New rules issued by FBR perturbed component importing industry

On July 9th the Revenue Division, FBR issued an Income Tax Notification S.R.O. 615 (I)/2020. It is a draft of proposed amendments in the Income Tax Rules 2002. The amendments in rules are being made to put in effect a mechanism for implementation of the withholding tax on imports amidst mass confusion as to the definition of raw materials and intermediaries. The necessity for SRO 615 arose as a result of the hue and cry of the business community immediately after the measures introduced in the section 148 of the Finance Bill.

A long list of raw materials genuinely used for in-house consumption were abruptly reclassified as end products and subjected to minimum tax of 5.5 percent withholding as opposed to the 2 percent threshold. As a result, the engineering concerns manufacturers estimate that final tax burden will rise to over 65 percent and liquidity will be further hampered in an already difficult business environment.

To add insult to injury, the SRO envisages a bureaucratic mechanism not seen since the 1980s. Under the SRO 615, all applications for redressal of raw material classification will entail each company individually applying and submitting its HS Codes, item by item for a firm specific approval. The reclassification will be first screened by the Chairman (member IR) of the just announced Committee. Subsequently it will be taken to a committee comprising of five members – three of whom will be members of FBR itself and one each from EDB and NTC. Only those applications that meet the approval of majority of the committee will then be put up to the Chairman of FBR for the final approval. The process will be anything but seamless, adding to the cost, time and woes of the business community.

The manufacturing industry is incredulous how such draconian and bureaucratic measures, as described in draft, could be a product of a 2020 tax machinery proposal. Where most economies have been automating and moving forward, Pakistan is going back to the 70s and 80s. It seems next will be a return to an era of price controls and quotas, all monitored by the FBR. A Lahore based industrialist requesting anonymity remarked “Imagine each and every company specific HS code being vetted and approved by the Member Inland Revenue – Policy, a Committee and then finally Chairman FBR. This after a long list of documents, procedures and plethora of bureaucratic speed breakers. It will take years and you’ll have to form a second FBR just to take care of SRO 615”.

“this SRO reflects the narrow vision and attitude of the FBR. The tax machinery never had any inclination to provide relief to the already overtaxed formal industrial sector. The concept of “ease of doing business” is as alien to its budget making as is the mantra of broadening the tax net. A former multinational CEO said “this SRO will substantially increase the “cost of doing business”, contrary to the tall claims made prior to the Budget exercise. SRO 615 reflects an arrogant, belligerent, insular and non-cooperative mood of the Revenue Division. FBR members spare no occasion to deflect critique or input by invoking the IMF. The IMF representatives privately express frustration that using their name is a lazy, over used shield to snuff out the sometimes constructive input or criticism.”

No sooner had this measure been passed in the Finance Bill, the Chairperson was abruptly dismissed. Tried, tested and failed SROs such as these reflect the increasing gap in intellectual capacity and inexperience of the revenue service officers. From the mood of the businesses it is evident that companies and affected individuals will yet again seek recourse from the court of law against another discriminatory and heavy handed tax measure. It is now an annual exercise where at least one ill considered, unrealistic tax measure is introduced, rejected and ends up in courts – only winners being the accounting firms and the legal fraternity.

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