ACCA proposes FBR to reduce corporate tax rate

ACCA has proposed the Federal Board of Revenue (FBR) to reduce the corporate tax rate from 35% to 34% and reduction in sales tax rate from 17 to 15 percent in the upcoming budget (2011-2012).
While presenting budget proposals of the ACCA for 2011-2012, Ms Ayla Majeed Vice Chairperson, Member Network Panel ACCA Pakistan informed at a pre-budget seminar on Thursday, that income tax exemption limit should be increased from Rs 300, 000 to 500, 000, withholding tax on withdrawal of cash is considered high and should not be more than 0.2%. Additionally, the cash withdrawal limit per day should be increased to Rs 40, 000. There should be reduction in GST rate from 17% to 15%.
For broadening of tax base ACCA proposed that the provincial laws relating to the taxation of agricultural income should be implemented in letter and spirit and a mechanism be devised through which the FBR collects such taxes, which can then be passed on to the provinces. The non-filers of returns should be penalised as per the legal provisions to encourage a culture of compliance with the tax laws.
Moreover, effective measures must be taken by the FBR to bring undocumented income into the tax net. The documentation of the economy is vital for the growth in tax revenues that is required for progress and development of the country. It is therefore suggested that the concept of final tax should be abolished step-by-step so that all sectors become taxable under the normal tax regime, on the basis of their declared income, as calculated from their audited accounts. The banks have earned high profits in recent years in spite of the global recession, owing to a number of factors such as higher interest spread and increased government borrowings. It is therefore proposed that the tax rate for banks should be increased by 1% to 2 percent, tax expert said.
Ayla Majeed explained that the corporate tax rate applicable in Pakistan is 35%. There is also a reduced rate of tax of 25% for small companies that meet certain criteria provided in the law. In order to promote private sector investment in Pakistan it is proposed that the corporate tax rate should be gradually reduced. ACCA proposed reduction of the corporate tax rate to 34% and that of listed companies to 33%.
The dividends paid by a company out of income that has already been taxed should either not be taxed at all or beneficiaries should be allowed to claim adjustment against their own tax liability. It is proposed that withholding tax on dividends should be reduced from 10% to 7.5%.
Currently, the basic exemption limit is Rs 300, 000. Keeping in view the high incidence of inflation it should be increased to Rs 500, 000. Rationalising Withholding tax on commercial imports by industrial undertakings should be reduced to 2% to reduce the costs of doing business.
She further highlighted that the law provides that taxation authorities may not make enquiries from any person as to the source of inward foreign remittances made through normal banking channels, and such an amount will not be taxable. This provision of law was meant to encourage foreign remittances into Pakistan, but it has been misused. Incomes earned in Pakistan and not disclosed to the tax authorities are sent abroad and are then remitted back to Pakistan.
Those concerned cannot be questioned as to the source of such remittances and nor can the latter be subject to tax in Pakistan, under the provision of this law. This has given the unorganised sector an opportunity for tax evasion. It is therefore proposed that the said provision of law, ie, section 111(4) of the Income Tax Ordinance 2001, should be abolished to eliminate discrimination and encourage compliance with the applicable laws.
Tax analyst pointed out that the Associations of Persons (AOPs) were being taxed on the slab rates applicable to non-salaried individuals. With the amendment in the law included in the Finance Act 2010, the tax rate applicable to AOPs is now 25%. This has caused an increase in the tax liability of AOPs, and has encouraged doing business within a sole proprietorship structure. It is proposed that the tax rates for AOPs should be the same as applied to business individuals, to encourage people to conduct business in-groups rather than as sole proprietors.
In view of the current energy crisis, withholding tax applied on purchaser of a power project privatised by WAPDA and power generating companies should be reduced from 7.5% to 5%. Ayla Majeed further proposed that the withholding tax rate on services is 6%, which is high, particularly for the SME sector.
This should be reduced to 3%. The withholding tax charged on commission on petroleum products should be reduced from 10% to 7.5% in order to reduce the high cost of doing business. The withholding tax on withdrawal of cash is considered high and should not be more than 0.2%. Additionally, the cash withdrawal limit per day should be increased to Rs 40, 000.
The ACCA proposed that the reduction of the GST rate and introduction of multiple rates band. The general rate of sales tax is at present 17%. This rate should be reduced to a maximum of 15%, which would increase consumption, resulting in demand-led growth.
All general exemptions in the existing law should be either reduced or withdrawn and all sectors should be brought within the taxation net, even if a marginal rate of tax is introduced (including for pharmaceutical companies, with reduced rates as low as 1%).
Moreover, zero rating should also gradually be replaced with low initial rates. This move can potentially damage economic development and therefore we strongly propose that the import of plant and machinery for industrial purposes should be zero-rated. Zero-rating of raw material on imports for manufacturing sector. It is suggested that all raw materials imported for industrial consumption should be zero-rated and that the rate of sales tax should be lowered. This will help reduce the cost of production and expand industrial output, she said.
About the FED related proposals, the ACCA proposed that an amendment should be introduced in the provincial laws through which sales tax should be charged on all the services currently covered under the Federal Excise law and corresponding amendments should be made in the Federal Excise Act 2005. ACCA Pakistan is of the view that the Federal Excise Duty has caused an increase in the indirect tax burden on the manufacturing sector and therefore the same should be abolished for that sector.
There is a need to review and rationalise the entire customs structure in order to make the importation of raw material and machinery reasonable for local manufacturers, promote local industry and create fair competition in the market, which will result in better availability of products for the consumer, Ayla Majeed added.