AIRLINK 62.48 Increased By ▲ 2.05 (3.39%)
BOP 5.36 Increased By ▲ 0.01 (0.19%)
CNERGY 4.58 Decreased By ▼ -0.02 (-0.43%)
DFML 15.50 Increased By ▲ 0.66 (4.45%)
DGKC 66.40 Increased By ▲ 1.60 (2.47%)
FCCL 17.59 Increased By ▲ 0.73 (4.33%)
FFBL 27.70 Increased By ▲ 2.95 (11.92%)
FFL 9.27 Increased By ▲ 0.21 (2.32%)
GGL 10.06 Increased By ▲ 0.10 (1%)
HBL 105.70 Increased By ▲ 1.49 (1.43%)
HUBC 122.30 Increased By ▲ 4.78 (4.07%)
HUMNL 6.60 Increased By ▲ 0.06 (0.92%)
KEL 4.50 Decreased By ▼ -0.05 (-1.1%)
KOSM 4.48 Decreased By ▼ -0.09 (-1.97%)
MLCF 36.20 Increased By ▲ 0.79 (2.23%)
OGDC 122.92 Increased By ▲ 0.53 (0.43%)
PAEL 23.00 Increased By ▲ 1.09 (4.97%)
PIAA 29.34 Increased By ▲ 2.05 (7.51%)
PIBTL 5.80 Decreased By ▼ -0.14 (-2.36%)
PPL 107.50 Increased By ▲ 0.13 (0.12%)
PRL 27.25 Increased By ▲ 0.74 (2.79%)
PTC 18.07 Increased By ▲ 1.97 (12.24%)
SEARL 53.00 Decreased By ▼ -0.63 (-1.17%)
SNGP 63.21 Increased By ▲ 2.01 (3.28%)
SSGC 10.80 Increased By ▲ 0.05 (0.47%)
TELE 9.20 Increased By ▲ 0.71 (8.36%)
TPLP 11.44 Increased By ▲ 0.86 (8.13%)
TRG 70.86 Increased By ▲ 0.95 (1.36%)
UNITY 23.62 Increased By ▲ 0.11 (0.47%)
WTL 1.28 No Change ▼ 0.00 (0%)
BR100 6,944 Increased By 65.8 (0.96%)
BR30 22,827 Increased By 258.6 (1.15%)
KSE100 67,142 Increased By 594.3 (0.89%)
KSE30 22,090 Increased By 175.1 (0.8%)

This year a tax has been accidentally imposed on services providers which is silently killing many businesses operating in the formal sector. A minimum tax of eight percent on revenues was imposed on services providing companies, which is simply making many business models unviable as virtually all these businesses operate with high volumes and low margins. FBR apparently never had the intention to do so; but it just happened, it is a comedy of errors. Or perhaps a sad tale of oversight.Upto June 30 2009, there were three categories (supply of goods, rendering of providing of services and execution of contracts) in Section 153 of the Income Tax Ordinance where WHT was deducted at source and considered as final tax. But companies were excluded from it by a specific provision. While the companies assessments were made under Section 113 where the minimum tax was one percent of revenues. Through Finance act 2009, they brought another proviso under Section 153(1) which said the tax deducted on rendering or providing of services will be a minimum tax. But that was limited to non-companies. FBR clarified the issue through circular No. 6 in 2009, which explicitly stated that even after the amendment; companies remained excluded from this minimum tax.However, the Federal Tax Ombudsmen; without delving into the spirit of the law, thought that circular 6 was issued due to collusion of FBR and the corporate sector. Subsequently, FBR issued a clarification, under pressure, in April 2011 that the tax was applicable on companies as well. Accordingly they brought an amendment in section 153 through Finance Act 2011 in which the provisos were removed and the general interpretation was that the tax is also applicable on companies. However, in October 2011, a SRO was issued whereby clause 79 was inserted in part 4 of the Second Schedule of Income Tax Ordinance which clearly said that this minimum tax was not applied to companies. The rate was six percent at that time for non-companies and a minimum tax of one percent was applied on companies under Section 113.Now in 2015, FBR has proposed in the Finance Bill; to clarify the confusion created by FTO and others, that with effect from tax year 2009; all companies are excluded from the application of this minimum tax under Section 153, while the tax rate has been increased to eight percent, for non-companies.However, FBR did not first take the proposal to the Parliament for its approval and then remove Clause 79 of part 4 of Second Schedule. Instead, it did both tasks simultaneously. The National Assembly passed the proposal but the Senate committee had an objection on the removal of the said clause. As a result, the House approved the proposal as it was sent back by Senate.According the notes of the Federal Budget, clause 79 was suggested to be removed as according to the new amendment, it was deemed to be redundant. Hence, had the FBR not notified the clarification in the finance bill, the companies would have remained excluded from the minimum tax of eight percent? But that is not the case.In essence, this is a typo and business models of many service rendering companies in formal sector are casualties of this typo. This isn funny, as its simply killing many legitimate tax-paying businesses. The cherry on top is that the eight percent minimum tax, is essentially 9.5 percent as the tax is imposed on revenues plus GST (which varies from 16% to 19.5%). Tax on tax; isn this simply absurd?These companies operate at high sales volume and low margins. Hence this tax will make them unprofitable. This tax poses existential threat to many sub-sectors in the services industry. The revenue tax is imposed regardless of the companys profitability. There are many businesses in services sector that operates at very low margins. These include but are not limited to manpower outsourcing, third-party logistics companies, security services providers, freight forwarders, cargo agents, costumer handlers, business process outsourcers and information technology service providers. Before tax margins in these businesses typically ranged between 3-8 percent. A minimum effective 9.5 percent tax on turnover (including GST) implies pre-tax profit margins of more than 29 percent to equate to an income tax liability of 32 percent which is the prevailing corporate tax rate. Such a high tax is tantamount to taxing capital.What could be the rationale of taxing companies on their capital invested? It is simply expropriation and against the Constitution. Its like taking away the right to do business. It is contradiction to Article 8 of the Constitution as an interrogation of fundamental rights to do business.Many new ventures are coming in the services sector and entrepreneurship is really spurring in the sectors mentioned above. This tax is a major disincentive for local entrepreneurship and hindering foreign investment. A few investments plans are either on hold or scrapped in the last two months due to this absurd tax.The irony of the matter is that FBR people understand this tax is not viable. Yet they have imposed it and are not rectifying it. They say that the ball is not in their court and they are helpless. They urge companies to lobby it themselves by going to court or have an out of court settlement by running media campaign and announcing strikes - cargo agents and freight forwarders have already published plea ads in newspapers and are on an indefinite period strike since yesterday. Two petitions have already been filed in the Lahore High Court by two companies and 25 more petitions are expected in the next two weeks.Its unfortunate that rather than focus on innovation and value creation; the brains of these companies management are being drained in a quest to survive. Is this the policy of spurring growth, enhancing productivity and generating employment? This tax is unjust, counterproductive, against the principle of free market and contrary to the practices in the world. It is a message to businesses, to pack up.Since 2009, companies in these sub-sectors have negotiated prices with costumers on the basis of one percent minimum tax. All of a sudden, the tax liability has shot up by 700 percent. How on earth in a competitive environment can this be passed on?Theoretically this tax cannot be completely passed on. If the service providers try to do so, their consumers will not accept the associated price hike; many of them may opt for the informal segment. This tax is against the spirit of broadening the tax base. The excessive use of withholding tax has resulted in shrinking of the number of tax payers to half - 1.8 million in FY06 to 0.85 million in FY15 and minimum tax on services is even worse!

Comments

Comments are closed.