KARACHI: A policy think-tank namely Institute for Policy Reforms (IPR) has put forwards budget proposals for the generation of additional revenue to the tune of Rs200 billion with almost 55 percent of the revenue to accrue through direct taxes.
Highlighting the budget proposals, IPR MD Dr Hafiz Pasha said that the proposed revenue target for the FBR in 2014-15 is Rs2,700 billion representing a growth rate of 20 percent. With normal growth, FBR revenue is likely to reach Rs2,500 billion. Therefore, taxation proposals are required which could yield Rs200 billion in 2014-15.
Almost 55 percent of the additional revenues accrue from proposals in direct taxes. This will make the tax system more progressive and convey the right signals to people. Pasha said that the estimated tax expenditure of income tax has been worked out at Rs260 billion including Rs110.1 billion income tax exemptions; tax deductions and allowances Rs98.3 billion and concessionary tax rates Rs37.7 billion.
The IPR MD said that 55 percent of the additional revenue would come from direct taxes. In the next Finance Bill of 2014-15, it has been proposed to tackle the issue of under taxation of Capital Gains on Securities. This will involve enhancement in the withholding tax on shares/securities traded in the stock exchanges, in lieu of capital gains. The proposal is to introduce Securities Transaction Tax, of the type that exists already in India. The suggested rate is 0.5 percent of the traded value of a share. Suitable arrangements will have to be made by FBR to ensure that this tax is fully collected. Exemption of income of certain trusts, NGOs, etc: This will only become applicable if the business income exceeds 50 percent of the total income (including charitable contributions). The taxable business income may be taxed at the reduced rate of 20 percent.
Tax deduction on provisioning of banks: This provision is contained in the 7th Schedule of ITO. The proposal is to restrict this benefit only to bad loans to SMEs, agriculture and exports. Tax deduction on pensions: Pension contributions already enjoy tax deductibility. The present system of also exempting pension income, in effect, provides a double benefit. As such, the second benefit is proposed to be withdrawn, especially in the case of retired corporate executives, for annual pension income in excess of Rs750,000.
Concessionary rate of sales tax: There is a tax rebate of 2.5 percent if sales are made only to registered persons. This is proposed to be withdrawn, as some buyers may be genuine small tax payers. Concessionary rate on dividends: All dividends may be subject to the standard rate of 10 percent. Concessionary rate on teachers: The partial concession currently available may be withdrawn.
He said that currently, different forms of unearned capital income are taxed as separate blocks of income. The proposal is to make a transition from scheduler to comprehensive income taxation. As such we recommend the withdrawal of the presumptive and final tax of 10 percent on dividends, interest from bank deposits, profit on government securities and prize bonds.
This may be replaced by a minimum withholding tax of 10 percent, which will make the tax system more progressive and also raise additional revenues. He was of the view that capital gains on property is more in the nature of income and should be within the fiscal powers of the Federal government. However, the focus should be on taxation of real, net nominal gains. Overall, the above three sets of proposals will signal the more towards progressive taxation, especially through broadening of tax to more effectively cover capital gains and unearned incomes.
Dr Pasha said that the ‘big move’ expected this year was the large-scale withdrawal of SROs, providing for special exemptions or concessions, in import duties and the GST. This is in the form of a Structural Benchmark in the IMF Programme to be implemented by June 2014.
Simultaneous withdrawal of SROs and scaling down of import tariffs will enable industry to absorb the big move, while leading to a simpler and more transparent import tariff regime.