OVERSEAS INVESTORS CHAMBER OF COMMERCE AND INDUSTRY

Transcription

1 OVERSEAS INVESTORS CHAMBER OF COMMERCE AND INDUSTRY TAXATION PROPOSALS PUNJAB PROVINCIAL TAXES AND LEVIES March, P a g e

2 TABLE OF CONTENTS Page Nos INTRODUCTION 03 INCREASED COST OF DOING BUSINESS All Collections Under One Ministry/Body 04 Tax Broadening Measures 04 Sales Tax on Services 06 Procedural and Structural Proposals 13 Other Levies 13 2 P a g e

3 INTRODUCTION The Overseas Investors Chamber of Commerce and Industry (OICCI), represents the largest bloc of foreign investors in Pakistan. It is the largest Business Chamber in the country based on contribution to the national and provincial exchequers, as well as to the GDP, as over one third of the total revenue collections in the country by the Federal and Provincial revenue authorities, come from OICCI members. OICCI members also have a large footprint on CSR activities as, besides the monetary contributions, employees spend over 800,000 man hours in community welfare work, which last year benefited over 40 million persons belonging to the underprivileged communities across the country. A few facts, which are part of the OICCI profile, are being mentioned below for an appropriate appreciation of the role played by the Chamber in the country s economy, including social inclusion activities: Representing 190 Foreign Investors Shareholders from 35 countries / Representation in 14 business sectors 56 listed on Karachi Stock Exchange / 50 associates of 2017 Global Fortune 500 companies Major contributor to the Economy of Pakistan Approximately one-third of government taxes/levies collected from OICCI members OICCI members invested USD 2.2 billion, in new capital expenditure, in Members provide employment to around one million people CSR activities of members benefit over 40 million underprivileged sections of society. Tax Environment OICCI members are fully tax compliant and share the concerns of the government on the very low tax to GDP ratio, which is primarily due to the fact that a significant portion of the economy continues to remain outside the tax net. Members appreciate and support all initiatives of the government to document the economy, penalize non-filers with higher withholding tax rates, and harmonize the property valuation besides the actions taken recently for potential access to multiple sources of tax evaded assets held locally or overseas. However many more measures and strict enforcement measures need to be incorporated in the relevant laws to ensure a more compliant tax culture in Pakistan, where there are rewards for the compliant tax payer and enforceable penalties for tax evaders. As OICCI members are fully committed to a tax compliant environment, they do not support introduction of tax amnesty schemes in any shape or form. The balanced views of the Chamber, based on research and operating experience of its members in Pakistan is closely followed by various international business chambers, diplomatic missions based in Pakistan and visiting foreign business delegations who come to get firsthand information of the business environment for potential foreign investors, and other stakeholders looking for a stake in the growing economic potential of the country/region. OICCI avails these regular interactions to highlight the business potential and various tax and fiscal incentives available to foreign investors, as well as to share success stories of member companies in Pakistan. 3 P a g e

4 INCREASED COST OF DOING BUSINESS Members continue to express concern that the cost of doing business in Punjab is higher than Sindh, on account of the fact that the sales tax rate on services in is 3% more than the rate in Sindh. Taxes levied in Punjab should be harmonized with taxes in other provinces of the country, to ensure that investors in Punjab do not lose on competitive edge. ALL REVENUE COLLECTIONS UNDER ONE MINISTRY/BODY 1. Integration of all Revenue Collections Currently revenue collections of the Province of Punjab fall under the following Ministries/Bodies; Punjab Revenue Authority (PRA) Excise & Taxation Board of Revenue (Punjab) OICCI strongly recommends that all revenue collections should be merged under one Ministry/Body. The provincial government can devise an in house mechanism to share the revenue of the above three bodies through intra-government fund transfer. This would add considerably to the ease of doing business (EODB), a matter which should be a priority for all policy makers in the country since Pakistan has fallen from 75 in 2010 to 147 in 2017, in the World Bank EODB survey. TAX BROADENING MEASURES 2. Agricultural Income Tax As per the statistics mentioned in the Government of Punjab White Paper Budget employment of 45% of the population of the province is dependent upon agriculture and the sector accounts for 21% of the overall national production. However, the collection of agricultural income tax is estimated to be even less than 1% of total collection of Federal and Provincial taxes. The above disparities in tax levies between different incomes segments need to be addressed. It is recommended that the Punjab government and revenue authorities take all possible measures to increase revenue collection from the agriculture sector. The original rationale of keeping agriculture out of tax net to facilitate small agriculturists is not applicable, due to non-implementation of land reforms, and the benefit of the tax exemption is being availed, as per common perception, by big landowners earning huge incomes. Furthermore, income and wealth is also transferred by unscrupulous elements to businesses fronting as agriculture sector. Some of the key issues related to agriculture income are identified as follows: 4 P a g e

