RATIONALE OF BUDGET 2006-07, INITIATIVES

RATIONALE OF BUDGET 2006-07, INITIATIVES <!--[if gte mso 10]> RATIONALE OF BUDGET 2006-07, INITIATIVES By M. Iqbal Patel, Karachi. The National Assembly's 345 members completed three readings of the Finance Bill 2006 within twelve days and passed it incorporating 14 amendments against 84 amendments of the opposition. These 14 amendments are related not only to the taxation laws but it includes on labor and privatization laws which have been made part of the money bill, the legal experts may be in a better position to say whether this practice is in confirmative with the Constitutional provisions. The Minister of Finance in his Budget speech said that the Pakistani economy has gone an amazing expansion. The Pakistan Economic Survey 2005-06 has reported that GDP grew strongly at 6.6% as against the revised estimate of 8.6% last year; the performance of agriculture remained weak this year as it grew by only 2.5% as against 6.7% of last year; manufacturing which is the second largest sector of the economy, registered growth at a relatively slower pace of 8.6% as against 12.6% last year particularly large scale manufacturing grew at 9% compared to 15.6% last year and construction achieved growth of 9.2% than 18.6% last year. Domestic debt as on March 31, 2006 has increased to Rs. 2,267 bin from Rs. 2,158.4 bin on June 30,2005. Total deficit will be Rs.327.5 bin equal to 4.2% of GDP compared to 3.8% targeted. Considering this worst scenario, Mr. Burki, retired World Bank official, warned that Pakistan was facing symptoms that preceded the Mexican financial crisis more than ten years ago. The higher inflationary trend in Pakistan is defended in the Budget speech and in Economic Survey. Although inflation has been the outcome of pressure that emanated by World Bank and other international donors. The government is required to comply with their conditionality to bring the prices at par with those internationally. Accordingly gas prices are increased which will hit the common men and specifically the industries, will adversely affect export being it will render their product uncompetitive. Interestingly this slogan is limited to the prices only and is not extended to other areas of our society. The prices of sugar were doubled. The government justified the increase that it is in sympathy with the increase internationally. To overcome this crisis, it has decided to give subsidy. Thereby the government admitted its inability to manage the prices of necessaries. Under this background of a lot of cacophony, the government has introduced cosmetic taxation measures to collect more tax revenue through the Finance Act 2006. The Act has changed the basis of chargeability to tax the salary income which presently allows deduction of perquisites and allowances from the gross salary income to arrive at the taxable salary. The system now envisages to do away with all the perquisites and allowances and the gross salary be taxed straight away. The Act also withdraws the medical exemption available to the resident taxpayer's upto Rs.30,000. The rates of tax of salary class has also been drastically reduced which apparently claimed will give great relief to the salary class. But an analysis of new formula introduced, reveals different story. In fact the change is in conformity with the past practice of the wizard of C.B.R. for last two years to give more relief to the higher class, while no tangible relief was given to the low grade employees, who are reeling under the ever increasing cost of living. The increase in minimum wage to Rs.4,000 per month of the labor is not going to help the poor in the real sense. The taxation of the salaried class had been categorized into two. Those who draws below Rs.599,999 and more. The salary drawn Rs.600,000 or more were allowed to claim only house rent allowance upto Rs.270,000; other perquisites were not allowed to them, hence as a result of merger of all perquisites into salary, this class would be least affected. But those drawing salary below than this threshold would not be benefited due to reduction in tax rates which may be in the range of Rs.500 or so However salary drawn of Rs.1.50 min and above would enjoy considerable tax relief of Rs.44,000 (equal to 20% or more) and above depending upon the amount of salary. Thereby the government will be able to collect more tax revenue from the low salary class. The Act has exempted the rental income not exceeding Rs.150,000 of an individual or association of persons and who does not derive taxable income under any other head. It withdraws the claim of expenses hitherto were available for deduction under section 17 to compute the taxable income from property. The rental income is now made subject to tax at the fixed tax rate of 5% of gross rental income from property. The taxpayer will not be required to file annual return of income but will file a statement under section 115. The tax so deducted at sources will be final discharge of his tax liability on his property income. The Act has extended to withhold tax at the rate, of 1% of turnover for a tax year of all the retailers, in addition to the retailers specified under section 113B, whose turnover exceeds Rs.5mln in the tax year and who are subject to special procedure for payment of sales tax at the rates of 2%. Thereby making it to 3% of the declared turnover as envisaged in the Sales Tax Special Procedure Rules 2006. The government is creating the distortions in the tax laws giving options to the taxpayers to manipulate their business and avail tax concessions. The Commissioners power is now restricted under section 148(3) to issue a certificate of reduction in tax upto 75% instead of 100% of advance tax payable at import stage by a manufacturer who imports raw materials other than edible oil for his own use if the tax paid or collected in a tax year