ISLAMABAD: The Reforms & Revenue Mobilization Commission (RRMC) has strongly recommended an increase in tax rates for non-corporate businesses in the coming budget (2023-24).
In this connection, the RRMC has recommended amendment in the corporate law for the registration/ incorporation of any person undertaking a business beyond certain limits based on revenue, profit or any other benchmark, etc.
The recommendation of the RRMC to the Ministry of Finance revealed that any person undertaking business through a company receives 51% of its profits after paying all kinds of taxes. Moreover, companies are withholding agents by default and are thus legally required to deduct withholding tax (WHT) from payments made, under a number of provisions of the Income Tax Ordinance.
The RRMC stated that the companies are also registered with the FBR at the time of their incorporation and a National Tax Number (NTN) is also assigned to them at that time.
Financial statements of companies are also required to be audited under the provisions of Corporate Laws. As such, companies have a number of tax and regulatory compliances, are in the tax net from their incorporation, and are subject to strict tax rules and regulations.
On the contrary, sole proprietors/ Association of Persons (AoPs) are able to conduct their respective businesses without any regulatory oversight/ limits. Their tax incidence on profits is also approximately 10% lower than that of a Company.
Besides, the withholding obligations of sole proprietors/ AOPs are either not applicable or practically not enforced. Moreover, the enforcement of obtaining an NTN, right from inception is also not present and thus they obtain an NTN, if and when they desire.
Furthermore, the AOPs/ individuals are withholding agents under sections 152 &153 of the Income Tax Ordinance if their turnover exceeds Rs100 million; whereas every company, regardless of its turnover, is a withholding agent and is thus required to deduct WHT from payments made. This is also one of the disparities between corporate taxpayers and individuals/ AOPs that discourages promotion of corporate sector.
The AOPs/ Individuals operate without any regulatory oversight unlike companies that are required to obtain NTN upon incorporation. Individuals/ AoP’s operate their businesses at a massive scale without having NTN, while having industrial or commercial connections of utilities.
It is; therefore, recommended that the corporate law be amended to require any person undertaking a business beyond certain limits to be incorporated. The limits can be based on revenue, profit or any other benchmark, etc.
The RRMC has also recommended that the tax incidence on sole proprietors/ AoPs (other than professionals who are barred from incorporating under the law) should be increased by 10%. Likewise tax on non-corporate exporters at one percent should be increased to 8 percent to account for tax on dividend not paid by non-corporates as compared to corporates.
The withholding obligations should be made applicable on every person conducting business whether through a company or otherwise. Clauses (45) and (45A) of Part IV which provide exemption from withholding should be withdrawn to remove distortions in withholding regimes. Clauses (12) and (46AA) which provide exemption from withholding for agriculture produce should be automated whereby electronic statement should be filed by those making payments providing relevant details of those whose withholding is not made. Circular 4/2011 which provides for exemption of compliance on purchase through commission agents should be withdrawn.
Every person engaged in business or profession should withhold tax under sections 152 & 153 (except for other than Tier-1 retailer discharging its tax liability on electricity bills). If this distortion is not removed, then alternatively, threshold of Rs. 100 million should be allowed to small companies as well to provide the said small companies a level playing field, RRMC recommendation added.
Copyright Business Recorder, 2023