5 Principle of Non-Discrimination: In principle, income from all sources, including agriculture, if exceeding the minimum threshold, applicable for other sources of income, should be taxed without any discrimination. Determination Basis: A transparent, easily understandable and applicable manner of determining such income should be designed. Flexible Income Based System: At present, the Agricultural Income Tax has effectively become a land tax, based on land holding, that leads to the perception that there is no tax on agricultural activities. Identification and Linkage with National Tax Number: There is no identification of even the small number of agricultural income taxpayer as they are not on the national tax number (NTN) system In light of the above, following proposals are made: a) Income Based System: At present, the tax is payable on land holding or net income whichever is higher. However, the manner of determination of net income is complicated and, in almost 100% of the case, tax is received on land holding basis. This discourages the taxation on net income basis. Therefore, taxability of income on land holding should be abolished and taxes collected on net income basis. b) Adjustable withholding tax: Advance tax should be introduced on sale of agricultural produce such as sugar cane, wheat, cotton and others. There are only around 10 to 15 agencies and enterprises which acquire such crops. The advance tax should be adjustable against income tax payable on net income basis. Rates of withholding and the threshold for the same should be aligned with other products for example any payment exceeding Rs 25,000 should be subject to advance tax at the rate of 1 to 3 percent as the case may be. Federal taxation system may be used for such collection on behalf of the provincial government in the same manner as is being done in other cases by the provincial governments. c) Link and Interface with the National Tax Number: All persons holding land should be required to obtain a National Tax Number (NTN), like the one maintained by FBR, and may be modified by adding one or two digits so as to identify that source of income is agriculture. [PRAL facilities may be used for such purposes in coordination with NADRA]. d) Definition of Agricultural Activity: Definition of agricultural income should be amended to include all agricultural activities like non-corporate dairy farming and poultry etc. e) Rent for the Use of Agricultural Land: Under the specific provision, the rent for use of agricultural land, which is general practice, especially for large landowners, is an agriculture income. There is effectively no mechanism to ensure completeness of recovery of taxes from such receipts. Such rent income should be subject to same rate of tax as is currently in vogue on property income under the FBR system. 5 P a g e

