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Monday July 22, 2024

Govt may drop bid to bring exporters into normal tax regime

There are around 60,000 exporters and contributing around Rs90 billion to Rs100 billion to the national kitty

By Mehtab Haider
June 25, 2024
Workers operate machines preparing fabric at a textile mill in Lahore on July 20, 2023. — AFP
Workers operate machines preparing fabric at a textile mill in Lahore on July 20, 2023. — AFP

ISLAMABAD: The government is considering withdrawal of its proposal for bringing exporters into a normal tax regime and may slap an enhanced tax rate of 2 to 3 percent on their export proceeds.

If it happens in the finalisation of the budget for 2024-25, it will demonstrate that the government has succumbed to the pressures of exporters because they have sternly opposed any move to bring them into a normal tax regime. With possibility of a wind-up speech by Minister for Finance Mohammad Aurangzeb probably on Tuesday, the government might opt to incorporate some changes in the Finance Bill 2024-25 and the biggest one is consideration of granting relief to exporters to fulfill their demand.

Pakistan and the International Monetary Fund (IMF) high-ups continued virtual parleys on Monday night for finalisation of the budget for 2024-25 prior to get approval from Parliament. The IMF has so far extended its stiff opposition to any such proposal and they might prefer to pay visit to Islamabad by end of the ongoing month or early next month because in case of eruption of any controversy it might jeopardise Pakistan’s move to clinch fresh deal under Extended Fund Facility (EFF). The government also seems agreed to withdraw increased tax rates for professors/ researchers in the budget. However, there is no possibility for any revision in the slabs of salaried and non-salaried class.

There are around 60,000 exporters and contributing around Rs90 billion to Rs100 billion to the national kitty. The IMF has asked the government to treat all kind of incomes equally, including the incomes earned by exporters. However, the exporters argued that they did not want to come into normal tax regime. They proposed to the government to slap enhanced tax rate from 1 percent to 2 percent on their annual exporters proceeds. The government is making last-ditch efforts to convince both the IMF and exporters for enhanced rate from 1 percent to 3 percent for the budget 2024-25.

At present, persons deriving income from exports have to pay 1 percent tax on their export proceeds which is final tax. On the principle of horizontal equity that taxpayers with equal income should pay equal tax, it is proposed income from exports be subjected to normal rates with 1 percent tax collection on their export proceeds be treated as minimum tax.

For reduction in tax rates for professors/ researchers, they argued before the Anomaly Committee to reconsider the removal of Clause 2 of Part III of The Second Schedule of the Income Tax Ordinance 2001, as proposed in the 2024 Federal Budget.

This amendment, if implemented, will create existential risks for universities by significantly hindering their ability to retain and attract quality educators. Such a measure jeopardises their capacity to deliver high-quality higher education in Pakistan, which will adversely affect the productivity and competitiveness of the economy by reducing the quality of human capital in the country.

In Clause 2 of Part III of The Second Schedule of the Income Tax Ordinance 2001, currently grants full-time teachers and researchers employed in non-profit educational or research institutions or universities recognised by the Higher Education Commission, a tax rebate equal to 25 percent of the tax payable on their salary income. The federal budget for 2024-25 proposes the abolition of this rebate.

Two top universities including LUMS and Beaconhouse University’s professors/ researcher took plea that if this abolition is approved, universities across the country including not-for-profit ones will face existential risks.

It will result in a 30 percent increase in the tax liability for full-time faculty, in tax payable on their salary income due to changes in the tax slabs proposed in the 2024 Finance Bill. The cumulative effect of the policies means the tax rate payable by full-time university faculty will increase three to fivefold compared to other salaried classes earning equivalent incomes.