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Taxation measures.

In order to counter the negative effect and to restore confidence in general at home and abroad as well as improve the stock market and investment climate it has been proposed:

a) Tax exemption to capital gains on the sale of shares of public companies and modaraba certificates that was expiring with assessment year and June 30, 1994 is being extended to assessment year ending on June 30, 1996.

b) Tax exemption to bonus shares issued by companies which was expiring on June 30, 1993 is being extended to June 30, 1995.

c) Modarabas which were to become taxable in assessment year 1993-94, will pay Income Tax for the first two years at a concessional rate of 12.5 per cent. Three years' tax holiday would remain available to new Modarabas and in the two years following, they will pay Income Tax at the same reduced rate.

d) Capital gains on sale of modaraba certificates prior to July 1, 1993 are also being exempted.

e) Modarabas have recently been given a reduced Withholding Tax rate of one per cent as against the normal 2.5 per cent in Modaraba transactions.

f) Capital Value Tax at the rate of 5 per cent on over last year is being withdrawn.

The Finance Minister turning to Income Tax law which was promulgated in 1979 and has gone through lots of amendments, some of them of fundamental nature, said that this law needs to be written afresh to make it concise, simple and free from ambiguities as far as possible. For this purpose a committee comprising tax lawyers, businessmen, industrialists and eminent citizens is being constituted for guiding the experts in preparing a draft legislation.

He said the Income Tax appellate system though quite elaborate and comprehensive, takes long in deciding appeals. An Income Tax Settlement Commission in the Revenue Division is being set up. Tax payers who may be willing to give up their right to appeal would be entitled to take their cases pending at any stage of this commission. Verdict of this commission would be final and no further appeal or revision will lie. Cases with definite evidence of concealment would however fall outside the purview of the commission.

The Finance Minister said it is common feeling that the Income Tax authorities have excessive discretionary powers. They may apply any profit rate and impose as much tax as they please. There is need for improving uniformity and transparency in the system. It is therefore proposed that the CBR may prescribe profit rates pertaining to different trades, businesses and industries. In this way the tax payers would not only be able to anticipate their tax liability but will also be able to avoid unnecessary litigation on the issue.

He said that it is also a general complaint that books of account maintained by taxpayers are rejected without sufficient basis, without providing opportunity to them to explain their case. It is proposed to make it essential for the assessors to confront the taxpayers with defects noted and to discuss their arguments in assessment orders. It is hoped it will enhance element of transparency in the decision making.

The Finance Minister said that for the past few years it has been a popular demand of taxpayers that in the scheme for self-assessment the provision regarding immunity from audit may be restored. Whereas such provision has certain negative implications, it also has its advances. It has been decided that return of such taxpayers may be given immunity whose cases have been subjected to audit at least once in the preceding three years and where the tax paid for the current year on the basis of declared income is at least 20 per cent higher than the maximum amount of tax paid during any of the preceding three years. Immunity will be available to such declarants in the following year on the same conditions.

About the salaried persons, the Finance Minister said that they are taxed in such a way that a tax of Rs. 6,000 is payable on an income of Rs. 100,000. However, in case the income exceeds that amount, on the first Rs. 100,000 a tax of Rs. 7000 is charged. This differentiation is without any justification. It is proposed to eliminate this anomaly, and some relief would be provided to salaried taxpayers.

Employees getting gratuity at the time of their retirement under a scheme approved by the CBR for the purpose, get tax exemption in respect of Rs. 80,000 of the amount. Inflation affects the fixed income group the most, for providing relief to retired persons, it is proposed to raise this exemption limit form Rs. 80,000 to Rs. 200,000 for approved schemes and from Rs. 25,000 to Rs. 75,000 in other cases.

It has been proposed to allow straight deduction on documented medical expenditure to individual taxpayers from income as against rebate, provided complete receipts and particulars of such medical expenses are submitted along with their returns. To encourage documentation of economy it is also proposed that only such donations may be eligible for tax rebate as are made through cross cheques.