6 SALES TAX ON SERVICES 3. Coordination Between Federal/Inter-Provincial Sales Tax Authorities All four Provinces and Federal Government have introduced distinct sales/service tax laws for their respective jurisdictions, with some of the clauses in clear conflict with each other resulting in foreign investors being pursued and harassed by the Federal and Provincial revenue collectors (FBR, PRA, SRB, KPRA and BRA) demanding tax on the same transactions creating undue hardship and double taxation claims for taxpayers. This situation is highly undesirable and creates complexities for investors. As an example, a service provider registered in Sindh providing taxable services to recipient in Punjab is liable to pay sales tax in Sindh whereas the withholding agent (recipient of service) is registered in Punjab and is liable to withhold sales tax and pay the same to Government of Punjab. Although, we have noted some improvements in the coordination between the revenue authorities, investors concerns continue, for e.g. the issue of levy of sales tax at 'origination' and 'termination' of service in both the provincial legislations on services has still not been resolved. In line with International and Regional practices a uniform service tax law may be drafted and agreed upon by the tax authorities of the Provinces and Federal Government, for implementation in their respective jurisdiction. Furthermore, a uniform tax return may also be introduced for the taxpayers. The above points can be addressed by taking the following four steps which will lead to effective management and expansion of the tax base: I. A policy board comprising of the Chairmen of the Federal and Provincial revenue authorities (FBR, PRA, KPRA, BRA and SRB) should be formed to ensure synchronization of the policies, standard tax rates, basis of apportionment of revenues and removal of all anomalies/ conflicts between the laws of the different revenue boards (for example issues of jurisdiction, sales tax on toll manufacturing, clarity on jurisdiction and deductibility of WPPF/WWF expenses paid to the provinces). II. III. IV. Revenue authorities should decide the basis of levy of indirect tax, which can be ORIGINATION or TERMINATION, to establish jurisdiction of taxation of services; To promote transparency and uniform interpretation, a Standard schedule should be introduced covering all services along with standard Tariff Headings and Standard definitions. The standard schedule should be adopted by all provinces and Islamabad Capital Territory while levying sales tax on services in their respective jurisdictions One return may be filed with identification of provincial head of account and direct deposit of share of tax of each province. 6 P a g e

7 Duplicate taxation is causing hardships to taxpayers and has given rise to unnecessary litigations and is one of the deterrents in attracting FDI in Pakistan. 4. Reduction in Sales Tax Rate OICCI commends the PRA for a number of steps introduced over the last few of years to streamline the sales tax on services structure, which has given a positive message to investors based in Punjab. However the sales tax rate continues to be very high even in comparison to the sales tax rate on services in the other provinces: lower by 3%, in the province of Sindh and by 1% in the provinces of KPRA and BRA. 7% 7% Regional Sales Tax Rates 10% 11% 12% 13% 16% 17% Thailand Singapore Indonesia Sri Lanka Philippines Sindh Revenue Board Punjab Revenue Authority Pakistan As a first step the PRA sales tax rates on services should be aligned with the Sindh sales tax rate on services which is 13% and gradually reduced to 10% over the next three years, whilst the current rate should be maintained for unregistered entities. This reduction in rate will encourage the registration of the unregistered taxpayers to avail the benefits of input adjustment and will enhance documentation. Subsequently, a study of the rates in the regional countries, with comparable economic parameters should also be done and sales tax rates be made more competitive. (A similar recommendation has also been given in the OICCI Taxation Proposals , submitted to FBR in respective of Federal Sales Tax) 5. Input sales tax be allowed to Registered Persons on services chargeable at reduced rate of tax 7 P a g e The second schedule of Punjab Sales Tax on Services Act, 2012 prescribes the following services to be charged at reduced rate of tax and does not allow the recipient of such services to claim input tax. Service Description Applicable rate Franchise Services 10% Construction Services 5% Travel agents 5% Tour operators 5%

8 Legal practitioners and consultants 5% Accountants and auditors 5% Tax consultants 5% The law should be amended to allow input sales tax as adjustment to the payer and the recipient of such services, as allowed under the Sindh Sales Tax. Similar examples can be found in Federal Sales Tax law where reduced rate is applicable but input tax claim is available The non-claimable input sales tax increases the cost of doing business for the recipient of such services. The same practice is valid in case of sales tax charged on the sale of goods which falls under the umbrella of SRO 1125 i.e. leather, carpet, and sports textile products and SRO (I)/2009 on local supplies of sugar. Further, this rule is against VAT mode of taxation. 6. Reverse charge mechanism and subsequent recovery by the taxpayer. [Section 4 of PSTSA]: The Provincial Statue provides that service provided by non-resident service provider is liable to tax under reverse charge mechanism i.e. in the hand of service recipient. A non-resident has been defined to mean a person who is not registered with the relevant provincial statute. Such a tax framework tantamount to double taxation, in case where service provider is located in other province of Pakistan as the service provider becomes liable to tax in his respective Province; while the recipient of service becomes liable to tax in the Province of his residence. Moreover, Provincial Statues do not allow registered services recipient to claim sales tax paid on reverse charge as input tax against their own name. Reverse charge should be restricted to such cases where service provider is located outside Pakistan. Further, tax paid under reverse charge mechanism should be allowed as input tax. To avoid double taxation, allow input tax and reduce cost of doing business. 7. Exemption/Relaxation of Withholding requirements for deducting Sales Tax from payments made to unregistered persons At present under Punjab Sales Tax on Services (Withholding) Rules 2012, where a service is provided by an unregistered person, the liability to pay tax is on the person receiving the service. As per Rule 5 & 6, in case of services obtained from unregistered person whole amount of tax needs to be withheld. 8 P a g e

