Regressive taxation

Published January 23, 2022

THE FBR appears to have kicked up a new and unnecessary controversy by serving notices on currency dealers to deposit 16pc federal excise duty on their total income and pay withholding tax on the outward remittances they make through an Irish company. The federal government had withdrawn FED on the exchange companies’ income after a decision by the Council of Common Interests in 2014 to accept the argument that exchange companies, which deal in buying and selling of foreign currencies and pay 29pc income tax on their incomes, were not service providers and, hence, the federal government could not take FED from them. The Sindh High Court has also ruled against the imposition of FED on currency dealers. Moreover, the service tax has been declared a provincial levy and its collection delegated to the provinces under the 18th Amendment in 2010. The FBR cannot tax services provided in the provinces. Likewise, the demand for payment of withholding tax on outward remittances sent through the exchange companies through an Irish firm is said to be a violation of the double taxation treaty with Ireland. In response, the exchange companies have written a letter to the finance minister, seeking his intervention for the withdrawal of the tax demand created illegally by the tax authorities.

Prima facie the FBR will not have a leg to stand on if the affected currency dealers challenged the legality of these notices in a court. Nevertheless, the exchange firms were also way out of line when they threatened to pass on the burden of this tax to their customers to bring pressure on the government for the revocation of the FBR notices. It is totally uncalled for. The right way for them is to engage with the finance/revenue ministry and the FBR and seek an amicable resolution of the issue. The FBR must also reconsider its action in the light of the CCI decision because the imposition of this tax will likely encourage the black market by moving a significant part of the legal forex business into the hands of illegal hawala/hundi operators, which could hit efforts to boost inward remittances through legal channels besides weakening Pakistan’s stance in FATF negotiations. The FBR’s desperation to increase its collection to meet hefty tax revenue targets is understandable. But that should not be used as an excuse to resort to regressive taxation. There are plenty of untaxed and under-taxed areas from where it can boost its collection.

Published in Dawn, January 23rd, 2022

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