Tax measures announced to achieve tax target
In its 6th budget presented on 27th of April 2018, the outgoing PML-N government assigned to the Federal Board of Revenue (FBR) a tax revenue target of more than four trillion rupees for the upcoming fiscal year 2018-19. To achieve this target, the government has also proposed new tax measures aimed at generating additional tax revenue.
Direct Tax Measures
The government proposed that withholding tax rates for non-filers are likely to generate Rs 1.6 billion. The following new tax measures have been proposed in the withholding tax regime.
— for sales and supplies under Section 153 of the Income Tax Ordinance, 2001, the rate of tax for non-filers has been increased from 7 percent to 8 percent in case of companies and from 7.75 percent to 9 percent in case of individuals and association of persons (AOPs), not being companies.
— for contracts, the rate of withholding tax for non-filers has been increased from 12 percent to 14 percent in case of companies and from 12.5 percent to 15 percent in case of individuals and AOPs, not being companies;
— the banks issuing credit and debit cards will be obliged to collect 1 percent advance tax from filers and 3 percent advance tax from non-filers in respect of credit and debit card transactions resulting in outward flow of remittances from Pakistan. The FBR is likely to collect around Rs 1 billion from withholding tax on payments remitted abroad through credit, debit and prepaid cards. This measure is proposed in view of the fact that credit and debit cards are being utilized to pay for foreign travel, lodging, shopping, etc., and also for online shopping from merchants outside Pakistan, which results in outward flow of remittances through the banks issuing such credit and debit cards;
— at present, the tax collected under Section 148 of the Income Tax Ordinance, 2001 (hereinafter ITO), from commercial importers at the import stage is final tax, therefore, they are not required to file their returns of income and compute their taxable income. This leads to under-invoicing, domestic transfer pricing and evasion of tax. Tax collected from commercial importers at the import stage shall now constitute minimum tax instead of final tax, therefore, commercial importers shall be required to file their returns of income depicting their taxable income;
— marriage halls, banquet halls, commercial lawns, etc., are mandated to collect 5 percent of the bill in respect of functions under Section 236D of the ITO. In order to improve and streamline the collection of this tax, marriage halls are now required to collect either 5 percent of the bill or Rs 20,000 per function in major cities and Rs10,000 per function in the remaining cities, whichever is higher;
— no gain or loss is taken to arise on the disposal of an asset by reason of a gift of the asset under Sections 37 and 79 of the ITO, i.e. it is treated as a non-recognition event, therefore, no liability for capital gains tax arises. Such non-recognition shall now be restricted to gifts given to relatives of an individual as defined in section 85(5) of the ITO;
— the tax deductible on services rendered/provided by permanent establishments of non-resident persons shall be treated as minimum tax; and
— persons would be required to explain the source of investment if the amount of foreign remittances in a year exceeds Rs 10 million.
Indirect Tax Measures
The government has proposed several tax measures concerning sales tax and customs duty to generate additional tax revenue. These measures include:
1. Sales Tax
The FBR generates more tax revenue through sales tax than any other tax, including income tax, customs duty and federal excise duty. Tax measures proposed to generate additional tax revenue from sales tax are as follows:
— the rate of sales tax for steel sector has been proposed to be increased to Rs 13 per unit of electricity consumed besides rationalizing the rate of sales tax for other allied steel industries, i.e. ship-breakers and re-rollers. This measure is expected to generate Rs 12 billion;
— raise in further sales tax under section 3(1A) of the Sales Tax Act, 1990, from 2 percent to 3 percent on supplies made to unregistered persons, will likely generate Rs 10 to Rs 12 billion.
— the scope of services under Islamabad Capital Territory (Tax on Services) Ordinance, 2001, has been increased owing to the fact that services, which are chargeable to sales tax in provinces, are not chargeable to sales tax under the Islamabad Capital Territory (Tax on Services) Ordinance, 2001. The new services, which are brought under the tax net, include: visa processing services; airport service; floral; decoration; furnishing of space; ancillary or allied services whether or not involving rental of equipment and accessories; photography/filmmaking services; services provided by accountants (including practicing chartered accountants or cost accountants); auditors; actuaries; corporate tax consultants; liquidators; auctioneers; corporate law consultants; public relation services; auction services; services provided by stockbrokers and commodity-brokers; services rendered by producers for anything related to TV, film, radio production; advertisement on close circuit TV; advertisements in newspapers and periodicals; advertisements on cable TV network; advertisements on poles; advertisements on billboards; other advertisements including those on web or the internet; services provided for purchase or sale or hire of immovable property; and services provided by legal practitioners and consultants.
2. Customs Duty
The new tax measures regarding customs duty as proposed in the budget are as follows:
— increase in additional customs duty from 1 percent to 2 percent on imports across the board will likely generate Rs 25 to Rs 28 billion, as this measure will have impact on 7200 customs tariff lines;
— review of regulatory duties on 731 customs tariff lines;
3. Federal Excise Duty
The rate of duty on locally produced cigarettes has been enhanced, and it is likely to generate additional tax revenue. New tax measures concerning federal excise duty include:
— the federal excise duty on cement has been increased from Rs 1.25 per kg to Rs 1.50 per kg. This measure is likely to generate Rs 11.5 billion during fiscal year 2018-19; and
— on 30 April 2018, the FBR issued SRO 561(I)/2018 that increases excise duty rates on locally-produced cigarettes with immediate effect. Increased excise duty rates are as follows: