate on import of hybrid vehicles was made applicable on import of new hybrid vehicles as well as import of second-hand hybrid vehicles imported under gift, personal baggage and transfer of residence schemes. However, the decision has not only resulted in loss of tax revenue as domestic car production has badly been affected besides creating serious environmental hazard related to the disposal of lithium batteries used in hybrid vehicles, they said.

Moreover, they said that considering the prices of hybrid vehicles in Japan, the effective combined rate of custom duties, sales tax and withholding tax on 3-year old hybrid vehicles is around 22 percent to 25 percent. Currently, the price of oil has dropped to a historic low of $30 to $35 per barrel due to which the pressure on Pakistan's current account has eased up and there is no apparent need to subsidize hybrid vehicles, they reasoned.

On the average, the locally assembled Toyota Corolla 1.8L and Honda Civic 1.8L consumes locally produced parts valued at approximately Rs 575,000 per vehicle. They urged the government to protect domestic industry and promote investment in local auto sector instead of facilitating used car imports in the country. They said that whilst FBR may allow 50% duty concessions on new hybrids it should withdraw the 50 percent duty rebate being allowed on import of second-hand hybrid vehicles under Gift, Personal Baggage and Transfer of Residence schemes, to protect the local industry and added that 5-years old imported SUVs have captured 87 percent market share, hence stifling the possibilities of investments in local manufacturing of SUVs in Pakistan.

According to the data from January to December 2015, the locally made SUV had just 13 percent share, of the market while imported used SUVs had a market share of 87 percent. Most popular SUVs imported in the this period were Land Cruiser/Prado, Mitsubishi EK Wagon, and other SUV models 'Similar to countries such as Thailand, China and India, SUV and Crossover vehicles segment has big potential to attract investments from global automobiles and auto parts manufacturers.

It is to be noted that under the Gift, Baggage & Transfer of Residence schemes specified under Annexure E of the Import Policy Order 2013, the maximum allowable age of used cars into Pakistan for cars is 3 years and for other than cars (Minivans/SUVs) is 5 years. However, these investments are not materializing as 87 percent market share for SUV segment is captured by 5-years old imported SUVs,' said industry experts. They suggested the authority concerned that SUVs older than three years must not be allowed to be imported under Gift, Personal Baggage & Transfer of Residence schemes.

9.      Fiscal Year 2017 budget needs to resolve issue of tax refund delays: OICCI

April 16, 2016

The Overseas Investors Chamber of Commerce and Industry (OICCI) has proposed to the Federal Board of Revenue (FBR) that all tax refund claims for the period up to June 30, 2015 should be released against bank guarantees and upfront levy of withholding income and sales tax at import stage on plant and machinery should be exempted for new foreign investment in budget (2016-17).

According to the budget proposals of the OICCI for 2016-17, the upcoming budget should resolve the issue of delay in processing and issuance of cheques against outstanding tax refunds. Pending Tax refunds is one of the biggest contributors to distorting the commercial image of Pakistan in all the Perception and Ease of Doing Business Surveys and a big detriment for Foreign Direct Investment. This has been pointed out many times at the relevant forums.

All tax refund claims for the period up to June 30, 2015 should be released against bank guarantees before March 31, 2016, followed by an audit of those refunds by company auditors. This process should be completed by September 30, 2016. The part of refund claim which auditors do not accept should be adjusted against the bank guarantee and the audit reports should be construed as an appealable order. Payment should be released within one month after the issuance of Refund Payment Order (RPO). Inter adjustment of Income tax and Sales tax refunds should be made part of the law, it proposed.

OICCI further proposed that the increase in import duty on machinery and equipment (not locally manufactured) from 5% to 10% is a restriction for companies seeking to make large scale investment in the country as it front loads the proposed investment. This should be reversed and the government should zero rate such imports. In order to avoid misuse of this facility, a condition of bank guarantee may be imposed and the guarantee be returned to the importer, upon confirmation of successful installation of the imported machinery and equipment in Pakistan.

The OICCI has proposed that review of Minimum Tax (MTR) Regime. It proposed that the Minimum Tax Regime (MTR), should not be applicable for companies assessed in Large Taxpayer Units (LTUs). As a transition measure, before withdrawal of the minimum tax regime, rate of minimum tax should be reduced to 0.2% on specialised sectors with high turnover and low margins like Oil Marketing companies and Refineries, LNG Terminal Operators and Large Chemical Companies where the application of MTR is resulting in an effective tax rate of over 50%. The gradual phasing out of FTR should be initiated; as a first step the Commercial importers and Commission agent should be phased out of FTR and they should be obliged to file the accounts along with their return of total income.

In addition to the continuation of the already announced policy for the proposed reduction of corporate tax rate (CTR) to 30% by 2017-18, the government should align the effective corporate tax rate to rates in regional countries. Sales Tax rates should be reduced. As a first step federal sales tax rates should be aligned with the Sindh sales tax rate on services of 14%. A study of the rates in the regional countries, with comparable economic parameters should also be done and sales tax rates be made more competitive.

OICCI further proposed that heavy reliance on withholding taxes is affecting the enforcement capabilities of FBR administration since majority of tax collections is through the withholding tax regimes and not through enforcement measures and warrants a review.

It proposed that the companies registered in LTU should be exempted from withholding income tax under section 148 on raw materials and capital goods at import stage. Alternatively, tax rate on these items, which is currently @ 5.5% should be reduced to 1 percent. Such Companies should be exempted from withholding income tax on sale of manufactured goods under section 153, as these are already liable to pay advance tax u/s 147 on quarterly basis and are also subject to greater scrutiny. These measures will boost the manufacturing base against commercial importers and will eliminate blockage of funds and arising of tax refunds, OICCI proposed.

All tax challan details for the amount of taxes deducted/collected, should be made available at FBR web-portal of the taxpayer on real time basis, for online verification of tax challans. Presently, only FBR has this access in the current 'Verisys' system. This self-verification model will reduce the hardship and improve compliance, as tax challans will then be available to the taxpayers on real time basis.

Withholding sales tax on payments to registered persons falling under LTUs should be exempted, as applicable earlier up to February 2013. Further, payment of withholding sales tax should be applicable at the payment stage, instead of purchases, as was the case up to June 2015. The minimum threshold for tax withholding for services and supplies which were fixed in 1990s at Rs 10,000 and Rs 50,000 should be increased to Rs 25,000 and Rs 100,000 respectively, in cases where both the tax withholder, and person from whom tax is being deducted, are on the Active Taxpayers List.

All Withholding Sales Tax must be deposited through Computerised Payment Receipt challans, similar to withholding income taxes, thereby introducing a verification mechanism. This will eliminate CREST discrepancies and reconciliation issues of the taxpayers, the OICCI added.