equals the amount of tax paid in the immediately preceding year. Presently tax is levable at the concessional rate of 5% on dividend received by public or insurance companies and others are taxed @ 10%. The amendment has now extended this confessional tax rates of 5% on interoperate dividends received by the private companies. The object of this concession to the private companies is underlined that it will encourage more investment. Presently there over 40,000 private companies are registered with the Securities and Exchange Commission of Pakistan. Instead of taking any measure whereby they are encouraged to get themselves listed on stock exchanges which would strengthen the capital markets; the reduction in tax rate would encourage the listed companies for delisting. Moreover the dividends declared by the private companies remains within the family members. In the circumstance how the proposed concession to them will attract more investment and benefit the nation is not comprehensible. The payments made by an exporter or an export house on account of rendering services of stitching, dying, printing, embroidery, washing, sizing and weaving to a resident person or a permanent establishment of a non-resident person will be treated as export and are made liable under section 153 for withholding tax at the same rate applicable to' exporter given in the Seventh Schedule to the Ordinance which ranges from 0.75% to 1.50%. This amendment has been brought in conformity with parameters given in the Trade Policy 2005. The tax so deducted will be final under Presumptive Tax Regime. This measure appears to be not applicable to such services to be rendered to non-exporters. The tax on real estate transaction, under the Constitution is a no-go area for the government on one hand and there lot of money is being invested in real estate and windfall gain is earned which remains out of tax net. In order to canalize the investment in real estate in an organized manner and to bring its income into tax net through documentation, the Securities and .Exchange Commission of Pakistan has issued the Real Estate Investment Trust Rules, 2006 (REIT). The REIT is a closed end investment scheme constituted as a unit trust fund and managed by a REIT management company. It will sell its units like a stock by Mutual Funds and will invest in real estate directly or indirectly. It will enjoy tax exemption on the analogy of Mutual Funds subject to condition that minimum distribution by REIT to its unit holders, out. of its net income shall not be less than 90% Further in order to give incentive this new scheme of investment, income of REIT is declared exempted from levy of minimum tax under section 113 and payments -to REIT has also been exempted from withholding tax under sections 151 and 233, on profit on debts and commission /brokerage respectively. The Government has also attempted to tax the sell/purchase of properties through imposition of Capital Value Tax (CVT), situated in urban area, measuring 500 sq yds or one kanal whichever is less @ 2% of the recorded value and in case the property is not recorded, Rs.50 per sq. yd. of the land area. The commercial property of any size will be taxed at the same rate as mentioned above. The legislature has also introduced amendment whereby 2% CVT would be levied on the purchase of residential flats with covered areas of 1,500 sq. ft. and above. Investment in real estate has always been a matter of concern for tax authorities. A long time ago Transfer of Property was a prerequisite before any land transaction could be undertaken. This practice was discontinued in 1970. Then CVT was imposed on non-agricultural land transactions in 1989 on fixed percentages basis which was also discontinued in 1999. The idea of collecting data on buying/selling of properties is unfeasible in an economy where 80% of investment is concealed and further that evidences are there that the politician, the wealthy, the landlords, .the stock brokers or industrialists have effectively neutralized government attempts to levy taxes through stiff resistance. However, the government's objective must be first and foremost to bring as many of the wealthy under the tax net as is possible on the principle based on ability to pay irrespective source of income. The payments made for services rendered in case of transport and other services were liable to withhold tax under section 152 @ 2% and 5% respectively and in the case of a contract @ 6%. Now all such services are made liable to tax at uniform rate of 6% which shall be the final discharge of tax liability under PTR, except companies. The applicability of PTR on professional firm's needs clarification from the C.B.R. in view of principles of taxation for AOP of professionals provided under section 92. Similarly commission to indenting agents and yarn dealers has been made under section 233 subject to uniform tax @ 10%. The advertising agent will continue to be liable to be taxed @ 5%. The non-residents also have been brought under the final tax regime at par with the resident commission/brokerage agents. Moreover with-holding tax levied under section 231-A in 2005 @ 0.1% on cash withdrawals from bank exceeding Rs.25,000 has been increased to 0.2% on single withdrawal in a day. Further withholding tax rate on all trading transaction made in stock exchanges has been increased on sale, purchase and trading of shares from 0.005% to 0.01% The CVT on purchase value of shares has been enhanced from the 0.01% to 0.02% In order to encourage further corporatization, the gain derived by an individual from transfer of individual membership rights including transfer of room of stock exchange by an individual to a company during the period July 2006-June 7 has been exempted from tax u/clause (133A) of the Second Schedule to the Ordinance. The government has so far not mustered the Continue ..