To encourage documentation: FBR to introduce 'Minimum Tax Regime'

The Federal Board of Revenue has proposed to bring sectors of Final Tax Regime and Fixed Tax Regime into the Minimum Tax Regime to encourage documentation from next fiscal year (2011-12). Sources told Business Recorder here on Friday that the proposal would result in filing of income tax returns by these sectors under section 114 of the Income Tax Ordinance 2001as against statements under section 115 of the Income Tax Ordinance 2001.
Resultantly, their tax returns would be subjected to audit and examination or books of accounts. The FBR has proposed that the sectors covered under the final tax regime included exporters, dividend income, profit on debt, commercial importers, suppliers, contractors and others should be brought into the minimum tax regime. It has been learnt that the FBR may make this tax as adjustable for the concerned sectors to facilitate those who would be brought into the minimum tax regime, sources added. According to the budget proposals (2011-12) of the Institute of Chartered Accountant of Pakistan (ICAP), in the last two years steps have been taken to reduce the scope of final tax, fixed tax and separate block tax regimes but a lot more needs to done by abolishing and replacing the same with minimum tax concepts to start with. This will ensure documentation and payment of tax at the applicable rate on the consolidated taxable income instead of breaking in different regimes.
The concept of taxing income from property as a separate block of taxable income should be done away. Deductions against the gross rent should be admissible only if actually incurred and that too subject to an overall threshold of 50 percent of the gross rent. The commercial imports should be excluded from the final tax regime and the tax collected at import stage should be converted into a minimum tax to start with. The sale of goods and execution of contracts should be excluded from the final tax regime and the tax deducted at source should be converted into a minimum tax to start with, it added.
The ICAP proposed that the undocumented, cash and parallel economy are black spot for entire taxation system. The major chunk of the state revenue is generated by few sectors of the businesses owned by national and multi-National companies and corporations. The transport, wholesale, retail and professional services sector of the business has a very low contribution to the tax revenue as compared to their share in GDP.
The direct tax laws need a major shift to curb this situation. Following are the examples of our existing laws that do not support documentation and resultantly the increase in tax base and resource mobilisation. Presently there are areas of final tax regime; fixed tax or separate block of income and a very extensive withholding tax regime coupled with final tax, which has converted direct tax into indirect tax.
Another very significant area for major shift is facilitation of compliant taxpayers and penalisation of non-compliant taxpayers. All our direct tax laws are day by day burdening the existing and compliant taxpayers. No measures are being taken to enforce the tax laws on the non-compliant taxpayers.