At present, capital value tax is not charged in certain cases if the purchaser has a national tax number (NTN). This concession is at times misused. To plug this loophole, it is proposed to allow exemption from CVT only to such NTN holders, wherever otherwise admissible to them, only if they have also paid income tax in respect of the preceding year.

The Finance Minister proposed the following measures:

a) Tax holiday for five years presently available to companies set up by June 30, 1993 for exploration and extraction of mineral deposits other than petroleum is being extended for another five years. Now companies set up by June 30, 1998 for the purpose would also be eligible for this concession.

b) Presently companies engaged in the exploration and extraction of mineral deposits, other than petroleum are allowed depletion allowance equivalent to 20 per cent of profits or 50 per cent of investment whichever is the less. The allowance is deductible from their incomes. The gap of 50 per cent of capital employed is proposed to be removed.

The Finance Minister announced that to expand the tax net and reduce tax rates, the programme announced last year is being extended to 1998-99. For banking, the rate would be further lowered other than public companies to 50 per cent and 35 per cent respectively from the assessment year 1998-99 with the hope that the corporate sector will now be able to undertake long-term planning with greater confidence.

In order to promote scientific research, it is proposed to allow expenditure incurred by businesses on sums paid to regular scientific research institutions or the sum spent on scientific research in Pakistan as deductions from income whether such research is related to the class of business of the taxpayers or not.

It is proposed to exempt from tax the business income of such charitable and religious institutions and trusts engaged in welfare activities as are approved by the CBR to the extent it is actually spent on welfare activities.

The present limit on donations to charitable/welfare institution is Rs. 500,000 which is being enhanced to 2,500,000 with the belief that philanthropists and well to do people would come forward to play a more effective role for the benefit of the less fortunate.

To promote national monuments, museums, libraries and the like institutions, it is proposed to exempt from income tax all donations made to them.

Exemption to the incomes of provident, gratuity and super annuation funds, regimental service funds and old age benefit institutions is being exempted for the benefit of the retired.

Withholding taxes having proved effective, two new withholding taxes have been proposed. These will be adjustable, due credit being given for them against the final tax liability determined at year's end.

It is proposed to levy a withholding tax of 5 per cent on the value of foreign exchange purchased for travel abroad which is a luxury. Those travelling for Haj, Umrah or on government business will be exempt from this levy. This withholding tax will be adjustable against final tax liability at the years end.

It is proposed to levy a withholding tax, 2 per cent of the estimated cost of palatial building and Plazas. This tax would be collected by the authority sanctioning the Plaza of such buildings in two equal installments one at the time of sanction of plan and the other on completion. This will also be adjustable against the final tax liability. This levy will not be applicable to residential houses.

Withholding tax on electricity bills of commercial and industrial consumers levied last year is being extended to all such consumers irrespective of the amount of the bill. Commercial consumers with bill amount of upto Rs. 400 and industrial consumers with bill upto Rs. 500 will pay Rs. 30 as advance tax which will be adjustable against their final tax liability.

To further improve the collection of wealth tax and capital value tax as part of the collection of direction taxes, it has been proposed that all assets of minors will be assessed with the wealth of their parents except agricultural land. The exception is without justification and is clearly discriminatory. It is proposed to be eliminated.

The net yield from various measures propose under wealth tax and capital value tax is estimated at Rs. 217 million.

To further rationalise the structural reforms of customs tariff and to reduce the cost of imports it is proposed that the highest slab of duty in their tariff is reduced from 90 to 80 per cent. The duty relief will be available to a large number of items which include dairy products, foods items, gum and resins, preparations of cereals and vegetables, paper and paper board, articles of iron and steel, tools etc.

