The Securities and Exchange Commission of Pakistan (SECP) has proposed reduction in tax rates for companies from 35 percent to 30 percent in the 2009-10 budget.
Sources told Business Recorder on Saturday that the Federal Board of Revenue (FBR) is actively examining the proposals by the SECP for incorporation in the Finance Bill 2009-10. Under the tax slabs proposed by the SECP, the rate of tax should be 33 percent for 'Tax Year 2009', and 30 percent for 'Tax Year 2010'. However, SECP has proposed that the existing taxation structure for the category of "small company" may remain unchanged in the budget.
The proposal is aimed at providing level playing field among companies and non-corporate entities, for which the existing tax differential between the two forms of business organisations needs to be eliminated. The SECP said that reduction in corporate tax rates would encourage corporatisation of business entities, which would lead to documentation of the economy, supplementing the government's efforts to enhance revenue collection measures.
Earlier, corporate tax rates were reduced via Finance Act 2002 through a five-year tax rate card which had significantly contributed to the growth of the corporate sector. According to SECP, the FBR has been contemplating on improving the tax-to-GDP ratio, and reducing corporate tax to 30 percent up to 2010 has been one of the measures considered earlier by it in this direction.
Globally, corporate rate of tax is maintained lower than the rate of non-corporate entities. The global average corporate tax rate was 26.8 percent in 2007. The regional segments reflect the average corporate tax rate of EU 24 percent, OECD 27.8 percent, Asia Pacific 30 percent, and Latin America 28 percent. Pakistan, with its rate of 35 percent is still higher than the regional and global averages. All countries, except Japan, have corporate tax rate lower than Pakistan.
In view of the current situation, the SECP has proposed to progressively reduce the tax rate for companies, excluding category of "small company", from the existing rate of 35 percent to 30 percent by 2010. Existing provision: Under the First Schedule, Part-1, division II (Rates of Tax for Companies), the rate of tax imposed on the taxable income of a company for the tax year 2007 and onward shall be 35 percent.
Proposed amendment: First Schedule, Part-1, division II (Rates of Tax for Companies), the rates of tax imposed on the taxable income of a company other than a small company as defined in sub-section 59A of section 2 of the Income Tax Ordinance 2001 shall be as follows: The rate of tax should be 33 percent for "Tax Year 2009" and tax rate should be 30 percent for "Tax Year 2010".
Rationale: The tax rates of companies other than small companies may be reduced to 30 percent by progressive reduction. It is important to mention that "Small Company" as defined in sub-section (59A) of section 2 of the Ordinance, is one that has paid up capital not exceeding Rs 25 million, employees not exceeding 250, and annual turnover not exceeding Rs 250 million. In case of "small company", if the turnover exceeds Rs 250 million, the income attributable to turnover exceeding the said limit shall be charged to tax at progressive slab rates ie 25 percent, 30 percent and 35 percent, so that the company is able to progress, still retaining its incentivised status of a "Small Company".
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