The mutual fund industry has proposed the government to abolish eight percent minimum tax on Asset Management Companies (AMCs) and real estate investment trust (REIT) Management Companies licensed by the Securities and Exchange Commission of Pakistan (SECP) in the coming budget (2020-2021).
According to the budget proposals of the Mutual Funds Association of Pakistan (MUFAP) for 2020-2021, the minimum tax at rate of eight percent is applicable under Section 153(1)(b) of the Income Tax Ordinance, 2001.
The federal government has lifted exemption available to companies from applicability of minimum tax at rate of eight percent under Section 153(1)(b) of the Income Tax Ordinance, 2001 through promulgation of Income Tax (Second Amendment) Ordinance, 2015, regarding application of minimum tax on service provider companies for certain corporate service providers.
These companies have been exempted through insertion of Clause 94 in Part IV of the Second Schedule. The AMCs and REIT Management Companies licensed by the SECP and trade associations licensed under the Trade Organization Rules, 2013 should also be included in the same list of companies exempted from applicability of minimum tax at rate of eight percent.
It said that the Clause 150A pertains to payment of profit on Sukuks and requirement of withholding tax on the payment. Since mutual funds and pension funds are exempt through Clause 47B from withholding from dividend, profit on debt, brokerage and commission, mutual fund and pension funds should also be exempted from withholding of tax on profit on Sukuks, it proposed.
The government should help the mutual funds industry grow and expand in the future to play its due role in promoting a savings culture in the country, mutual funds proposed.
As per budget proposals, the provisions of minimum tax on services provided by AMCs and REIT Management Companies should also be subject to reduced minimum tax rate of three percent.
Three percent of the gross amount payable, in the cases of transport services, freight forwarding services, air cargo services, courier services, manpower outsourcing services, hotel services, security guard services, software development services, IT services and IT-enabled services as defined in clause (133) of Part I of the Second Schedule, tracking services, advertising services (other than by print or electronic media), share registrar services, engineering services, car rental services, building maintenance services, services rendered by the Pakistan Stock Exchange Limited, and the Pakistan Mercantile Exchange Limited inspection, certification, testing and training services, services provided by the AMCs and REIT Management Companies, investment advisory services and trade associations licensed under the Trade Organization Rules 2013, the budget proposal said.
Certain corporate service providers as mentioned in Clause (2)(i) of Division III of Part III of First Schedule are subject to reduced minimum tax rate of three percent, whereas AMCs and REIT Management Companies are subject to a minimum tax rate of eight percent. This is an exorbitantly high rate of withholding tax for the AMC.
Due to low, AUM in Pakistan and requirement of high expenditure on marketing and distribution expenses, the industry is working at breakeven point. Moreover, 13 out of 19 AMCs end up paying minimum tax, which is multiple times to what their actual tax liability should have been on corporate tax rates.
The flaw in tax law is that the tax authorities are treating all service industries as having same rate of profitability, and hence same rate of withholding tax, it added. The MUFAP has also proposed that a separate section was introduced for profit on corporate Sukuks and the same has been missed out for inclusion in the withholding section for entities exempt in Section 47B.
The provisions of sections 150, 151, 233, 150A (and Part I, Division VII of the First Schedule) shall not apply to any person making payment to Division VII of the First Schedule) shall not apply to any person making payment to National Investment Unit Trust or a collective investment scheme or a modaraba or Approved Pension National Investment Unit Fund or an Approved Income Trust or a collective investment scheme or a modaraba or Approved Pension Fund or an Approved Income Payment Plan or a REIT Payment Plan or a REIT Scheme or a private equity and venture capital fund or a recognized provident fund or an approved superannuation fund or an approved gratuity fund.)
Scheme or a private equity and venture capital fund or a recognised provident fund or an approved superannuation fund or an approved gratuity fund, it added.