Secondly, tariff is being rationalized to promote and expand exportable goods specifically of textiles and leather. The duties on a large range of dyes and chemicals required as inputs for the number of textile and leather manufactures to bring to a uniform rate of 30 per cent except few items on which duty ranging from 50 to 80 per cent is necessary for the protection of the industry. Further to promote exports of value added goods, exemption from customs duty and sales tax only available to five industries upto 30 June, 1993, is proposed to be extended for a further period of two-year until 30th June, 1995, however Iqra surcharge will not be applicable to these industries. Iqra surcharge will be exempted for three years on the import of leather and textile machinery and then payable in two installments in the next two years, thus reduce the capital cost of these industries. Similarly exemption from custom duty and sale tax allowed to key industries in 1989 which is expiring on 30.06.93 is also proposed to be extended for two years. Thirdly, high rates of regulatory duty were initially imposed on items removed from the negative list of imports. These regulatory duties have been revised to cap the total incidence of import duties at a maximum of 80 per cent.

A significant step taken in the taxation proposal is the reduction on the import of cars etc. In order to help reduce the prices of cars which have gone out of reach of people belonging to middle class. Besides, the need for tariff adjustment has become urgent in view of local assembly of cars under a highly concessional duty structure. In order to protect the consumers and provide cheaper public transport to common man, it is proposed to reduce the incidence of duties and taxes on cars in CBU condition upto 1000 CC from 141 per cent to 85 per cent, on cars upto 1300 CC from 197 per cent to 100 per cent, on cars upto 1800 CC from 293 per cent to 125 per cent and on cars more than 1800 CC from 518 per cent to 200 per cent and for four wheel drive vehicles from 141 per cent to 125 per cent.

Other specific relief proposal include:

* Reduction of duty on photographic films, photographic paper and photographic camera from 60 per cent and 50 per cent respectively to 40 per cent.

* Reduction of duty on photographic laboratory equipment and its parts from 60 per cent to 40 per cent.

* Reduction of duty on fuel wood, wood charcoal, rough wood and on teak wood from 60 per cent, 30 per cent and from 90 per cent to 0 per cent. This would help reduce consumption of local wood and control fast depletion of forests.

* Exemption from customs duty, regulatory duty and sales tax on import of pesticide names "sex pheromone". Increased use of this pesticide will protect the cotton crop from pest and increase its yield.

* Withdrawal of specific duty of Rs. 12 per kilo on imported milk powder in view of recent increase in import prices. This will provide relief to the common man.

* Duty on all types of man-made yarn which at present is Rs. 36 per kg. plus 10 per cent is proposed to be reduced to Rs. 30 per kg. plus 10 per cent. Duty on filament yarn had earlier been reduced in May 1993 to Rs. 30 per kg.

* Extension of exemption from customs duty in excess of 10 per cent and whole of sales tax on importation of ground handling, training and security equipment to all companies licences by civil aviation authority to provide ground handling facilities.

* Reduction of customs duty on tyres of buses and lorries from 80 per cent to 70 per cent, of cars, motor cycles and bicycles from 90 per cent to 70 per cent.

* Reduction of duty an polyester film used for manufacture of metallic yarn from 90 per cent to 70 per cent. This will encourage local manufacture of mettalic yarn.

To check the phenomenal illegal increase in the import of raw materials and finished goods under the Pak-Afghan transit trade, duty is proposed to be reduced on a wide range of items, e.g. on cocoa and its preparations from 90 per cent to 50 per cent, on perfumery, cosmetics, polishes and creams from 90 per cent to 60 per cent, on dish washers and sewing machines from 90 per cent to 60 per cent and 70 per cent respectively, on refrigerators and airconditioners from 75 per cent to 60 per cent, on tape recorders, VCRs and radios from 75 per cent, 60 per cent and 90 per cent respectively to 50 per cent and on watches and watch movements from 30 per cent to 20 per cent. This will induce regular imports and discourage the illegal trade.

In addition, measures have been initiated to renegotiate the Afghan transit trade agreement with the Government of Afghanistan. It is proposed to adjust regulatory duty on ball bearings so as to reduce total incidence of duty to a maximum of 80 per cent on the ball bearings.

