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Sweeping withdrawal of exemptions, large increase in income tax and sales tax collections along with strict enforcement measures in finance bill. Income taxpayers, whether salaried or non-salaried, will contribute the largest share of new revenues, equal to Rs53 billion total. Brownfield investments will lose tax credits on investment. Gift scheme wiped out except for close relatives. Withholding taxes on property along with hikes in FBR valuations of real estate.

ISLAMABAD: In its first budget the PTI government has decided to withdraw discriminatory concessions and exemptions worth Rs300 billion besides revising tax rates on individuals and sectors to enhance the country’s tax-to-GDP ratio and promote investment.

The Finance Bill 2019 proposes measures for broadening of income tax base, increasing cost of non-compliance, tariff reforms, simplification of business processes for taxpayer’s facilitation and effective enforcement through enhanced use of automation.

Keeping in view the increase of Rs1.405 trillion in the tax collection target for the Federal Board of Revenue’s (FBR), the government has introduced additional revenue measures worth only Rs568bn inclusive of the tax exemptions amount.

Additional revenues

The breakdown of new tax measures reveals that the government expects additional funds worth Rs258bn from income taxes, Rs250bn from sales tax and federal excise duties and Rs60bn from custom duties.

However, these measures do not reflect the true picture whether FBR will be successful in achieving the targets or will have to announced additional revenue measures at the beginning of the next fiscal year.

On the other hand, the government has announced relief measures worth Rs27.290bn including Rs23.590bn in customs, Rs3.2bn in sales tax and federal excise duty and only Rs500 million in income tax --- the lowest relief in any budget during the decade.

Income Tax

The government has also revised the tax rates for salaried and non-salaries individuals. The move will contribute the largest share to the national kitty as it embarks to achieve the mammoth tax target in the next fiscal year.

The budget has changed the tax rates for these individuals to the 2017 levels with a higher income tax slab of 35pc.

The measure is likely to help government raise nearly Rs34bn and Rs19bn from salaried individuals and non-salaried individuals, respectively.

Contrary to this, the rates for big taxpayers-corporate sector have been kept unchanged at 29pc for the next two years.

The government has also decided to do away with the tax credit for investments classified as brown-field and plans to reduce the credit from the existing 10pc to 5pc and completely phase out the benefit in the FY2020-21. The discontinuance is expected to add Rs67bn to the national kitty. Furthermore, the gift scheme has also been brought under the normal

income tax regime to minimise its misuse and raise additional revenues to the tune of of Rs20bn. In the tax year 2018, Rs275bn were reported as gifts in the income tax returns filed by individuals.

The government, in the budget has enhanced the turnover tax from 1.25pc to 1.5pc, from 0.2pc to 0.25pc, from 0.25pc to 0.3pc and from 0.5pc to Rs0.75pc, respectively to raise additional Rs26bn in the next fiscal year.

It has also been proposed to streamline tax regime for the real estate sector as 3pc tax levied on not explaining the source of income has also been withdrawn. Similarly, the rate of withholding tax on purchase of immovable properties has been reduced to 1pc from 2pc irrespective of the value of property with the condition that the tax on sale of property would be collected where the holding period is up to five years. These measures are estimated to yield additional revenue of Rs20bn.

The capital gains on immovable property will be taxed at the normal tax rates which will generate additional amount of Rs8.75bn for the national kitty.

Another major revenue spinner will be the discontinuation of depreciation and brought-forward losses while computing income for super tax to raise additional revenue of Rs10.6bn.

Other major revenue measures are related to banking sector, remittances, rental income and increase in withholding tax on certain services.

The government has also proposed to tax bank’s government securities at the rate of 37.5pc as is in excess of 20pc of total profit before tax. The measure will yield around Rs10.2bn in revenue. Similarly, the government has reduced the limit of not explaining source of investment through foreign remittance from Rs10m to Rs5m. The move is expected to generate additional Rs8.67bn.

The government has also enhanced the dividend rate to 15pc from 7.5pc on income received on shares of a company set up for power generation or on shares of a company supplying coal exclusively to power generation to earn additional revenue of Rs8bn.

The tax rate for services with reduced rate of 2pc of the total turnover is being revised upwards to 4pc of the gross amount of turnover.

The present rate of 2pc for transport services has also been increased to 4pc to help government earn additional revenue of Rs5.6bn.

The government has withdrawn the 15pc initial allowance in the case of buildings. This will help to generate around Rs8.67bn.

A withholding tax has been introduced at the rate of 15pc of the gross amount of royalty to be deducted from resident persons.

The government has shifted all transactions from sectors except exporters from final tax regime to minimum tax regimes. The sectors included in the minimum tax regime include commercial importers, commercial suppliers of goods, contractors, persons deriving brokerage or commission income and individuals earning income from CNG stations.

The rate of withholding tax on the payment on debt has also been enhanced to 15pc from 10pc which will be applicable for profit on debt up to Rs36m and for the amounts exceeding Rs36m, the profit on debt will be made part of the total income and taxed at normal rates. The move will help raise around Rs7.1bn.

The government also has done away with the concept of non-filer and introduced special legal framework for punitive measures for individuals not appearing on the Active Taxpayers List (ATL) to ensure filing of return by such individuals. The measures include 100pc increase in the tax rate, and other legal formalities under the Income Tax Law. Moreover, the income tax commissioner has also been empowered to initiate penalty proceedings for concealment of income.

