KARACHI:  The Karachi Tax Bar Association (KTBA) has suggested that the tax structure for corporate sector should be rationalized and tax rates for listed companies should at least be 5.0 percent lower than the non-listed companies.

“The higher rate of tax is effectively a disincentive for multinational groups for locating their businesses in Pakistan; reduction in the costs of doing business in Pakistan would consequently promote increased investment”.

Tax practitioners’ body criticizes alternate corporate tax introduced via Finance Act, 2014. It provides that where a taxpayer, who may otherwise not pay tax due to availability of tax depreciation, amortization and brought forward losses, would still be subject to tax under the alternative corporate tax.

“It appears that the legislature aims to recover more taxes from the existing documented sector instead of broadening the tax base, ” KTBA’s document said.

The Karachi Tax Bar Association (KTBA) has also recommended reduction of sales tax rate to 10 percent from the existing 17 percent, which as claimed would assist in expansion of tax base and reduction in corruption.

KTBA notes in their proposals for Budget 2016-17 that present rate of sales tax of 17 percent with an additional 3.0 percent  value addition tax on commercial importers is too high.

“There is a narrow tax base due to high tax rate, which induces tax evasion, under invoicing, corruption and smuggling”.

“Sales tax rate should be brought down to a single digit. However, as a first step it is proposed the rate of sales tax be brought down to 10 percent. Moreover, same rate of valued addition tax (i.e., 3.0 percent) is levied on luxury goods, which are expected to be sold at a higher value in the local market as compared to other goods”.

The tax practitioners’ body suggests higher value addition tax ranging 5-7 percent should be levied on import of luxurious items adding the proposed amendments would assist in the expansion of tax base, reduction in smuggling and corruption, rise in government revenues and increased competitive edge and promote documentation of economy.

Furthermore, the reduced tax rate would encourage persons to get themselves registered, resulting in broadening of tax base. On the other hand, higher value addition tax on luxury goods would generate additional revenue and support the local industry.

It is also proposed that workers’ welfare fund (WWF) and workers profit participation fund (WPPF) may be eliminated and instead of further burdening the taxpayer with above levies, an endowment fund may be created out of existing funds available with the government of Pakistan and profit earned from such a fund may be utilized for the benefit of the workers.

“Companies, in addition to the corporate tax, pay WWF of 2.0 percent of their taxable income and WPPF of 5.0 percent of their profit. This results in a tax impact of approximately 40 percent. This sort of levy discourages the existing manufacturers to expand their business in Pakistan and at the same time discourages foreign investors in setting up the manufacturing operations,” the document added.

Moreover, option for opting out of presumptive tax regime in respect of sale, import and export of goods introduced via Finance Act 2012, and withdrawn via Finance Act 2014 should be restored to help reduce the additional burdens imposed on the corporate sector and decrease the risk of tax audits.

KTBA notes that a flaw exists in the calculation of capital gains, especially in the case of investment in shares, where the investment is made in foreign currency.

Such a gain is calculated in historical rupee terms, which may result in a tax liability to a nonresident due to devaluation of Pakistani rupee vis-à-vis foreign currency, even if the shares are sold at the same value in foreign currency or even at a loss. “This manner of calculation of capital gain needs to be corrected,” the proposals suggest.

KTBA in the proposals for upcoming budget has also advocated incentivizing increased industrialization through certain concessions and credits. The association has also recommended measures to bring simplicity as well as broadening the scope and equitability of the law.