President Karachi Chamber of Commerce & Industry (KCCI) Agha Shahab Ahmed Khan has stressed that the rate of GST should be reduced by 3 percent to 14 percent from current 17% which will have a very positive impact on business sentiment and it would trigger demand in domestic market, besides providing much needed relief to trade, industry and consumers.
Highlighting Budget Anomalies identified by KCCI which have been submitted to the Anomalies Committee (Business & Technical), President KCCI advised to withdraw 3 percent Further Tax on Sales to Unregistered persons to facilitate transactions. Agha Shahab said that it is unjust to force suppliers to provide CNIC of unregistered person and pay 3% further tax at the same time. After getting unchecked access to the database of citizens, Federal Board of Revenue (FBR) should be made responsible to broaden the tax base and register all entities in Sales Tax regime so that suppliers are not forced to sell to unregistered persons.
He further pointed out that after acquiring powers by FBR to access data of citizens from institutions and organizations such as FIA, Banks, NADRA and airlines etc., a major security risk has been created for citizens/taxpayers. Hence, Adequate safeguards may be inserted in the law and exemplary penalties be fixed in the provisions in case if the data is compromised by an official while access to data should be limited to officers in higher grades only, he proposed.
President KCCI said that the phenomenal increase in rate of FED from 13% to 25% on Caffeinated Energy Drinks is unjust and discriminatory. Caffeinated Energy Drink is produced by only one of the two major producers of beverages in Pakistan who contributes a major portion of over Rs.100 Billion in Tax revenue. The unjust increase is tantamount to targeting one producer and is discriminatory. Any tax should be imposed on the industry, not individual producers therefore, the Rate of FED on Caffeinated Energy Drink be restored to 13 percent.
Referring to Clause 12 of Finance Bill U/S 45B in which a new sub-section (5) has been added, which disallows production of any new documentary material or evidence before Commissioner (Appeals) which earlier has not been produced by the Appellant before the officer of Inland Revenue. He stressed that the clause may be removed as it is contrary to law of natural justice and ultra-vires of the constitution. A taxpayer should not be denied the right to produce evidence or documentary material at any stage while contesting his case.
KCCI had proposed to restore Tax Credit @10% on purchase of new machinery for BMR, to encourage investment in industry and spur growth, which was allowed prior to 2019. However, the proposals have not been included in Finance Bill’2020-21 Agha Shahab urged the policymakers to restore rate of tax credit to at least 10% and this credit should be applicable up to FY2025 to enhance the investment in production capacity of industries.
Expressing concerns over re-imposition of 3 percent Value Addition Sales Tax on Commercial Import of Raw Materials, President KCCI said that the VAT cannot be imposed where no value is added. Therefore, the anomaly may be rectified and the clause re-imposing 3% Value Addition Sales Tax on commercial importers of Raw materials in the Finance Bill should be deleted.
He further mentioned that inclusion of Flavored Milk in 8th Schedule since July 2015 has resulted in sharp increase in cost and retail price of Flavored Milk which has been a healthy diet supplement and popular among the masses. Flavored Milk category is in initial development stage within Dairy Industry, but its growth potential has been capped by imposition of Sales Tax and Further Tax at high rate and market size has reduced. Ironically, Milk and Fat Filled Milk (Liquid Tea Whitener) and components remain in Zero Rate Regime.
Flavored Milk with natural ingredients is a healthy substitute for other drinks, particularly for children and has a tremendous market potential for growth. It also complements to import substitution and saving of foreign exchange. Therefore, the locally manufactured Flavored Milk and its components/ sub-components may be excluded from 8th Schedule and included in Zero Rated regime by insertion in 5th Schedule, and status prior to Finance Act 2015 may be restored.
He believed that disallowing of input tax U/S.8(m) in the Finance Bill, has unfairly penalized registered manufactures/ suppliers specially those engaged in supply of third schedule products which are subject to Sales Tax on retail price whereas it is the responsibility of FBR and its field officers to identify unregistered persons and bring into tax-net. Clause – (m) of Section – 8 should therefore be deleted to allow registered suppliers to continue business activity freely rather than going into unnecessary litigation that in result would generate revenue for the exchequer.
By amendment in Finance Act’2019 importers of Automobile and Motorcycle spare parts are required to print MRP (Maximum Retail Price) on the packages and pay Sales Tax and Addnl. Sales Tax on Customs Value. Agha Shahab emphasized that It is not possible to ascertain the retail price of Automobile and Motorcycle parts before arrival of consignments to Pakistan due to fluctuation in exchange rates and forecast the prices in domestic market. He suggested that Automobile/ Motorcycle spare parts may be taken out of Third Schedule and included in normal import regime for assessment of duties and taxes, subject to standard valuation procedures.
Agha Shahab further recommended to rescind SRO.351, and restoration of PMC and PVC in the list of exclusions in SRO.190 (I) 2002. SRO.351 is ambiguous as to the actual products intended to be zero rate for export. PMC materials such as Polypropylene and Polyethylene are not produced in Pakistan and the country is a net importer of these materials, hence there is no justification in allowing zero rates export to Afghanistan. It seems the concession has been obtained by certain vested interests through misleading representations to Ministry of Commerce.
He also advised to take out MDF Board from the items allowed under FTA due to material damage to domestic industry which has adequate capacity to fulfill domestic requirements. Concessions on import under FTAs and various SROs be withdrawn and Regulatory Duty be imposed @16% on import of MDF board which is produced in Pakistan.
He pointed out that the single Local manufacturer of Aluminum Beverage Cans already enjoys a high degree of protection through the increase in Custom Duty (20%) on Empty Beverage Cans, additional Duty (7%), Regulatory Duty (5%) and Valuation ruling on higher side. Further, such manufacturer is also exempted from Income Tax and other taxes. This wide disparity has created a monopoly rendering the import of Aluminum Beverage Cans unviable for the bottlers, who are left with no option but to purchase it from local Beverage Can manufacturer whereas reliability and quality of which is yet to be tested in long run.
