Informal economy outgrows formal one on presumptive tax regime: PBC

KARACHI: Pakistan’s informal economy has outgrown the formal economy due to presumptive tax scheme that encourages mispricing, widely known as under-invoicing, in foreign trade, a business policy advocacy group said on Friday.

The Pakistan Business Council (PBC) said the final tax regime – where taxes are withheld at the source on the sale of goods and execution of contracts – should be converted into normal tax regime.

“Massive under-invoicing especially by commercial importers is destroying the domestic industry,” the PBC, representing at least 78 private sector businesses, said in budget proposals for the upcoming fiscal year of 2019/20.

“Commercial importers should be required to file returns under the normal tax regime and their status should be restored as introduced under the Finance Act 2018,” the council said.

The PBC in a previous report estimated five billion dollars of under-invoicing in a year, calling for comprehensive review of import valuations.

The PBC further said minimum tax rate should be reduced for all listed companies to 0.5 percent to promote industrialisation and attract foreign direct investment. It proposed the government to raise withholding tax rates on non-filers of income tax returns to increase number of compliant taxpayers.

The council said the concept of separate withholding tax rates for filers and non-filers was introduced to improve documentation of the economy.

“Though large amounts are being collected from non-filers no effort has been made to increase the tax base,” it added. The policy to increase tax on non-filers/unregistered individuals should be implemented to broaden tax base without burdening existing taxpayers.

Currently, withholding tax on international air ticket for filers and non-filers is flat Rs16,000 that should be raised to Rs50,000 for non-filers. Withholding tax on functions and gathering is same at five percent or Rs20,000 whichever is higher. It should be increased for non-filers to Rs100,000 and filers be exempted. Withholding tax of two percent on sale of immovable property for non-filers should also be enhanced to 10 percent. Besides, motor vehicle tax for non-filers should be increased to Rs50,000 for 1,600cc-1,999cc and Rs200,000 for 2,000cc and above.

The PBC further said there should be an additional sales tax of five to 20 percent on industrial/commercial entities not registered with the sales tax office and have monthly electricity bills of above Rs20,000. The enhanced rates should be continued for six months and later all such connections should provisionally be converted into national tax number (NTN) and sales tax registration number (STRN) and returns filing by the connection holders should be enforced.

The PBC said unregistered industrial and commercial electricity consumers should be given one year to get their NTN or STRN otherwise their connection should be discontinued. The PBC said there should be NTN requirement for domestic electricity consumers in case of annual bill exceeding Rs1.2 million.

The council said all exemptions, including agriculture income tax, should only be made available to filers so that exempted income is reported and wealth is reconciled.