Goods allowed by the Economic Co-ordination Committee (ECC) to pass through Pakistan under Afghan Transit Trade (ATT) are smuggled back into the domestic market, hurting the legitimate business carried on.
This has been cited as one of the issues by the American Business Council of Pakistan (ABC) in its suggestions for the 2004-05 Federal budget.
It said that smuggling of goods were not only eroding the government revenues, but were also hurting local business and the industry's revenues.
Goods allowed by the ECC include electronic goods, shampoo, soap, vegetable ghee, razors and shaving blades to pass through Pakistan but ultimately find their way back into Pakistan market.
It said the smuggled goods gained market share because of their cheap cost as no taxes were levied on them. This causes the following problems:
-- Local producers have tough competition, importers are compelled to reduce their volumes, causing loss of revenue for the government in the form of import duties and taxes, and this scenario will also deter government efforts to improving investment climate in Pakistan.
The ABC proposed that it was necessary that the Price Printing Law on individual products should be implemented by the government and should monitor that only price-printed products were sold in the market and also ensured that no smuggled and counterfeit products would be available in the market.
The government should take necessary steps that all taxes and duties at the import stage would be levied on the suggested country's price on all goods, it suggested.
The ABC suggested the government should also withdraw the ATT facility on the above mentioned items, which were seriously affecting domestic business.
It also proposed reduction on import duties on specified items, which were easily smuggled through baggage or by any other means.
Reduction of highest duty slab was also required to discourage smuggling, it opined.
The ABC said that total taxes and levies were very high in Pakistan. "These high taxes are being levied at the stage of imports in the form of high import duties on raw materials and finished goods and again at the consumption stage in the form of high sales tax and central excise duty.
"There is also an element of double taxation of dividends and perquisites. At first stage, companies are taxed on profits and at the second stage, it is taxed in the hands of shareholders when the companies distribute dividends to the shareholders. "Similarly, perquisites to employees are taxed in the hands of recipients and are again taxed in companies if it exceeds 50 percent of the basic salary," said the ABC suggestions.
It, therefore, proposed the following steps:
-- To reduce import duties on raw materials and finished goods, eliminate central excise duty on all products, no tax on dividends income of companies, tax on excess perquisites should be eliminated, reduce sales tax rate, and remove tax over tax.
The pointed out that the corporate income tax rates were gradually under rationalisation for the corporate sector other than public companies quoted on the stock exchanges.
"This rationalisation will wipe off the incentive of lower tax rate available to public quoted companies by 2007, it said. Although these companies were required to be more documented through the compliance of RECP regulations, the ABC suggested code of corporate governance, listing regulations of stock exchanges, formation of internal audit department, audit committee, central depository companies rules and regulations etc, publication of quarterly, half yearly and annual accounts.
It has been strongly recommended to maintain a comparative differential of minimum five percent lower corporate tax rate for public quoted companies while maintaining the current trend of reduction in the tax rate of the corporate sector.
On the issue of advance tax, the ABC proposed that companies should be allowed to pay advanced tax based on their own estimates of the year's profit. In the 1979 Ordinance, before amendment via Finance Act 1997, the law provided for payment of advance tax on own estimates.
"Additional tax may be levied if advance tax paid is less than 80 percent of the tax assessed," said the ABC.
Similarly, on the issue of the payment of determined refunds of income tax, the ABC proposed that the refunds, which had been determined, must be paid off in cash or in the shape of negotiable bonds within three months of determination of the same.
This bond scheme was successfully implemented for the banking system by the government in June 2002, the ABC said, and recommended that the same should be done in 2004 for all companies.
Furthermore, the law pertaining to the additional payment to assessees at the rate of 15 percent per annum for delayed refunds under Section 171 of the Income Tax Ordinance, 2001 should be expeditiously exercised.
On the mandatory payment for filing of an appeal, the ABC proposed that when a tax demand was in dispute, what rationale one could give for its recovery before the decision in appeal.
The ABC, therefore, recommended that necessary amendments should be made in the Finance Ordinance so that the payment of appeal fee should only be the requirement for filling an appeal.
On the refunds and hearing of sales tax, the ABC said that the time involved in settlement of sales tax disputes was very lengthy. In addition, the condition to deposit the disputed amount before hearing was a huge burden on companies' cash flow resulting in excessive financial costs, the ABC added.
The ABC pointed out that refunds, which were determined, were generally not paid in cash or allowed to be adjusted against the payment of output sales tax by the sales tax department.
It proposed that there should be a time limit for the settlement of all sales tax cases, and suggested that maximum allowable time should be six months from the filing of the case.
The condition to deposit show-cause amount as advance cash should be waived, it proposed, adding an indemnity bond (IB) should be made an acceptable form of security for the customs authorities.
On refunds, which have been determined, the ABC proposed that they must be paid off in cash or allowed to be adjusted against output sales tax payments the month after the order had been issued.
The ABC further proposed that the highest tax rate for salaried persons should be reduced, and said the exemption of 45 percent house rent be restored.
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