FBR Policies Trigger Divestment by Existing Investors

Every now and then, we see news items stating that the FBR, via upcoming Finance Bills, intends to increase withholding tax on goods supplied by filers, services rendered by filers, goods or plant and machinery imported by manufacturers, and salaries received by employees, and so on and so forth. There has been a news item stating that the sales tax rate is proposed to be increased to 19%. All this is being proposed by the FBR with an apparent intent to squeeze the already burdened taxpayers, without realizing that there are many other avenues for increasing tax collection without placing additional burdens on existing taxpayers.

2.         In this connection, the Pakistan Business Council, in a letter addressed to the Finance Minister, has suggested collecting tax from the undocumented sector. According to the letter, the documented sector pays up to 35% income tax, 10% super tax, and tax on dividends, whereas the undocumented sector does not pay any income tax and remains out of the tax net by only paying insignificant withholding tax on certain transactions. PBC has highlighted that there appears to be a serious disparity between the following with Income tax filers:

A.         As of June 30, 2023, there were 177 million bank accounts in Pakistan [source: https://www.samaa.tv/2087310799-sbp-reports-over-177-million-bank-accounts-in-pakistan]

B.         There are more than 4million industrial and commercial utility connections, however, registered sales tax Filers are around 200,000. Out of these 200,000 only around 41,000 are making payments alongwith monthly sales tax return.

C.        Number of Registered Vehicles was reported at 7,020,803 Unit in Dec 2022 [source: https://www.ceicdata.com/en/indicator/pakistan/number-of-registered-vehicles]

3.         To avoid further burden on already burdened taxpayers, PBC has suggested the FM to collect tax from sectors / persons who are not contributing at present. Some of the recommendations submitted by the PBC are as follows:

A.         FBR values should be revisited to reflect actual market value. Simple comparison of values as per leading property websites with FBR values will provide a fair idea of significant difference. Property, at present, is a parking lot for black money. Bringing up FBR values in line with market value will resolve this issue.

B.         POS prize scheme should be relaunched. At the time when this scheme was in place, many retailers were forced to issue QR code based sales tax invoices due to pressure from customers as well as fear of online complain to FBR by customers.  Although FBR is collecting Re 1 per invoice issued by all retailers but the amount is neither being included in FBR’s revenue nor being distributed to buyers through balloting.

C.        Law should be amended to encourage new taxpayers to get themselves registered with POS by allowing (i) reduced Sales Tax rate for POS integrated retailers of textile and leather sector from existing 15% to 14% and to (ii) 13% in the first year for new integrated retailers as a welcome gesture and to (iii) absolve newly POS integrated retailers  from all sort of tax audits / proceedings atleast for preceding as well as subsequent 3 years.

D.        At present, filers pay tax under section 7E on annual basis whereas Non-Filers on pay once at the time of disposal of immovable property. Rules need to be framed by FBR to make it clear that this 1% will also accrue for every year of holding on non-filers in urban and semi-urban areas and to  ensure that this accrued 1% tax on land is collected from Non-filers, by instructing the Land registering and transfer authorities to ensure its collection on transfer of the land just like NUF (non-utilization fee is collected by various authorities).

E.         Incase of non-payment of tax under section 7E by Non-Filers, rates should be increased for non-filers after every 5 years as follows:

i.    For first 5 years = 1% of the value

ii.   Incase tax is not paid for first 5 years, rate should be increased to 1.25% and be made applicable from year 1.

iii.  Incase tax is not paid for total 10 years as above, rate of tax should be increased to 1.50% and be made applicable from year 1

Increase in rate for unpaid years will create deterrence and will encourage non-filer to pay tax under section 7E on timely basis.

F.         Tax rates on agriculture sector, under the provincial laws, on the basis of land area, must be revisited to reflect changes in the income potential from land due to efficiencies / output growth in Agriculture sector. Even though agriculture income is not subject to income tax, however, income tax return and wealth filing under the Federal Income tax law, must be made mandatory for all agriculturists falling which, Federal income tax law should be made applicable to them.

G.        Leverage the NADRA database, which holds the identification data of all Pakistanis. FBR should coordinate with concerned departments like banks, registrar of properties, car registration authorities, airlines to trace ownership of vehicles, properties and bank account by Non-Filers as well as frequency of air travel by Non-Filers. Proposals tabulated below should seriously be considered.

Incase above proposals or some other proposals to levy tax on undocumented sectors are not seriously implemented by the Government this time and incase those already paying taxes are burdened further, Pakistan will unfortunately, see fast paced deindustrialization. Due to overall economic situation coupled with FBR’s demand from existing taxpayers to meet ever increasing revenue targets, local investors are already very hesitant to make any further investments. Even those with commitment to invest in manufacturing sector are backing out. Recent example can be seen from a notice [attached] issued by Tariq Glass Limited / Lucky Core Industries whereby they have informed PSX about their intention to discard their investment in glass manufacturing plant. Moreover, as per the newsclipping https://tribune.com.pk/story/2468753/bat-threatens-to-exit-over-tax-hikes, British American Tobacco has already threatened to exit from Pakistan over increasing tax hikes.