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March 31, 2020

PBC seeks tax collection deferment from manufacturing sector

Business

March 31, 2020

KARACHI: Pakistan Business Council (PBC) has called for a business relief package that doesn’t entail an immediate cash handout from the struggling government, but it implies deferment of tax collection to the manufacturing sector amid lockdown.

The PBC said the package would benefit the manufacturing sector, which employs the largest number and pays a disproportion percentage of taxes. “It is important that in the lockdown period and immediately thereafter, businesses retain their solvency and sustain employment. It may take rest of the year for normalcy to return,” the business policy advocacy group said in a tweet. “In the lockdown period, businesses have no cash inflows, but expenses to defray. Unlike other governments, ours is unable to offer handouts. However, it can defer collection of taxes, which will be facilitated by greater flexibility assured by the IMF (International Monetary Fund) last week.”

PBC said it is the prime responsibility of businesses to sustain employment, especially of the low to mid income groups. PBC Chief Executive Officer Ehsan Malik said the export sector faces acute problems due to order cancellations and shipment deferrals following the closure of retail outlets in the main overseas markets.

“It is unlikely that normality will be restored in this sector till the end of 2020,” Malik said in a letter to Adviser to Prime Minister on Finance Hafiz Sheikh. “The problems of the export industry, especially of textiles, which employs the largest percentage of industrial workers and now faces existential threat, need to be addressed urgently.”

Malik said the zero-rated sales tax regime for the export sector should be restored at least for the period to end of December this year. “The concurrent zero-rating of domestic sales of the textile sector will also enable some capacity utilisation and hence employment and economic activity in this sector.”

PBC chief urged the government to provide direct subsidies to the domestic industry, instead of tax credits, to help in maintaining employment, especially of the lower paid workers. “For this, we recommend that a separate export bail-out fund should be established to help exporters in difficulty.”

Malik said foreign customers are invoking force majeure clauses to cancel orders and delay shipments. “Banks in Pakistan, however, are reluctant to adopt the same basis to unwind the forward exchange contracts which were contingent on continued export streams,” he added. “These will now not materialise within the contracted period and exporters will suffer loss due to the further devaluation of the rupee.”

PBC CEO said all tax refunds and rebates due to the export sector need to be refunded immediately to help the industry overcome the cash flow crisis.

The business relief package was formulated keeping under consideration the government’s resources constraint, its willingness to forego pending taxes from the private sector and retention and continued payment of salaries to documented employees,

Malik said manufacturing businesses have been the major source of tax revenues. “Assisting their cash flows during the crisis period will improve the speed with which normal tax revenues can be restored.”

The business relief package recommended that the output sales tax and excise duty payments due from manufacturing businesses for February, March and April should be accumulated and paid in six equal installments commencing July 2020. Up to 100 percent input adjustment to sales tax should be allowed. Higher adjustment level is expected to reduce the pressure on cash flows. Additional sales tax of three percent at import stage should be abolished for the manufacturing sector.

The package further proposed that turnover tax should be brought down to zero percent from 1.5 percent currently for tax year 2020 and 2021. Tax should be levied on the assessed profit of the businesses. Advance tax on imports collected at import stage – even though it is adjustable for raw material importers – should be suspended for six months. The application of tax should commence from imports from October onwards.

Advance tax collections on goods, services and contracts should be suspended for six months for manufacturing business allowing them to receive gross amount and improve cash flows during the interim period between receipt of funds and submission of funds to the government. Business making 90 percent of their sales to registered individuals should be allowed 10 percent initial allowance against new capital expenditure for balancing, modernization and replacement projects, as prior to FY2019 budget.

Companies, which pay full salary to employees earning under Rs30,000 per month during the lockdown period, should be given tax credit for the amount of such salary paid. The government was asked to waive all the social welfare payments for the current fiscal year. Advance quarterly income tax should be suspended for March and June 2020 quarter ends to help manage the cash flow. An income tax rebate of 50 percent was sought for employees with taxable income of Rs1.8 million per annum in FY2020.

PBC also sought a straight five percent reduction in the corporate tax rate, a cut in additional custom duty of four and seven percent on goods with normal custom duty of 16 and 20 percent to two percent with immediate effect, withdrawal of 100 percent margin against import letter of credit for industrial raw materials, revocation of fixed charges on electricity bills for the next three months and reinstatement of industrial support package of Rs3 per unit for at least next six months, abolishing of waive demurrage or detention charges on imports during the lockdown period, and reduction in gas and electricity tariffs.

PBC further asked the Sindh administration to withdraw infrastructure development cess or at least defer it for a year. No cash payment or bank guarantee should be given. It advised 50 percent cut in property tax on businesses for the FY2020.