The withholding tax rates have also been enhanced on dealers, commission agents and arthis. Under the new regime, the tax rates are being increased for Class A from Rs10,000 to Rs100,000; for class B from Rs7,500 to Rs75,000; for class C from Rs5000 to Rs50,000 and for any other category from Rs5,000 to Rs50,000. The revenue impact of this revision in rates is estimated at Rs684m.

A nominal punitive tax for placement on ATL after due date of filing of return has been also proposed: for companies, the tax rate will be Rs20,000, Rs10,000 for association of persons, Rs3,000 for non-salaried individuals and Rs1,000 for salaried individuals.

The budget also includes provisions for tax credit to employers hiring fresh graduates whereas the personal allowances for the armed forces have been exempted from tax.

Sales Tax and Federal Excise Duty

Despite strong criticism from the zero-rated export-oriented sectors including textile, leather, carpets, sports and surgical goods, the government has imposed a standard sales tax rate of 17pc on all items.

The SRO1125, which exempted the sectors from sales tax, has been streamlined to tax the aforementioned sectors.

The sales tax rate on local supplies of finished articles of textile, leather and finished fabric has been raised from 6pc for integrated businesses and 9pc for others to 15pc and 17pc, respectively.

The government has also withdrawn the concessionary rates on gas, electricity and fuel for the exporting sectors whereas the refunds to the sector have also been automated.

Moreover, 10pc tax has been introduced on ginned cotton as well. The FBR expects to raise additional Rs75bn from these measures.

The government has also introduced a standard rate of 17pc on steel sector including the tribal areas to raise Rs25bn for the national kitty. The revision in the tax rates on cigarettes will raise additional amount of Rs35bn. The government has done away with the three-tier system and introduced only two tiers for the tobacco sector.

However, the government has allowed zero-rating on supply for the tobacco exports.

Moreover, tax rate on sugar has been enhanced to 17pc from 8pc to raise additional amount of Rs24bn.

The government has also imposed 17pc tax on items sold in retail packing with brand names including frozen, prepared or preserved sausages and similar products of poultry meat or meat offal; meat and similar products of prepared frozen or preserved meat or meat offal of all types including poultry, meat and fish; fat filled milk, in liquid or powered form; cereals and flours, other than those of wheat and meslin. The revenue from these items is estimated at Rs7bn.

Similarly, government has also added new items to the third schedule to allow payment of sales tax 17pc at the retail price basis. This measure will generate around Rs10bn in revenue. The items included in the third schedule are foams and mattresses meant for consumers, paints & varnishes, electric and gas home appliances such as TVs, fridge, deep freezers, electric fans, air conditioners, recorders, players, electric bulbs, electric irons, washing machines, telephone sets, heaters, ovens, stoves geysers, cooking ranges etc.

Other items include lubricating oil, brake oils, transmission fluids, and similarly, vehicular fluids in retail packing, storage batteries, motor cycles and auto rickshaws. The retail price taxations will also apply to imported goods.

The exemption available to cottage industry is streamlined to generate additional revenue of Rs10bn. Similarly, the government restored the normal procedure for collecting federal excise duty on ghee/cooking oil to raise an additional amount of Rs15bn.

The tax on aerated water waters has been enhanced to 14pc from 11.5pc, which will raise additional revenue of Rs5bn. The government has changed the retail system and withdrawn the turnover tax option.

These measures will help raise Rs10bn from the retail regime. Another Rs2bn will be raised from increase in fixed value of gas supplied to CNG dealers. The federal excise duty was enhanced to Rs2 per kg from Rs1.5.

The move will help pocket extra amount of Rs18bn. The scope of FED has also been enlarged on cars which are expected to raise additional Rs6bn.

The FED on packaged non-aerated sugary/flavoured juices, syrups and squashes has also been increased. Moreover, another Rs3bn will be raised from the increase in FED on LNG sectors.

It is proposed to tax gold in jewellery at 1.5pc, diamond at 0.5pc, and making charges at 3pc with input adjustment.

The standard rate of 17pc has also been introduced on the sale of marbles.

Under the relief measures, the government has withdrawn 3pc value addition on petroleum products and mobile phones, reduced rates on brick kilns, reduce sales tax to 7.5pc from 17pc on food supplies by restaurants, bakeries and caterers etc; reduction of rate on milk powder, removal of ban on export of PMC and PVC to Afghanistan.

Customs Duties

The government has enhanced customs duty to 4pc from 2pc on goods subject to 16pc tariff slabs and from 2pc to 7pc on goods subjected to 20pc and higher tariff slabs including specific rate slabs. No increase was proposed on 3pc and 11pc tariff slabs. This measure alone is expected to yield additional revenues to the tune of Rs38bn for the government.

The withdrawal of exemption on import of LNG will yield revenues worth Rs20bn. These two were the only major revenue measures under the customs head.

Under the relief measures, the government has exempted custom duty on 18 materials and other medicinal items; duties have also been exempted on 1,629 raw materials, chemicals and other items; seven raw material for hemodialysers have also been exempted.

Similarly, tax has been exempted on 12 inputs used in production of home appliances and regulatory duty has also been rationalised on 74 home-appliance sectors; and duty rates on another 66 items have been reduced in the budget.

The regulatory duty has also been reduced on mobile phones, smuggle-prone items and other industrial inputs and tyres.

Published in Dawn, June 12th, 2019