SUNDAY JUNE 19: Reducing sales tax to 16 percent for last 10 days of June: announcement anytime soon

ISLAMABAD: The federal government has decided to announce shortly a major relief for the business community by reducing standard rate of sales tax from 17 to 16 percent and abolition of 2.5 percent special excise duty (SED) during the last 10 days of June 2011 instead of applying these reduced tax rates from July 1, 2011.
Sources told Business Recorder here on Saturday that the decision has been taken in the meeting of the Tax Reform Co-ordination Group (TRCG) chaired by Dr Abdul Hafeez Shaikh, Minister for Finance, Revenue and Economic Affairs. It is expected that the announcement of the major tax relief would be announced by Finance Minister during the ongoing budget session.
The issue came to light during the meeting of the TRGC when FBR Member Customs Mumtaz Haider Rizvi informed the meeting that the many importers are reluctant to clear their imports at existing higher rate of 17 percent sales tax and 2.5 percent SED. The reduced rate of 16 percent sales tax and withdrawal of the 2.5 percent SED would be applicable from July 1, 2011. A number of importers are reluctant to clear their consignments at 17 percent sales tax and 2.5 percent SED and waiting for reduction in the tax rates from July 1, 2011. If the government allows the importers to clear their consignments at reduced rate of 16 percent with no SED, it would be a major relief for the business community during remaining period of current month and the financial year.
According to sources, the proposal was agreed by all concerned officials of the Ministry of Finance, FBR and Members of the TRGC. It has been decided that the tax relief would be announced in coming days to ensure applicability of the reduced rate of 16 percent sales tax and abolition of the SED during the last 10 days of June 2011. The government is expected to give this concession from June 20 instead of July 1, 2011, providing extra relief to the taxpayers during the last 10 days of June.
During the meeting, the TRGC strongly recommended to exclude services provided or rendered by companies under the proposed section 153 of the Income Tax Ordinance 2001. There was a general consensus among the TRGC members that serviced provided or rendered by companies be excluded from the purview of the section 153 of the Ordinance 2001.
The tax officials informed the TRCG that the total collection of the FBR stood at over Rs 111 billion during first 17 days of June 2011 against Rs 87 billion in the corresponding period of last fiscal. The meeting also discussed the idea of applicability of capital gains tax (CGT) on immovable property after the passage of 18th Constitutional Amendment.
Sources said that the legal status of the applicability of the CGT on sale and purchase of property was discussed during the meeting. One legal view was that the federal government is legally empowered to impose CGT on sale and purchase of immovable property after 18th Constitutional Amendment. However, the rate and the modalities have to be worked out in this regard. It was also suggested that a lower rate of the CGT on such transactions could be considered, if legally possible.
Sources said that some of the members of the TRCG endorsed the legal viewpoint that the CGT on immovable property could be implemented after 18th Constitutional Amendment. It was decided that the legal status of imposition of the CGT on immovable property after 18th Constitutional Amendment would be further examined before any final decision is taken in this regard.
When contacted, a tax expert said the exclusion of the 'immovable property' from the section 37 (Capital Gains) of the Income Tax Ordinance 2001 may empower the Federal Board of Revenue (FBR) to collect capital gains tax on property transactions without legal implications. However, the opinion of Law and Justice Division would further help clarify the legal status of the issue. Presently, immovable property is exempted from capital gains tax under section 37 of the Ordinance 2001. If the government amends the Income Tax Ordinance 2001 through the Finance Act 2011, the immovable property could be directly brought within the purview of the capital gains. Primarily, the present taxation of the capital gains is restricted to buying and selling of shares. In case the exemption granted to the immovable property from capital gains is withdrawn, the difference of purchase and sales of property may be liable to capital gains tax. Keeping in view a huge investment in the real estate sector, the amendment in section 37 of the Ordinance 2001 might be helpful for the government to generate a huge amount from the capital gains tax from 2011-2012. If such kind of proposal is considered, the FBR can draft detailed rules on the taxation of capital gains on the immovable property. One of the ways to tax the urban properties is to expand the scope of section 37 (Capital Gains) of the Income Tax Ordinance 2001.
According to expert, the section 37 of the Ordinance 2001 deals with the Capital Gains under which a gain arising on the disposal of a capital asset by a person in a tax year, other than a gain that is exempt from tax under Income Tax Ordinance 2001 shall be chargeable to tax in that year under the head-Capital Gains. Under the provision, the capital asset means property of any kind held by a person, whether or not connected with a business, but does not include (a) any stock-in-trade consumable stores or raw materials held for the purpose of business; (b) any property with respect to which the person is entitled to a depreciation deduction under section 22 or amortization deduction; (c) any immovable property; (d) any movable property [excluding capital assets specified in sub-section (5) of section 38] held for personal use by the person or any member of the person's family dependent on the person.
If in sub-section 5 (c) any immovable property is included in the definition of property for the purpose of capital gains, amendment would be required in section 37 of the Ordinance 2001. Through the proposed amendment, the immovable property could be considered as capital assets for chargeability of tax under the head - Capital Gains.
Sources said the sale and purchase of immovable assets could be taxed as a normal business under the said proposed amended provision of the Income Tax Ordinance 2001. However, the viewpoint of Law and Justice Division would help clarify the issue, the expert added.