Islamabad: The American Business Forum (ABF) has suggested the government in its budget proposal to encourage investment in the knowledge-based economy through targeted fiscal measures.
President ABF Salim Ghauri has said that sectors like Information Technology, Pharmaceuticals and Biotechnology are the cornerstone of the New Economy and can help Pakistan diversify its export portfolio and reduce its risk from exposure to crop-risk and natural disasters.
Increased investment in these sectors yields the added benefits of enhanced FDI, human development and employment of educated youth, reversal of brain drain, technology transfers and skills and productivity up gradation, he added. President ABF said the employees who are providing I.T. services in the I.T. Industry should be given special tax credits and tax exemptions in their salary income in order to encourage them to work in I.T. Industry in the country and not to go abroad for jobs.
On pharmaceutical sector, Salim said, the ABF has proposed to grant a 10-15 year tax holiday to those units who invest in and obtain international quality approvals, such as WHO, PICS or EU/USFDA certification. Further, he said, the exporting Companies’ entitlement to retain only 15% of their export earnings in foreign currency accounts within the country should be increased to 40%, to support exporters in hedging against their input costs for imported inputs, and a hedge against currency devaluation and inflation.
In the above said sections, tax credit is allowed to Industrial undertaking which is setup between 01 July 2011 and 30 June 2016 with 100% equity owned by the company, this condition for availing tax credit is too strict for the tax payers and should be eliminated/limited/reduced/ relaxed for availing Tax credit. Moreover such tax credit should also be provided to other sectors of the economy, he added.
Also, he said, the supplies of pharmaceutical products must be entitled to claim any input tax paid on the purchases made by them as the whole amount of input tax paid on purchases is not allowed to be carried forward to future tax periods and is wasted. Salim said the ABF has also proposed the government to reduce the GST rate on Pesticides to 5% and should only be levied at the import stage. He said Section 149 allows the employer to deduct the tax at average rate of tax after adjustment of tax credits, un-adjustable WHT and excess or deficient tax. It is suggested that employer is explicitly allowed to adjust excess or refundable tax under section 149(1)(ii) on the basis of return, which is deemed assessment order. Currently, the salaried persons are required to obtain refund order for adjustment of excess tax by employer.
Furthermore, there is no compulsive provision to effectively enforce rule 42(2) of the Income Tax Rules, 2002. Also, neither the monthly nor the annual statement contains any field whereby the status of employee like resigned; retired etc has to be mentioned. At the same time, there is no effective mechanism whereby an employee, leaving an employment and joining a new one, is obliged to submit his old tax deduction during the part of that year to the new employer. Absence of these might have caused serious revenue implication for the exchequer.
Similarly, he said, Section 164 provides for issuance of certificate of collection or deduction of tax. It is suggested that issuance of serialized number of certificate be made mandatory at the time of issuance of payment instrument. Further, Tax Payment Receipt and Monthly/Annual statement under section 165 be amended to incorporate the reference of serial number of such certificate. This would help timely allowance of tax deducted or collected.
He said the tax returns should be prepared comprehensively and once prepared, instead of being changed each year. If any change is necessary, it may be incorporated in a manner the previous return retains its format, except this change instead of changing the entire format, he added.
In order to encourage greater levels of investment, economic activity and employment, President ABF has proposed that the tax rates should be brought down to 26%. At the same time, to balance for this potential loss in revenue, a corresponding increase in the rates of withholding tax should be applied, and the option of treating at source deductions as final liability be withdrawn in a phased manner so that all tax-payers are incentivized to file returns and declare their real incomes.
Although increase in withholding tax may have an inflationary impact in the short term, this step, coupled with withdrawal of the final liability option will significantly improve compliance, broaden the tax base and improve our tax/GDP ratio in the long run. He said the ABF has also proposed to reduce the rate of GST by 2% per annum to 10% over the next few years as an anti-inflationary measure and to stimulate the economy. At the same time, exemption from GST in any sector should be removed, as it acts as a barrier to the pursuit of a transparent and documented economy.
GST exemptions should be removed, and only for essential commodities like food items, medicines and textbooks, zero-rating should be introduced in its place so that manufacturers in these sectors should also declare their transactions fully. He said currently there is no section in the Income Tax Ordinance, 2001 to provide special tax credits/exemptions for FDI.
In the ordinance a new section should be inserted to provide special tax concessions to FDI. Different tax concessions may be provided to encourage Foreign Director’s Investment in Pakistan. In order to improve the performance of tax administration on income tax side Salim said there is need to deliberate on how tax cases can be disposed of within a reasonable period, for the system to acquire credibility. The ordinance has a number of provisions where no time frame is given.
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