9 The rate of withholding sales tax against the invoices of unregistered persons should be reduced to 1% in line with the FBR s Withholding Sales Tax regime as applicable under SRO.660 (I)/2007. The withholding agents are unnecessarily burdened with deduction of sales tax which is not claimable as input tax and resulting in increasing their cost of doing business. 8. Elimination of PST withholding for all registered persons As per rule 5 of the Punjab Sales Tax on Services (Withholding) Rules, 2015, withholding agent is required to withhold the whole amount of sales tax shown in the tax invoice issued by a registered person as service provider. It is suggested that withholding of sales tax on purchases from registered persons should be abolished after successful implementation of STRIVe. The real-time verification system introduced by PRA already covers risk of revenue leakages by non-compliant tax payers. 9. Reduction In Sales Tax On Telecom Services The high growth rates of cellular Industry in Pakistan have slowed down due to various reasons, including high taxation. Pakistan cellular industry is one of the highest taxed in the region. This has resulted in the relative decline in growth with consequential decrease in revenue. The current sales tax rate on telecommunication services of 19.5% should be brought at par with the general sales tax rate on all other services in order to harmonize all sales tax on all services. This will not only harmonize the tax rates and may also increase the tax collections by helping telecom operators tap lower income population of Pakistan. 10. Zero Rating for Pharmaceutical Inputs 9 P a g e All pharmaceutical products are exempt from Sales Tax. Consequently any sales tax paid by pharmaceutical industry on goods or services purchased, can neither be passed on to the consumer nor can be claimed as input, and has to be absorbed by the manufacturers in their costs. It is resulting in increasing the cost of doing business, amidst already spiraling inflation, and frozen prices of finished products. This is also against the philosophy of sales tax which is supposed to be borne by the consumer. Services received by pharmaceutical industry should be zero rated.

10 Since pharmaceuticals prices are controlled, sales tax paid on inputs can neither be added to the selling price nor separately charged. 11. Provincial Sales Tax on toll manufacturing Punjab and Sindh provincial governments are treating toll manufacturing activity as a service and PRA has levied sales tax at the rate of 16 percent effective July 1, Notwithstanding the fact that toll manufacturing is not a service and therefore outside the constitutional scope of Provinces to charge PST, such a levy has directly increased cost of doing business, especially for pharmaceuticals which are exempt from Federal Sales Tax. It may be noted that toll manufacturing activity, since inception of sales tax regime, has always been treated as a manufacturing activity. Since pharmaceutical and some other supplies are exempt from sales tax under the FST Act, no Federal Sales Tax was leviable under the FST Act. The position is further aggravated owing to the fact that prices of pharmaceutical products are regulated by Drug Regulatory Authority of Pakistan; therefore effect of such levy has to be borne by pharmaceutical company itself. Toll manufacturing should be deleted from the list of services, as taxable under the Federal Sales tax and will avoid double taxation. It will bring practice in line with the norm besides reducing cost of doing business. 12. Labour and Manpower Service Labor and Manpower Services' have become an essential need of modern business. This business is operated with very low margins. Generally, service charge is based on percentage of salary / wage reimbursement of per hour of labour. These services are taxable at the rate of 16% in Punjab and 13% in Sindh. Under the Punjab sales tax law, these services are chargeable to tax at the rate of 16% and taxable value is not allowed to exclude reimbursement of salary/ wage component. As a result, a very high cost is to be borne by the recipient. Salary/ Wage being a reimbursement cost is also taxed which is against the spirit of the law. It is suggested to amend the Punjab sales tax law in order to cater the aforesaid situation. Special procedure should be introduced for chargeability of sales tax on the services of 'labour and manpower'. These services are highly essential for conducting business and very strong support for enhancing employment opportunity in the province. Reimbursement is not revenue for service provider in any manner. 13. Joint and several liability of registered persons where tax is unpaid: [Section 19 of PSTSA]: The Provincial Statutes stipulate that where a registered person, receiving a taxable service from another registered person, is in the knowledge of or has reasonable grounds to suspect that some or all of the tax payable in respect of that taxable 10 P a g e

