ISLAMABAD: The International Monetary Fund (IMF) has recommended the Federal Board of Revenue (FBR) conduct a comprehensive review of the tax incentive regimes with the objective to eliminate and streamline unnecessary or duplicative incentives.

Sources told Business Recorder that the IMF has conveyed to the FBR that although the Income Tax Ordinance (ITO) has been amended to remove some of the tax incentives, new incentives have also been introduced in recent years. For example, a new Section 44A was introduced in the ITO by the Finance Act, 2023 to provide for tax exemptions and concessionary tax treatment in respect of income from qualified investments under the Foreign Investment (Promotion and Protection) Act, 2022, as well as income of all investors and shareholders of the qualified investment, their associates, and companies specified in the Second and Third Schedules to the said Act including third party lenders.

IMF comes up with new ‘wish list’

IMF has recommended a comprehensive review of the tax incentive regimes should be undertaken with a view to eliminate and streamline unnecessary or duplicative incentives, and to adopt cost-based tax incentives, such as accelerated depreciation, where incentives are necessary. Rather than having stacked incentives, it is preferable to have a more regular tax system with a lower tax rate supported by a wider tax base.

Other features of the tax system that pose impediments against investments, such as its complexity and high compliance burden, will, when removed, have a positive effect on the investment climate. Consideration could also be given as to whether the current classical system of taxation that taxes both corporate profit and dividend distributions, resulting in double taxation of corporate income, ought to be replaced by either a one-tier corporate tax system or an imputation system. Double taxation of corporate profits results in inefficiencies and makes investments less attractive, sources quoted IMF as recommending to the FBR.

Copyright Business Recorder, 2024

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