Iqra Surcharge will be treated as a minimum import charge. All exemptions except on wheat, fertilizers, pesticide, drugs and pharmaceuticals, POL, LPPG and such other items as may be notified are proposed to be withdrawn.

To simplify the tariff it is proposed to convert the composite rates into specific rates on a number of items.

The levy of 1 per cent flood relief surcharge is proposed to be continued in 1993-94 to complete the repairs and rehabilitation of infrastructure damaged by floods.

To encourage manufacture of bags it is proposed to withdraw exemption from Customs, Sales Tax and Iqra Surcharge allowed to empty bags imported along with bulk consignments of fertilizers and sugar.

The deferred payment of duty of 11 per cent per annum surcharge is being proposed to enhance the rate of surcharge to 14 per cent to facilitate process of industrialisation.

It is proposed to levy a surcharge of 14 per cent per annum on import duty and other charges on the goods which are not cleared with 30 days of the completion of bill of entry. The measures proposed above will yield additional resource of Rs. 4.11 billion.

In the field of sales tax four changes are proposed to minimize misuse of discretionary powers by the tax officials. Firstly, to achieve uniformity in tax levy by CBR will lay down Pakistan Trade Prices (PTP) for different types of locally produced commodities. Sales Tax will be levied on these prices. This concept is similar to prescribing International Trade Prices (ITP) for calculation Customs Duty.

Secondly, it is proposed that small and medium size firms may be allowed an option to pay Sales Tax at a reduced rate without claiming credit for fax paid on purchases. It is proposed that CBR or collector of Sales Tax may on access to relevant information examine hardship cases and provide relief to the tax payers.

Lastly, it is proposed that the Appellate Collectors be empowered to waive the condition of pre-deposit tax which has to be fulfilled to file an appeal against order of Sales Tax Officials.

A number of commodities are exempt from Sales Tax. Last year, Sales Tax exemption on some goods was withdrawn. It is proposed to extend Sales Tax on 10 goods which at present are exempt. Some of these goods are toilet soap, electric fans and desert collectors. This measure is expected to yield Rs. 173 million.

To check the sale of poor quality goods, it is proposed that such industries be declared as "Non-exempt industries and Sales Tax be charged on each unit belonging to such industries. However, all such units falling in this category will have the option to pay sales tax at 5 per cent without adjustment of tax paid on inputs. This proposal is expected to yield Rs. 60 million.

The present rate of sales tax is 12.5 per cent and it is proposed to increase the existing sales rate to 15 per cent to meet the budget deficit. This measure is expected to yield additional revenue of Rs. 4.30 billion while the cost of living will increase be only 0.3 per cent.

The rate of duty on fruit juices is being increased 10 paisa per unit to 5 per cent of retail price per unit container of 250 ml. gram. These rates are effective from today. (June 14, 1993)

Central Excise Duty on marriages held at hotels is being reduced from 30 to 20 per cent and on other parties from 20 to 10 per cent weddings at marriage halls, lawns will be charged excise duty at 10 per cent of the charges.

The Excise Duty on domestic phones is being reduced from 60 per cent to 35 per cent of the charges. This will reduce the rate per call from Rs. 2 to Rs. 1.70.

The capacity scheme about cement industry has been withdrawn and instead excise duty on production and clearance of all kind of cement has been proposed at the rate of Rs. 510 per ton.

Lastly, the prices of petroleum products are being raised by 10 per cent. In future these prices would be linked to the exchange rate and notified on a quarterly basis, to obviate the need for large unforeseen adjustments. The measure will yield Rs. 7.1 billion.
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Title Annotation:Special Section: Budget 1993-94; Pakistan's tax policy
Publication:Economic Review
Date:Jun 1, 1993
Previous Article:A richman's budget.
Next Article:Budget 1993-94 - a ritual performed every year.

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