KARACHI: Tax practitioners have proposed the government to cut sales tax rate to 10 percent and slap value addition levy on luxurious imports to increase revenue collection and curb corruption.
The Karachi Tax Bar Association (KTBA), in its proposals for the coming budget of 2016/17, said the current rate of 17 percent, coupled with an additional three percent value addition tax on commercial importers, is too high.
“There is a narrow tax base due to high tax rate, which induces tax evasion, under invoicing, corruption and smuggling,” the proposals report said. “Sales tax rate should be brought down to a single digit. However, as a first step the rate of sales tax should be brought down to 10 percent. Moreover, valued addition tax should be levied on luxury goods.”
The association demanded five to seven percent value addition taxes on luxurious imports.
It said the proposed measures will help in expanding the tax base, reduction of smuggling and corruption, rise in government revenue and promoting documentation of the economy.
Furthermore, the tax practitioners’ body said the reduced tax rate will encourage people to get registered with the tax authorities. On the other hand, higher value addition tax will generate additional revenue and support the local industry.
KTBA suggested that the tax structure for corporate sector should also be rationalised and tax rates for listed companies should at least be five percent lower than the non-listed companies.
“The higher tax rate is effectively a disincentive for the multinational groups for locating their businesses in Pakistan,” it said. “Reduction in the costs of doing business will consequently promote increased investment.”
Tax professionals criticise the alternate corporate tax introduced via the Finance Act, 2014, which says: “Where a taxpayer, who may otherwise not pay tax due to availability of tax depreciation, amortisation and brought-forward losses, would still be subject to tax under the alternative corporate tax.”
“It appears that the legislature aims to recover more taxes from the existing documented sector instead of broadening the tax base,” they said.
It is also proposed that workers’ welfare fund (WWF) and workers profit participation fund (WPPF) may be eliminated and instead of further burdening the taxpayer with above levies, an endowment fund may be created out of existing funds available with the government and profit earned from such a fund may be utilised for the benefit of the workers.
“Companies, in addition to the corporate tax, pay WWF of two percent of their taxable income and WPPF of five percent of their profit,” the proposals document said. “This results in a tax impact of approximately 40 percent. This sort of levy discourages the existing manufacturers to expand their business in Pakistan and at the same time discourages foreign investors in setting up the manufacturing operations.”
The report proposed that an option for opting out of presumptive tax regime with regards to sale, import and export of goods introduced via the Finance Act 2012, and withdrawn via the Finance Act 2014 should be restored to help reduce the additional burdens imposed on the corporate sector and decrease the risk of tax audits.
“A flaw exists in the calculation of capital gains, especially in the case of investment in shares, where the investment is made in foreign currency,” it said. “Such a gain is calculated in historical rupee terms, which may result in a tax liability to a nonresident due to devaluation of Pakistani rupee vis-à-vis foreign currency, even if the shares are sold at the same value in foreign currency or even at a loss. This manner of calculation of capital gain needs to be corrected.”
KTBA also advocated concessions and credits to increase industrialisation. It recommended measures to bring simplicity and broaden the scope and equitability of the law.
“Our submissions on the budget proposals for this year aim not only to broaden the tax net and generate more revenue but also to make taxation structure more progressive and balanced,” Mohammad Zubair, president of KTBA said.