Former Advisor to Prime Minister on Finance Dr Hafeez Pasha said that the 0.6 percent withholding tax on banking instruments is too high which would hurt the whole banking system and discourage documentation drive of the government.
Speaking at "Paisa Bolta Hai" of Aaj News, Dr Pasha said that since imposition of the levy from July 1, 2015 there is a decrease of Rs 60-70 billion in banks deposits. Moreover, there is an increase in currency circulation in the country. If this withholding tax has not been handled properly, it would create serious problems for the entire banking sector. Initially the withholding tax was imposed on cash withdrawals from banks. Now, the 0.6 percent withholding tax has been levied on all kinds of banking transactions. Instead of increasing documentation, it would narrow the tax base. It is also apprehended that the people would come out of the legal system of documented economy.
He suggested that the government should immediately resort to pre-budget status before Finance Act 2015. The system of withholding tax prior to budget 2015-16 should be restored.
Dr Pasha said that the government has mainly focused on withholding tax regime for the last 1-2 years and withholding tax rates for non-filers have been considerably enhanced. The withholding tax has also been imposed on new items. So far, withholding taxes have been collected at 37 stages. In Pakistan, the biggest withholding tax regime is applicable as compared to other countries. Around 70 percent of the direct taxes revenue comes from withholding taxes.
To a query, he said that the traders are paying a wide range of taxes including withholding taxes. The withholding tax is also applicable on telephone, electricity, vehicles, foreign travel and others. If the traders are not filing income tax returns, this does not mean that they are not paying any taxes. Traders are paying very high taxes under the withholding tax regime.
The commercial importers are paying highest rate of withholding tax at the import stage. Annually, Rs 200 billion has been collected from importers from withholding tax. The amount comes to around 20 percent of the FBR revenue collection.
Dr Pasha said that 0.6 percent is a very heavy tax and there is a danger of hurting the banking system due to this levy. "The withholding tax on banking instruments of non-filers is very high," he said.
When asked about raise in the POL products, Dr Pasha said that as a result of change in tax system during the last 1-2 years, 50 percent of the collection of indirect taxes is coming from energy products. While giving an example, of high speed diesel, he said that the HSD is subjected to highest rate of sales tax at 45 percent. This rate is highest in the history of Pakistan. Besides POL products are subjected to petroleum levy, Gas Infrastructure Development Cess. Five percent statutory rate of duty and 7 percent regulatory duty is applicable on the import of Furnace Oil in order to get revenue in advance. Thus, the FBR has imposed around 12 percent duty on the import of Furnace Oil. Moreover, all POL products are subjected to 2 percent additional duty. There is an increase in rate of sales tax on POL products, petroleum levy and GIDC. Out of total revenue collected by the FBR, around Rs 800-900 billion is coming from energy sector. Resultantly, country's prices of energy are much higher as compared to the world prices having direct negative impact on exports.
He said that the energy taxes are imposed across the world including India. However, Pakistan has imposed so many taxes on energy sector during the last 1-2 years which has made our exports uncompetitive. The price of gas has been substantially increased on fertilisers which would increase prices of fertiliser in the country. At the time when international commodity prices are collapsing, Pakistan is raising input cost of farmers. This is going to be a very big problem for the country in future. It is very necessary to immediately reduce the input cost of the farmers.
Such increase in rates of taxes is a desperate attempt of the government to generate revenue, but it would not increase in revenue collection. The imposition of the distorting taxes would reduce the tax base. Such kind of higher incidence of taxes would decrease production and subsequently reduce revenue from exports. This is completely contradictory to the reality of Pakistan today. It would directly affect the backbone of the county ie farming community.
He stated that the government has to lay down principals that the income from all sources be treated similarly. Sharing distortion in taxation system, Dr Pasha said that the exemption granted to the Independent Power Producers (IPPs) has caused revenue loss of Rs 500 billion during the last 20 years. Similarly, a number of concessionary SROs and distortion in tax laws needs to be abolished by replacing it withy a simple tax system. The standard rate of 17 percent sales tax is too high. There is a need to abolish all Exemption Schedules in the federal tax laws.
In budget 2013-14, the government announced to reduce non-salary cost by 30 percent. At the end of the year, annual demands and grants documents revealed that the cost has been increased.
To a question on privatisation, Dr Pasha added that the main objective of privatization program is to privatise the loss making entities like steel mill. There is no mentioned in the manifesto of the government that they would sale shares of profitable entities like banks.
There is a huge opportunity after 18th Amendment to reduce the size of the federal government. Pakistan needs a comparatively small federal government. However, this is not happening. The federal bureaucracy is resisting the move. There is also need for enhancing the capacity of the provincial government, he added.
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