Government mulls freezing corporate tax rate at 29pc

KARACHI: The government is considering freezing corporate tax rate at the present level of 29 percent, owing to economic challenges and substantial decline in revenue collection, sources in the Federal Board of Revenue (FBR) said on Tuesday.

The corporate tax rate for the tax year 2019 (July 1, 2018–June 30, 2019 or companies having special tax year) has been fixed at 29 percent, other than the banking companies. Through the Finance Act, 2018, it has been made part of the statute that the corporate tax rate will be reduced up to 25 percent by the tax year 2023. The corporate tax rate other than the banking companies is 30 percent for the tax year 2018. The sources said the country was facing serious economic challenges due to twin deficits in the wake of tight foreign repayment schedule. The economic managers are making efforts to bring the country out of this difficult situation, but to do this, the government needs significant increase in revenue collection to create avenues for development and curtail budget deficit. The revenue collection target for the current fiscal year has been set at Rs4,398 billion. The FBR managed to collect around Rs1,300 billion during the first five months of the current fiscal year, posting a growth of 6.7 percent, compared with the collection of Rs1.223 billion in the corresponding period of the last fiscal year. Reduction in the corporate tax rate is one of the reasons for shortfall in the revenue collection, the sources said, adding that the previous government of PML-N had taken this decision in the budget presented in the election year.

The previous government through the Finance Act, 2013 introduced reduction in the corporate tax rate from 35 percent to 30 percent for the next five years (tax year 2014 to 2018). Then through the Finance Act, 2018, the rate was further reduced in a phased manner to 25 percent up till the tax year 2023. However, the tax rate for banking companies remained intact at 35 percent.

The sources said the government is considering freezing the corporate tax rate at 30 percent or 29 percent. In 2016, the government had reduced the corporate tax rate to 30 percent in a phased manner to 30 percent on the recommendation of the Tax Reform Commission (TRC). The TRC, which was constituted by the previous government, in its report in May 2015 recommended that the corporate tax rate should be reduced to 30 percent till 2018 with appropriate amendment in the First Schedule of the Income Tax Ordinance 2001. In case of listed companies other than those on which separate schedules are applicable, ie, banks, insurance and oil and gas companies, reduction of two percent is considered as a differential. The commission said reduced rate of tax for the listed companies will serve as an incentive to the companies for enlistment, which will help improve the documentation of the economic growth and will have a positive impact on the overall economy of the country. “This will also help promote better corporate disclosures, excellent returns to equity investors, broadening of corporate sector tax base and enhancement of revenue for the exchequer,” the TRC added.