ISLAMABAD - The Institute of Chartered Accountants of Pakistan (ICAP) on Thursday recommended the government to bring all sectors of the country within tax net in budget proposals. The proposals were given by Ashfaq Tola, chairman Committee on Fiscal Laws and Razi Khan, executive director. Moreover, an efficient model for growth requires equitable taxation and credible tax administration, stated the budget proposals of ICAP.

Pakistan's tax-to-GDP ratio is the main impediment in the economic development, which has compelled the government to take short-term tax measures.

At present, there is over dependence on the indirect taxes. It is, therefore, felt that withholding tax in indirect taxes both in federal and provincial level should be withdrawn. The FBR should focus on increasing the tax base instead of further burdening the existing taxpayers.

The corporate sector, which is the most documented segment of the economy, has been neglected due to extreme abrupt tax collection measures taken by the government in order to meet annual budget targets. Further, the organized sector is seriously affected by incidence of sales tax (and federal excise duty, where applicable) as against non documented economy or unorganized sector.

The service, wholesale/retail, transport and the agriculture business sectors are still not fully documented and most of them are out of the tax net. Even more than three million persons having commercial electricity connections are hardly into the tax net.

 There is a serious need for the policymakers to simplify the complex system of determining the tax liability. Immediate remedial measures include abolishing taxes like alternative corporate tax, tax on undistributed profits and super tax.

Service providers, both corporate and non-corporate, should be exempted from levy of minimum tax. By charging nominal additional tax and creating narrow difference in tax deduction of filers and non-filers, the government failed to attract unregistered persons to get themselves registered.

In order to obtain/utilize party wise data of unregistered persons from whom sales tax @ 1percent  is deducted, a minimum threshold for sales tax withholding should be introduced in lines with the Income Tax Law.

Harmonization of Sales Tax on Services

a)    A uniform service tax law should be agreed upon by all provinces and the federal government for implementation in their respective jurisdictions by respective tax authorities. Further, a uniform tax return may also be introduced for the taxpayers.

b)    Revenue authorities should decide the basis of levy of indirect tax, which can be origination or termination to establish jurisdiction of taxation of services.

c)     To promote transparency and uniform interpretation, the first schedule should be standardised covering all services along with standard tariff headings and standard definitions. The standard first schedule should be adopted by all provinces and Islamabad Capital Territory while levying sales tax on services in their respective jurisdictions.

d)    One return may be filed with identification of provincial head of account and direct deposit of share of tax of each province and central directorate of audit with representation from each province and the FBR.

Tax Administration

a)     Tax administration requires institutional rebuilding, designed to strengthen the independent policy-making role of Federal Board of Revenue (FBR), modernize the tax system and formulate independent, fair and transparent tax policies. Efforts are required to separate tax policy and tax administration. The FBR should be responsible for implementation of policies and collection of revenue only. The FBR may be converted to an autonomous and independent institution that has structural and strategic support necessary for its organizational development and capacity building.

b)     Power to make adjustments to compute accounting income should not rest with commissioner and accounting income as reported in the audited financial statements of the organization, which are prepared in accordance with IFRS and Companies Act 2017 should be considered.

c)     It has become practice of tax authorities of visiting the taxpayer's bank and coercing the bank manager to immediately pay the amount from taxpayer's account against the tax amount recoverable or else face the consequences. In some cases, recoveries are made in haste even where the matter has already been decided by the judicial forum in favor of taxpayer.

Other Key Recommendations

1) All presumptive/value addition/fixed tax schemes should be abolished and all such sectors/ goods may be brought under the uniform tax regime to promote the culture of income-based taxation rather than receipt based taxation. The scope of opting out of final tax regime be expanded to cover all incomes falling under FTR and the rates of minimum tax for opting out of FTR be reduced to raise the difference between final tax and minimum tax by at least one percent.

2) Section 111(4)(a) of the Income Tax ordinance should be abolished; alternatively the applicability of Section 111(4)(a) should be made conditional i.e. remittances by an overseas non-resident Pakistani to a relative as defined in Section 85(5) without any threshold. However, remittances by others may be subject to tax scrutiny if it exceeds the limit prescribed by the State Bank of Pakistan, which is currently $10,000. Alternatively, until this provision is abolished, this kind of remittance should be restricted solely for the purpose of investment in industrial undertaking in Pakistan.

3) Minimum tax should be reduced to 0.5percent . Moreover, companies having a gross loss position for the year should be excluded from the purview of the minimum tax. The law should also be clarified to allow carry forward of minimum tax paid in the year of loss.

4) Section 65A should be reinstated in order to encourage documentation and broadening of tax base. Moreover, condition of 90 percent  supplies to registered persons be reduced to 75 percent . The restricted benefit of this tax credit to manufacturers be extended to all persons registered under the Sales Tax Act.

5) FBR values of immoveable properties are far below the fair market value, may be gradually increased. However, at the same time the rates of stamp duty and other transfer taxes levied by provinces should be reduced to keep the cost of transfers stabilized.