11 service or any previous or subsequent taxable service provided would go unpaid, such person as well as the person providing the taxable service shall be jointly and severally liable for payment of such unpaid amount of tax. The provision should be aligned with Section 8A of STA. Accordingly, the burden to prove that the service provider and service recipient acted in connivance, should rests upon the tax authorities. To bring harmony among federal and provincial sales tax laws. 14. Certificate By The Auditors [Section 31(5) of PSSTA]: The registered service providers, whose accounts are subject to audit under the Companies Ordinance 1984, are required to submit a copy of the annual audited accounts along with a certificate by the auditors certifying the payment of the tax due and any deficiency in the tax paid by the registered person. The condition for provision of certificate by the statutory auditors should be done away with. Instead, special audits may be conducted by the revenue authorities through special auditors, wherever desired, under the existing provisions of provincial sales tax laws. With the current scope of statutory audit, the auditor cannot certify the payment of the sales tax due and any deficiency in the tax paid by the registered person. 15. Tax Exemptions For Social Cause Under STA, sales tax exemption is available on certain goods / areas which directly concern the common man or which are basic commodities and service for every livelihood. Accordingly, agricultural produce, medicines and medical equipment, food, machinery supplied to certain social organization, goods supplied to hospitals run by the Federal or Provincial Governments, etc. are exempt from sales tax. In line with Federal Government s policy to exempt social areas from Federal sales tax, the Institute recommends that services provided in / to such sectors should also be exempted. To remove inequality in provincial sales tax laws. 16. Admissibility of Input Sales Tax on Advertisement As per Rule 13(2) of Punjab Sales tax on services (withholding) Rules, no adjustment or credit shall be admissible to the persons registered under the Act in case the tax is deducted or withheld and paid in respect of advertisement services. 11 P a g e

12 Rule 13(2) should be abolished from the withholding Rules by giving the legal right to claim of input tax to service provider in respect of advertisement services. This is a legal right of the tax payer to claim input tax paid on providing taxable services. Moreover, the bar imposed through Rule 13(2) looks more like an anomaly as no such bar is imposed in the PST Act or The Punjab Sales Tax on Services (Adjustment of Tax) Rules 2012 and primarily it is against the VAT mode of taxation. 17. Exemption of Capital Value Tax for Islamic Banking Institutions The Federal [Provincial]* Government may, by notification in the official Gazette, exempt any person or class of persons or assets or class of assets from the Capital Value Tax. [Sub-section (10) of section 7 (10)] * After Eighteenth Constitutional Amendment, CVT has become provincial subject (reference is made to Circular No. 3 of 2012 issued under Finance Act, 2012). Under sub-section (10) of section 7 of the Finance Act, 1989, the Provincial Government may issue a suitable notification to be published in official gazette. The sale or purchase of immovable property by the banks or financial institutions under any Islamic mode of financing approved by the State Bank of Pakistan or the Securities and Exchange Commission of Pakistan shall be exempt from the levy of Capital Value Tax. The registration of sale of property is subject to stamp duties, registration fees, capital value tax and town taxes which approximately comes to 6% of the sale value, which has a significant impact on cost of doing business. 18. Valuation of Franchise Services on Beverage Companies [Rules 57(2) of the Punjab Sales Tax on Services (Specific Provisions) Rules, 2012] This provision should be deleted Where franchiser is a foreign or local beverage company and there is no proper or formal agreement between franchiser or franchisee, the assessable value for the purpose of levy of the tax shall be payable on the value of concentrate or syrup or similar input material supplied by the franchiser to the franchisee. The value of concentrate (which is a good) cannot possibly be taken to be the whole value of services. It is not only double taxation but unconstitutional that a good be taxed twice. 12 P a g e

