ISLAMABAD: The Pakistan Business Forum (PBF) on Saturday called for a simplified tax system to reduce complexity and encourage compliance, in a bid to boost economic growth and competitiveness.
In its budget proposals to the federal government, the PBF recommended rationalizing tax rates, eliminating exemptions, and automating processes to reduce human interaction.
"Complexity in the tax system is a major hurdle for businesses in Pakistan," said Ahmad Jawad, vice president of PBF. "Simplification will encourage compliance and boost economic growth."
The forum also proposed tariff reductions on raw materials and machinery to 0-5 percent to encourage industrial growth and exports. Additionally, it suggested removing additional customs duty and regulatory duty on imported raw materials and machinery, and rationalizing customs tariff structure to eliminate anomalies.
"The removal of additional customs duty and regulatory duty on imported raw materials and machinery, and rationalization of customs tariff structure to eliminate anomalies and disparities, with the alignment of customs tariff according to international best practices, will enhance competitiveness," Jawad said.
The PBF has also put forth certain legislative measures concerning FBR in order to modify sections 25(A) and 25(D) of the Customs Act 1969 and grant permission to domestic manufacturers. Likewise, the misuse of the Afghan Transit Trade poses a significant problem for formal sector companies, whether they are engaged in manufacturing or imports.
"Furthermore, the smuggling from Iran is inflicting irreversible damage on both the industry and FBR revenues. In light of this, goods transported under ATT from Pakistan to Afghanistan should be subject to duties and taxes in accordance with Pakistani laws, with the resulting revenue being transferred to the Afghan government."
Jawad said the rate of minimum tax of 1.25 percent under section 113 is extremely high and unrealistic.
"To promote industrialization, the minimum tax should be abolished for all listed companies as these companies are subject to stringent regulations and audits. For other companies, the rate of minimum tax should be reduced gradually by 0.25 percent on an annual basis so that by Tax Year 2027, the rate is 0.5 percent."
Since exports do not contribute towards output tax, therefore, the condition of 50 percent should be amended to 10 percent on a monthly basis for all exports irrespective of any sector; otherwise, it would not be possible for a registered person to absorb the amount of input tax paid for the purposes of manufacturing items for local and export sales, and consequently, the same would discourage the export of goods.
"This amendment is necessary to encourage local manufacturers with excess production capacity to look for export opportunities for unutilized capacity. At present, due to restrictions under section 8B, manufacturers are reluctant to venture into export markets. PBF also urged a re-evaluation of the super tax, as it was imposed on the documented sector retrospectively through the Finance Act, 2022. This is a penalty on the well-organized documented sector that creates jobs and disposable incomes for millions and also generates substantial tax revenues for the country."
Moreover, under section 4C, super tax is not progressive in nature and is applied to the entire profit once a threshold is crossed. This is contrary to the concept of marginal tax rates under the progressive basis of computing tax liabilities.
Additionally, under the Sales Tax Act, Section 8B, a company is not allowed to adjust input tax in excess of 90 percent of the output tax for that period. Considering the recent unprecedented increases in gas/electricity prices coupled with extraordinary depreciation of the Pak rupee, the cost of manufacturing has increased exponentially.
As a result, it has become almost impossible to absorb the amount of input tax. On top of this, the application of section 8B further aggravates the situation by placing an embargo on the claim of total input tax and results in piling up of a huge sales tax carry forward balance with a huge increase on a month-on-month basis; if the restriction under section 8B is removed, there won’t be any revenue loss to the Government as the amount paid under section 8B is ultimately refundable after the end of the financial year.
Similarly, limited companies and their subsidiaries should be taxed under the normal tax regime instead of the minimum tax regime, and the rate of WHT under section 153(1)(b) for the aforesaid companies may be reduced to 3 percent in the federal budget.
PBF also said that massive under-invoicing, especially by commercial importers, is destroying the domestic industry; in this regard, special measures should be taken seriously in the budget.
The forum proposed that transparency in the collection of taxes will discourage misdeclaration, measures to discourage evasion of taxes and duties will help the industry to fairly compete with unscrupulous imports, and also the Government stands to benefit from the increased indirect tax revenues.