Pakistan Tax: Budget to bristle with Rs138bn new taxes

By Khaleeq Kiani, 28 May 2010, ISLAMABAD -- The government has finalised proposals for collecting Rs1,650 billion in taxes during 2010-11, envisaging additional taxes of Rs138 billion, including levy on 20 new services. The proposals also include relief to the tune of Rs5 billion on salaries and electricity consumption.

The proposals, prepared by a revenue advisory committee led by Dr Hafiz Pasha in consultation with the Federal Board of Revenue (FBR), envisage introduction of value added tax (VAT) from July 1.

Under the proposals, withholding tax on electricity consumption will be reduced from 10 per cent to 5 per cent in the highest slab, causing a revenue loss of Rs4 billion.


Income tax

Presumptive income tax on export of services will be reduced from six per cent to three per cent, costing another Rs1 billion.

The rates of income tax for salaried people will be rationalised and the number of slabs reduced from 20 to 12. The maximum rate (applicable now on income of Rs4.5 million and above) will be increased to 25 per cent from 20 per cent. Tax rates will be slashed for income groups between Rs250,000 and Rs900,000. The steps will yield Rs1 billion in additional revenue.

For non-corporate taxpayers, the rates will be rationalised and number of slabs reduced from 14 to seven — ranging from Rs200,001 to above Rs3 million. The rates will range from five per cent to 30 per cent. There will be an average increase of Rs500,000 from one slab to the next.

The basic threshold for non-corporate individuals will be raised from Rs100,000 to Rs200,000. This will yield Rs2 billion in additional revenue.

All associations of individuals will be taxed at a flat rate of 25 per cent, yielding Rs3 billion.

Presumptive income tax on commercial importers will be increased from four per cent to five per cent, yielding an additional Rs12 billion.

Exemptions on capital gains from sale of modaraba certificates, instruments of redeemable capital and shares of a public company, including vouchers of the Pakistan Telecommunication Corporation, are due to expire on June 30. Tax on capital gain will be levied on these transactions with effect from July 1, fetching another Rs4 billion.

Presumptive income tax on goods transport will be increased to Re1 per kilogramme of laden weight. This will bring in an additional Rs1 billion.

A withholding tax of five per cent will be imposed on air tickets for domestic travel. The measure is estimated to add Rs2 billion to the exchequer.

A withholding tax of 0.3 per cent will be charged on banking transactions of over Rs25,000 like cashier's cheque, demand draft, payment order, telegraphic transfers, TDRs, SDRs, RTCs and CDRs.

To make coverage of capital value tax on property more effective, the rate will be reduced from four per cent to two per cent with no exemption on purchase of immovable property, except agricultural property.

Rates for industrial plots will also be included. The scope of the CVT will be revised in view of mushroom growth of housing societies in the vicinity of cities. This will yield Rs2 billion.


Federal excise duty

Federal excise duty on cigarettes and filter rods will be increased to yield Rs5 billion additional revenue. The duty on lower slab will be increased from Rs4.75 to Rs5 and the minimum price set at Rs10 per pack of 10 cigarettes. Duty will be levied at a rate of Re1 on filter rods.

Fifteen per cent FED will be imposed on imported and domestically produced consumer durables like air conditioners, refrigerators, deep freezers and microwave ovens to earn Rs7 billion.

Excise duty on natural gas will be raised from Rs5.09 to Rs10 per MMBTU to earn Rs6 billion additional revenue.

Likewise, five per cent excise duty will be imposed on telecommunications to earn Rs7 billion. This will help cover revenue loss because of a reduction from 19.5 per cent general sales tax to 15 per cent VAT.

Moreover, 10 per cent FED will be levied on compressed natural gas (CNG) to make up for replacement of 25 per cent GST by the VAT and earn additional revenue of Rs4 billion.

The 20 new services to be taxed by the FBR under VAT with revenue yields of Rs82 billion include consulting engineers, architects, management consulting firms, practising chartered accountants and cost accountants, practising law firms, IT software companies, large real estate agents and developers, private security companies, large manpower recruitment agencies and authorised service stations for automobile companies.

They also include large storage and warehousing services, container services, transport of oil and gas through pipeline, cable operators, packaging services, asset management services, life and other insurances, large wholesale and retail outlets, cinemas and other entertainment services and laboratory and testing facilities.


Net revenue gains

The overall FBR revenues with normal growth of 4.5 per cent and inflation at eight per cent have been targeted at Rs1,512 billion. An amount of Rs85 billion has been estimated to come from VAT after deducting Rs47 billion transitional costs.

An additional Rs26 billion is expected to be raised from direct taxes and Rs29 billion from federal excise duty.

A revenue loss of Rs2 billion has been estimated because of elimination of 10 per cent customs duty on tea to discourage smuggling.

After deducting transitional costs, the government expects a net revenue gain of Rs85 billion in 2010-11, accounting for 0.5 per cent of the Gross Domestic Product.

The Rs47 billion transitional costs include Rs25 billion on account of moving from standard tax rate of 16 per cent to 15 per cent, Rs15 billion from loss of revenue from items currently charged at above 16 per cent and Rs7 billion because of withdrawal of sales tax at the retail stage.

The government has estimated additional revenues of Rs132 billion through withdrawal of exemptions and broad-basing. This includes Rs82 billion by covering more services, Rs39 billion by ending exemptions to major sectors, Rs8 billion transitional revenue from VAT on plant and machinery and Rs3 billion from withdrawal of domestic zero-rating on export sectors.