13 PROCEDURAL AND STRUCTURAL PROPOSALS 19. Active Taxpayer List (ATL) be Provided In Excel Under the income tax regime, the FBR provides list of ATL in excel form. This provides ease to the WHT agent to verify the status of tax payer. Such documents also became a reference/ supporting documents in case any dispute arises with the FBR / suppliers on the status of the tax payer. Currently no such facility is available for PST registered person which should be provided on PRA portal. OTHER LEVIES 20. Exemption to Banking Companies on transactions under Islamic mode of financing [Section 9A of the Stamp Act 1899]: Power of Provincial Government to exempt certain instruments The Provincial Government may by [notification in] the official Gazette, generally exempt from payment of the whole or any part of the duties on any instrument executed by or in favor of a banking company in the normal course of its banking business. Explanation For the purpose of this Section, Banking Company shall have the same meaning as in the Banking Tribunals Ordinance, 1984 [Sub-section 2 of section 14 of Stamp Act 1899]: (2) Instrument includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. 13 P a g e New legislation to be drafted in the light of below comments: The registration of sale or purchase of immovable property by banks or financial institutions under any Islamic mode of financing arrangement approved by State Bank of Pakistan or Securities and Exchange Commission of Pakistan shall be exempt from the levy of registration fee, stamp duty, district, municipal or town taxes or any other related taxes. Explanation: In case of sale or purchase of immovable properties by banks or financial institutions for the purpose of extending finance under Islamic modes to their clients, the registration fee, stamp duties, district, municipal or town taxes, etc. shall be levied once and not twice. Whereas in case of sale and lease back contracts, no stamp duty etc. shall be levied both at the time of purchase of immovable property by the bank or Special Purpose Vehicle created for the purpose and sale back at maturity of the financing contract. Special Purpose Vehicle means a Special Purpose Vehicle as defined in the Asset Backed Securitization Rules, Exemption of duties under Stamp Act 1899 In order to ensure tax neutrality for Islamic Banking Institutions as well as fulfilling the registration requirements with regard to sale/purchase of immovable property under the Registration Act, 1908, the provincial governments may be requested to exempt the

14 registration of sale/purchase of immovable properties for the purpose of extending financing facilities under Islamic modes of financing by IBIs. Section 9A of Stamp Act 1899 empowers the provincial governments to do the needful, as proposed. We strongly believe that such exemptions should also be provided on Islamic financing transaction involving transfer of immovable property in Pakistan so that it may act as the necessary stimuli for facilitation of Islamic banking in the country and the Islamic financial institutions can have a level playing field. Accordingly, provincial governments may be requested to issue the proposed SRO/notification in their official gazettes. Rational or Benefit In order to facilitate Islamic financing transaction involving transfer of immovable property, developed countries such as Malaysia and United Kingdom have specifically allowed exemption to Islamic financing transaction from such levies. Whereas, in Pakistan the sale/purchase of immovable property by IBIs is subject to stamp duties, registration fees, capital value tax and town taxes which approximately come to 6% of the sale value. These taxes consequently render transactions involving transfer of immovable properties for Islamic financing purposes unviable. This issue was even faced in issuing GOP Sukuks. 14 P a g e