Federal Budget anomalies: KCCI for restoring zero-rating, RCET, all incentives under National Textile & Apparel Policy

The Karachi Chamber of Commerce & Industry (KCCI) has expressed gratitude and appreciation to the Federal Minister of Finance Ishaq Dar, Chairman FBR Asim Ahmed and his team for giving due consideration to the budget proposals for FY2023-24 presented by the KCCI. A substantial number of proposals related to various sectors of trade and industry were incorporated in the Finance Bill for FY2023-24 including relief for manufacturing of Solar Panels, Adhesive Tapes, Iron & Steel and various other segments of industry.

Keeping in view the economic instability, foreign exchange crises, depleting exports and other challenges being faced by the country, the Karachi Chamber advised the government to revive zero-rating so as to allow five export sectors survive in times of liquidity crunch. Government must accord priority to Export Oriented Industries in all terms, particularly the Value-Added Textile Industry.

The Karachi Chamber, in its comprehensive document highlighting anomalies in federal budget, stressed the need to continue Regional Competitive Energy Tariff (RCET) for five export sectors by providing level playing field and enabling them to compete with the regional competitors.

KCCI also underscored the need to restore and provide all incentives under the National Textile and Apparel Policy 2020- 25, particularly DLTL, TUF, etc. to the Value-Added Textile Industry.

KCCI further suggested to restrict Super Tax to Tax Year 2023 as it was imposed for a period of one year vide Finance Act 2022 but if it was not possible this year then maximum rate of this levy should be reduced to 4 percent instead of 10 percent.

KCCI noted that a new concept of ‘additional tax on income, profits and gains’ with a capped rate of 50 percent has been introduced for extraordinary incomes arising from economic factors to be determined by the Federal Government for preceding five years. The proposed section carrying this concept should be deleted as any income, on which tax under normal course, has been levied, it should not be taxed again. Moreover, existing rates of income tax were already too high so this further tax will burden documented sector.

Referring to amendment in the definition of associates, KCCI advised to abolish the amendment as majority of the suppliers from whom import is made or buyers to whom goods are exported will become associates, which is against the intent of the law.

KCCI further recommended that the bonus shares, not within the scope of income, should not be taxed as it will create unnecessary hurdles in way towards industrialization and its growth.

KCCI noted that the bill proposes to introduce a tax holiday for SMEs setup exclusively as Agro based industry in a rural area, which should be extended to all areas including urban to incentivize investment in Agro based industries across the board.

KCCI pointed out that the bill has proposed incentive of exemption from advance income tax collection from non-resident with certain conditions. While appreciating this amendment, KCCI suggested that all unregistered persons must be required to mandatorily file income tax return and report advance tax payment in income tax return subject to exclusion given under the law. “Moreover, 1 percent advance tax under section 7E is only being collected from filers. In order to rationalize this, property registration authorities should be made liable to charge 2 percent tax [1 percent increased rate for being non-filer] under section 7E on all property tax challans issued to non-filers which would broaden the tax net and rationalize tax collection on immovable properties”, KCCI added.

Referring to a new section which would empower Commissioner to recover any outstanding liability under any other law for the time being in force, KCCI suggested that scope of the powers of Commissioner should be limited to the extent of Income Tax, Sales Tax and FED to avoid unfettered and discretionary powers to tax machinery resulting in unnecessary harassment.

KCCI, while mentioning proposal pertaining to restriction under Section 8(1)(h) to disallow input tax on building / construction materials, recommended that input tax on building / construction material should be allowed on such materials used for extension / expansion, BMR or industries to provide incentive for industrialization and growth.

KCCI noted that increase in line with PKR devaluation in threshold for annual turnover of cottage industry has been proposed which should be increased to Rs50 million.

KCCI stressed that despite several representations on the issue, the 3% Value Addition Tax imposed on Commercial Importers of Polyethylene and Polypropylene has not been removed which is a deterrent to legal imports of industrial raw material and is an incentive for smuggling. A major chunk of imports have, therefore, moved to smuggling regime so the unfair tax should be removed.

KCCI stated that at present, dividend received by a shareholder from a Company under Group structure is subjected to around 68 percent tax, which is extremely high as compared to the rates applicable to sole proprietorship and partnerships while the undocumented sector was totally out of the tax net. “As per study on 46 countries, income under the Group holding structure [where controlling interest [greater than 50 percent] is owned by the Holding Company], is nowhere taxed multiple times and the same is treated as exempt in the hands of holding Company. Consequently, in order to provide level playing field to documented sectors, taxation on multilayered basis should be removed.”

KCCI said that as per proposed amendment, rate of income tax withholding under section 153 on specified services is proposed to be increased from 3 percent to 4 percent which should be reduced to 2 percent as it was a well-known fact that service providers are already under severe financial pressure due to rise in energy prices, escalation of expenses relating to manpower etc. while the overall trade activities are affected due to market slowdown worldwide. “In this scenario, increase in rate has been proposed without considering the fact that business in Pakistan have considerably gone down and it will not be possible for the service-oriented sector to continue business after this increase.”

While appreciating the amendment to enhance sales tax rate for textile and leather retailers, KCCI suggested to incentivize the sector by allowing immunity from audit and offering tax reduction on transactions executed via Debit / Credit cards to incentivize registered POS retailers and simplify compliance for retail segment.

KCCI further said that under Income Tax Ordinance 2001, audit is allowed to be carried out once in every 4 years. “We suggest similar provision to be included in Sales Tax and Federal Excise Act.”

KCCI advised to abolish Section 8B of Sales Tax Act in order to provide much needed breathing space to documented sector. Alternatively, provision should be incorporated to allow exemption / exclusion from payment under section 8B on the basis of last year data. Moreover, the condition of 50 percent exports should be amended to 10 percent on monthly basis for all exports irrespective of any sector.

KCCI further suggested that supplier of goods should be excluded from the purview and scope of withholding of sales tax on services which would avoid unnecessary compliance, complications and undue tax burden of services on registered supplier of goods.

KCCI said that FBR, presently, has one single Tax Collection Pool as well as Refunds. At times, fake refunds are given resulting revenue losses, hence, separate and dedicated heads and pools for tax collection and refunds be introduced for all sectors which will help in highlighting sector-specific collections and refunds and shall also pinpoint fake/excess refunds given, if any.

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