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FBR proposes amendments to facilitate filing of income tax

ISLAMABAD: The Federal Board of Revenue (FBR) has proposed a separate tax slab for builders, developers and for incomes from property deals in the Finance Bill 2016 which will come into effect from July 1 subject to parliament’s approval.

Three different rates are proposed for builders and developers in urban areas of Pakistan.

For Karachi, Lahore and Islamabad, the rate of tax for commercial buildings will be Rs210 per square feet. The rates for residential buildings and offices will be Rs20 per sq feet on area of up to 750 sq feet, Rs40 for 751-1,500 and Rs70 for 1,501 or more.

The proposed tax rate for builders and developers in case of commercial buildings will be Rs210 per sq ft. This rate will be applicable in Hyderabad, Sukkur, Multan, Faisalabad, Rawalpindi, Gujranwala, Sahiwal, Peshawar, Mardan, Abbottabad and Quetta.

In the case of residential buildings and offices, a rate of Rs15 per sq ft will be applicable on area of up to 750 sq ft, Rs35 on 751-1,500 and Rs55 on 1,501 or above. Similarly, the proposed rate for other urban areas is Rs210 per sq ft.
In case of residential building and offices, the rates would be Rs10, Rs25 and Rs35, respectively.

Income from property is currently taxed under normal regime, and return filing forms are too complicated for an individual and association of persons (AoPs). Through the Finance Bill 2016, the government proposed tax rates for individuals and AoPs, which will be full and final discharge of their income tax liability.

There will be no tax on property rent up to Rs200,000. However, the rate of tax will be 5pc of amount ranging between Rs200,001 and Rs600,000; Rs20,000 plus 10pc of amount between Rs600,001 and Rs1,000,000; Rs60,000 plus 15pc of amount between Rs1,000,001 and Rs2,000,000; and Rs210,000 plus 20pc of amount exceeding Rs2,000,000, respectively.

The finance bill proposes to levy a tax of 10pc on capital gains on disposal of immovable property where holding period did not exceed five years. In case the holding period is more than that, the gain shall be exempt. It is believed that the proposal might not yield any additional revenues without changes in collector rates in relation to the market value.

In the latest budget, the government has expanded the scheme of differential taxation for filers and non-filers for penalising the non-compliant people.

To further squeeze non-filers of tax returns, an explanation has been proposed that a withholding tax (WHT) would be levied on aggregate withdrawals from all the bank accounts if they exceed Rs50,000 in a single day.

Three new WHTs were introduced in the budget, including an advance tax of 3pc on the turnover for those people who file sales tax returns with the provincial revenue authorities.

Similarly, the government has introduced a 3pc advance tax on the turnover for those people who file sales tax returns with the provincial revenue authorities. This tax will be collected by the provincial revenue board. There are 15,000 sales tax return filers with the provincial revenue authorities who are not filing income tax returns. Tax officials estimate to generate maximum revenue from these people.

In the WHT regime, two major decisions were taken. Some new withholding taxes were introduced for non-filers — 5pc tax on the value of minerals, 3pc tax on the value of vehicles at the time of leasing , advance tax of 4pc on general insurance premium and 1pc on life insurance.

Similarly, the various rates of withholding taxes for non-filers were also increased — dividend income, payment for goods by fast-moving consumer goods, brokerage and commission, collection of tax by stock exchange, transfer or attesting transfer of immovable property, and purchase of immovable property.

Since prize bonds are bearer instruments, they are often used by tax evaders and non-compliant people to whiten their income. Therefore, it is proposed to increase the withholding tax rate for non-filers from 15pc to 20pc on winning of prize bonds. To improve tax compliance, withholding tax has been increased to 12pc from 10pc on electricity use of commercial consumers.

Income tax

Some special industries, like pharmaceuticals, operate under their specific regulations. They incur and claim huge expenses on advertisement from their taxable income despite the fact that they are restricted, under their regulations, not to expend beyond 5pc.

Currently, any person who discovers any omission or wrong statement in its return of income, after filing the same, may revise the return of income, subject to condition that approval of commissioner. The finance bill proposes to withdraw the condition of approval from commissioner in these cases where the return of income is to be revised upward, ie the return causes additional revenue to the exchequer. However, where any legal proceedings are pending in respect to such return, no such revision will be allowed.

Sales tax

A new mechanism for filing of sales tax and federal excise duty returns is proposed to be introduced, whereby only sales and exports (Annexure C and D) shall be entered by the taxpayer, whereas purchases and imports (Annexure A and B) will automatically be updated consequent to respective declarations made by suppliers. This system will work as an upper layer of existing CREST system currently implemented.

The dates for filing of annexes will be specified by the FBR.

A similar mechanism is successfully being implemented in European countries, especially Sweden. By introducing the proposed system, it is expected that the fraudulent input adjustments will be curbed and consequently additional revenues will be accrued.

The finance bill also proposes constitution of directorate general (DG) of input output coefficient organisation (IOCO).

The DG of IOCO is proposed to be consisted of director general and directors, additional directors, deputy directors, assistant directors and such other officers as the board may appoint. Similar organisation also exists in Pakistan Customs.

The cottage industry is defined as a manufacturer whose annual taxable turnover during the last 12 months ending any tax period does not exceed Rs5 million or whose annual utility bills during the last 12 months ending any tax period do not exceed Rs800,000. The limit of utility bills originally was Rs600,000 which was increased to Rs700,000 and Rs800,000 (under finance acts of 2008 and 2015, respectively).

A cottage industry is exempt from requirement of registration and is not charged any sales tax on supplies as per Serial 3, Table 2 of the sixth schedule. The Finance Bill 2016 proposes to increase the limit of annual turnover to Rs10 million from existing Rs5 million. This means that manufacturers having turnover less than Rs10 million will be exempt from registration requirement and will not be liable to charge sales tax on their supplies. The limit seems to be increased to balance the administrative costs and benefits associated with monitoring, by department, of these small manufacturers.

The following items, which are currently zero-rated, have been exempted: colours in sets, writing, drawing and marking Inks, erasers, exercise books, pencil sharpeners, geometry boxes, pens, ballpoint pens, markers and porous tipped pens, pencils including colour pencils, milk, and fat-filled milk.

No input adjustment will be allowed against the supply of the abovementioned goods. The unadjusted inputs will tend to be added into cost, resulting in increase in their falling prices. These items are related to stationery and dairy products.