To prevent monopoly of a captive market and protect the beverage industry from exploitation, President KCCI stressed that exemptions and concessional rate of Duty proposed in Finance Bill 2020-21 should be rationalized and the high rates of Custom Duty, Sales Tax and WHT on import of Aluminum Beverage Cans be reduced. Around 70 percent raw material for beverage cans is imported because there is no domestic production of Aluminum Coils in Pakistan, hence there will be a perpetual loss of revenue.
He was of the view that Domestic market has been monopolized by a single local manufacturer while also the rates of Custom Duty and Sales Tax on raw materials for manufacturing of Aluminum Beverage Cans have been further reduced to ZERO in Finance Bill 2020-21. To make the local beverage industry competitive and prevent monopoly by local manufacturer of beverage cans, Rates of Customs Duty be reduced from 20% to 10% and Additional Custom Duty (7%) and RD (5%) should be withdrawn to support domestic beverage industry which is among the largest taxpayers and it has to compete with imported and smuggled canned beverages, he added.
President KCCI pointed out that through Tax Laws (Second Amendment) Ordinance, 2019 (issued in December 2019) a New sub-Section – 4 to Section – 73 was added by which the registered manufacturers were not allowed to supply to un-registered person in excess of Rs. 100 million in a year and Rs. 10 million in a month. Suppliers/manufacturers engaged in supply of third schedule products which are subject to Sales Tax on retail price, are particularly affected by the provision.
He proposed that sub-Section – (4) of Section – 73 added through Tax Laws (Second Amendment) Ordinance, 2019 be deleted to facilitate manufacturers/suppliers while laying the responsibility to identify undocumented entities on the field formations.
Agha Shahab stated that through Finance Act, 2019 new Section -108B to Income Tax Ordinance, 2001 was inserted by which a Manufacturer supplying 3rd Schedule goods under a dealership arrangement to persons not registered in Sales Tax and not appearing in IT ATL, an amount equal to 75% of the dealer’s margin (which is 10% of manufacturer’s sale price) shall be added to the income of supplier / manufacturer.
Such provisions amount to punishing the compliant registered persons for the inability of FBR to bring unregistered persons into tax net. He said that Section – 108B of the Income Tax Ordinance 2001 should be deleted and efforts be made to bring undocumented persons in the tax net.
Referring to addition of two clauses (p and q) through Finance Bill 2020, Agha underscored that both the clauses to Section – 21 of the Income Tax Ordinance, 2001 shall be deleted from Finance Bill 2020 to avoid unnecessary disagreements between taxpayer and officers and to avoid unnecessary appeals / litigations.
He said that through Finance Bill 2020 major changes are proposed to Section – 22 of the Income Tax Ordinance 2001 by which tax depreciation on new additions to Capital assets are to be restricted to 50% of allowable tax depreciation. This change would negatively affect the Capital expenditures by the business specially the investment in Plant & machinery by the Industrial undertakings. Such proposal should be dropped in approved Finance Act, 2020 for broader interests of all stakeholders.
Agha Shahab mentioned that through Finance Bill 2020, major change is proposed to Section – 131 of the Income Tax Ordinance 2001 that makes the filing of Appeal before the Appellate Tribunal Inland Revenue (ATIR) conditional upon payment of 10 percent of tax demand as up-held by the Commissioner (Appeals) Inland Revenue CIR (A). Such proposal may be revoked because it is a coercive measure against the appellants.
He stated that further imposition of RD on polyester filament yarn @ 2.5 percent would be grossly unjust and render the textile industry uncompetitive. Therefore, President KCCI suggested to omit the Regularity @2.5% which has been recommended in the Finance Bill 2020-21.
Polyester filament yarn is a raw material and both, commercial and industrial importers, supply this yarn to the SME sector. It is therefore recommended that a uniform rate of WHT be applied on import of PFY @1.0% for both Commercial importers and manufacturers.
He stressed that Federal Budget should only reflect projections of Revenue and Expenditures and the changes in relevant provisions which give legal effect to revenue measures. Any changes in powers and authority of the FBR and IR Officials should be made through separate bills which may be debated in parliament before approval.
Agha Shahab stated that, Optical Fiber industry in Pakistan is a high-tech industry and supplying cable to major projects and industry. However, the rates of Custom Duty and Additional Customs Duty is charged at high rates on the Raw Materials used by the manufacturers. He proposed that Custom Duties and ADC on raw materials including Cable Filling / Flooding Compound, Polybutylene Terephthalate, Fiber Reinforced Plastic, Glass Reinforced Polypropylene, Water Blocking/Swelling Tapes, Single Mode / Multi Mode Optical Fiber may be revised to Zero. He added that Fiber Optic Cables including Optical Fiber Cables – OFC and Telephone / UG Cables – UG may be inserted in SRO.211 (I) 2009 dated 05.03.2009 Schedule XXIV to be eligible for repayment of Customs Duties. support an important industry.
In order to save the steel industry, he suggested concessions given to wire rod manufacturers should be omitted from Finance Bill 2020. This decision will protect the steel industry of Pakistan as well as the government in terms of Revenue Losses of substantial amount. Furthermore, some of the industries producing long steel products will face closure. The steel industries in Pakistan have been constantly increasing their manufacturing capacities to localize the steel products and generate employment in the country.
These anomalies and issues created by various provisions in the Finance Bill’2020-21 will be discussed in more detail by the KCCI team with the Anomaly Committees formed by the FBR to address these issues and rectify the anomalies in the budget for FY2020-21.