FBR plans to suggest one percent cut in corporate tax rate

The Federal Board of Revenue is planning to propose to the Ministry of Finance to reduce the rate of corporate income tax from 35 to 34 percent for private and listed companies in the upcoming budget (2012-13). Sources told Business Recorder on Friday that it would not be appropriate to suddenly bring down the rate of corporate income tax from existing 35 percent to a lower level of 30-25 percent.
On an experimental basis, the rate of income tax for companies would be proposed to be reduced from 35 to 34 percent and gradually every year one percent reduction would be made to bring down the rate for the corporate sector in the next three years. In case of Association of Persons (AOPs), one of the proposals is to bring the rate of 25 to 35 percent which is presently applicable for companies. However, if this proposal is not feasible, the government can introduce different slabs for the AOPs for taxability purposes. The FBR can charge different rates for the AOPs depending on their income and sales. The income tax would be charged on the basis of the specified slabs for the AOPs. The AOPs with higher income may be subjected to higher rate of tax and AOPs with lower rate of income to lower rate of tax, sources added.
It is important to mention here that the Securities and Exchange Commission of Pakistan (SECP) has proposed gradual reduction in the corporate tax rates for private and listed companies with simultaneous increase in tax rate of Association of Persons (AOPs) in budget (2012-13). The high corporate tax rate- 35% vis-à-vis 25% for non-corporate sector - is an incentive for non-corporate sector to remain undocumented and without any supervisory oversight. The existing tax regime for small companies discourages corporate progression from small company to normal company, exceeding the threshold defined for small company.
In its budget proposals (2012-13) communicated to the Chairman Federal Board of Revenue (FBR) Mumtaz Haider Rizvi, the SECP has estimated that the gradual reduction in corporate tax rate triggered growth of corporate sector, an average annual increase of 3,000 new companies.
The SECP has proposed that the classification of small company be omitted considering the economic disincentive for small company to increase its turnover, paid up capital or employment. The SECP has also proposed that the fiscal incentive for listed companies to distribute dividend- The rate of tax in case of company not distributing a minimum of 30% of its after tax accounting profits of the year as dividend will be 3% higher than the normal tax rate for listed company.
The SECP was of the view that the proposed increase in the rate of income tax for AOPs and reduction for companies (private and listed) will encourage corporatization and documentation of the economy. Potential loss to the national exchequer will be offset against the enhanced government revenue through income tax from increasing number of companies; capital gain tax, increased collection of withholding taxes, dividend taxation, federal excise duty, increase in rate of small companies, conversion of AOPs into companies and monitoring of FBR on existing non filers.
The SECP has also made assumptions for tax revenue projection of the said proposal. The number of business; AOPs and Non-Salaried Individuals that will convert into company for next three years will be 500, 1,000 and 2,000. It has been estimated that 3,000 new companies incorporated every year will be new entrants in the corporate tax net. Out of 45,000 non filer companies, the number of companies coming into the tax net will be 500, 1,000 and 2,000 during next three years respectively. Only 5% of new companies will come into profitability ie, 150, 475 and 1,000 during next three years respectively, SECP added.