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May 23, 2020

OICCI suggests introducing advance tax on agricultural produce


May 23, 2020

KARACHI: Overseas Investors Chambers of Commerce and Industry (OICCI), in its proposals for provincial budget, suggested advance tax should be introduced on sale of agricultural produce, such as sugar cane, wheat, cotton, and others.

There are only around 10 to 15 agencies and enterprises which acquire such crops. “The advance tax should be adjustable against income tax payable on net income basis. Rates of withholding and the threshold for the same should be aligned with other products – for example any payment exceeding Rs25,000 should be subject to advance tax at the rate of 1 to 3 percent as the case may be,” as per the proposal.

OICCI suggested the federal taxation system might be used for such collection on behalf of the provincial government in the same manner as was being done in other cases by the provincial government.

OICCI also has proposed to provincial government to collect taxes on net income basis from agriculturists. As per the constitution of Pakistan, right of taxing income lies with the federal government except income from agriculture, which is taxable under the respective provincial laws. Agriculture related activities contribute approximately 20 percent of the overall national production.

However, the collection of agricultural income tax is estimated to be even less than one percent of total collection of federal and provincial taxes. The above disparities in tax levies between different incomes segments need to be addressed. Therefore Sindh government/revenue authorities should take appropriate measures to increase revenue collection from the agriculture sector.

“The original rationale of keeping agriculture out of tax net to facilitate small agriculturists is not applicable, due to non-implementation of land reforms, and the benefit of the tax exemption is being availed, as per common perception, by big landowners earning huge incomes and unscrupulous elements by transfer of income and wealth to businesses fronting as agriculture sector,” OICCI noted.

At present, tax was payable on land holding or net income, whichever was higher. However, the manner of determination of net income was complicated and therefore in almost 100 percent of the cases, tax was received on land holding basis.

Therefore, OICCI, proposed taxability of income on land holding should be abolished and taxes be collected on net income basis.

Under the specific provision, the rent for use of agricultural land, which was the general practice, especially for large landowners, was an agriculture income. There was no effective mechanism to ensure completeness of recovery of taxes from such receipts.

“Such rent income should be subject to same rate of tax as is currently in vogue on property income under the FBR system,” it suggested.

OICCI recommended tax authorities should use technology, data analytics, including artificial intelligence tools, and to effectively utilise NADRA database and other documented sources to ensure that all income earners from services were included in the provincial taxpayers list.

The chamber noted sales tax collection from other cities in Sindh and new sectors of services should be shared at least quarterly with the stakeholders like OICCI showing growth faster than in collections from mature markets like Karachi.

Sales tax on services for income tax non-filers should be double the tax on filers of tax returns. Additionally, preferential treatments to active filers might also help – eg active filers should be given early utility connections etc.

OICCI noted that all four provinces and federal government have introduced distinct sales and service tax laws for their respective jurisdictions, with some of the clauses in clear conflict with each other resulting in foreign investors being pursued and harassed by the federal and provincial revenue collectors demanding tax on the same transactions creating undue hardship and double taxation claims for taxpayers.

“In line with international and regional practices, a uniform service tax law may be drafted and agreed upon by the tax authorities of the provinces and federal government, for implementation in their respective jurisdiction. Furthermore, a uniform tax return may also be introduced for the taxpayers,” OICCI recommended.

OICCI also proposed one percent reduction in sales tax on services in Sindh Finance Act 2020-21 and gradually taking it to 10 percent over the next three years for registered entities, whilst the current rate should be maintained for unregistered entities.

Currently, sales tax rate on telecommunication services is 19.5 percent. This should be brought at par with other services.

Sales tax on telecom services should be equivalent to general sales tax rate on services, in order to harmonise all sales tax on services rates. This would increase the tax collections by helping telecom operators tap lower income population of Pakistan.

Since pharmaceuticals prices were controlled, sales tax paid on inputs could neither be added to the selling price nor separately charged, therefore it was proposed that services received by pharmaceutical industry should be zero-rated.

“The sale or purchase of immovable property by the banks or financial institutions under any Islamic mode of financing approved by the State Bank of Pakistan or the Securities and Exchange Commission of Pakistan shall be exempt from the levy of capital value tax,” OICCI recommended.