Finance Act 2015-16: Dissecting major reforms – I

The following article has been published in Daily Nation, dated 13th July 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-07-13/page-9)

(Onlinehttp://nation.com.pk/business/13-Jul-2015/finance-act-2015-16-dissecting-major-reforms)

Finance Act 2015-16: Dissecting major reforms – I

By: Omer Zaheer Meer

The finance bill for financial year 2015-16 was passed by the National Assembly with some amendments and released as the Finance Act 2015-16. The opposition’s walkout on 23rd June 2015 allowed the finance ministry officials an easy outing with the Treasury benches rendering their support for granting the approval to the finance bill. There have been positive developments in some areas while much is left to be desired in others. The honorable finance minister explained his constraints in his budget speech when the original finance bill was floated, pointing out to the strong lobbies with vested interests and that the incumbent Government is undertaking reforms in a phased manner. We’ll discuss some major reforms, their impact on businesses and economy as well as the reaction of the impacted segments towards them in this write-up.

This is first of a two part write-ups on the above titled subject aimed to enlighten our readers on some of the least understood aspects of the finance act.

First up is the reduction in tax rate for companies which has been reduced for the tax years 2016, 2017 and 2018 to be 32, 31 and 30 percent of taxable income respectively. This is the fulfillment of the commitment by the incumbent Government to reduce the tax rate for corporate sector to 30 percent by 2018. The move is seen positively and welcomed by the corporate sector. Lowering the tax incidence on corporate sector is viewed as an incentive for this segment.

Interest Free Loans for Solar Tube Wells upto Rs.1 Million for setting up new solar tube wells or replacing the existing tube wells with solar tube wells shall also be provided to small farm owners having landholdings of less than the 12.5 acres economic threshold. This is a positive step aimed to address both the energy crisis impacting the agricultural sector as well as providing some relief to the small farmer as most of the other measures for the agricultural sector seems to be aimed at benefitting large landowners and investors.

Next up is perhaps the most controversial and discussed about yet least understood reform of the imposition of advance tax on banking transactions by non-filers. A lot of hue and cry including strikes by traders has resulted in the original levy of 0.6 percent withholding tax halved to 0.3 percent till end of September 2015 by way of an ordinance promulgated by the President of Pakistan. The original reform required all banking companies to collect advance tax at the rate of 0.6 percent on all transactions from an account either by way of sale of any instrument including demand draft, pay order, etc. and/or transfer of any sum through cheque and other similar manners or clearing interbank transfer through cheques etc which meant that all debits (amounts taken out) of an account shall be liable to this tax.

There are a few important qualifications to this advance tax though. Firstly this is only applicable to non-filers. Secondly the provision will apply only where the sum total of payments for all transactions in an account shall exceed Rs 50,000 in a day. Also this tax will be adjustable against the tax liability if the person files his/her return of income. Furthermore, the onus is on the account holders to inform their banks/financial institutions about their status of being a filer sans which collection will become applicable on their accounts.

Last but not the least, this provision is in addition to the existing provisions of Section 231AA of the Income Tax Ordinance where in all cases (being a filer or non-filer) a collection of tax is made on cash transactions. This effectively means that the new tax will apply to non-cash transactions of non-filers whereas section 231A and 231AA shall continue to apply on cash transactions. The rate of withholding tax on cash withdrawals under section 231A (in case of non-filers) and section 231AA (in case of both filers and non-filers) has been increased from 0.5% to 0.6%.

If we look at this reform from an objective perspective, though cumbersome administratively it incentivize businesses and individuals to come within the ambit of filing tax returns. The objective is to broaden the tax net. However the structural inefficiencies, rampant corruption within most tax authorities and a regressive taxation system all act as a deterrent against becoming a filer. This reform alone does not address all these issues and therefore this context can help us better appreciate the negative reaction from masses particularly businesses instead of simply dismissing their concerns as the prevalent tax avoidance culture.

Another interesting reform is the imposition of a one-time “super tax” for tax year 2015 for the rehabilitation of temporarily displaced persons on all those with income of Rs. 500 million or more as below:

  • (i) banking companies at 4%
  • (ii) all other taxpayers at the rate of 3%

This is an example of a reform pursuing the progressive tax regime by taxing those with higher income to the advantage of the downtrodden sections of the society. If the entire taxation system is revamped with a focus on direct taxation pursuing a progressive tax regime many of the ills facing our revenue generation and thereby economy can be rectified.

We’ll continue with some more interesting amendments, issues and structural reforms introduced by the Finance Act 2015-16 in the second and last part of this writeup.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced Fellow Chartered Certified Accountant and Anti-Money Laundering Expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

Budget: An Objective View

The following article has been published in Daily Nation, dated 08th June 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-06-08/page-9)

(Onlinehttp://nation.com.pk/business/08-Jun-2015/budget-an-objective-view)

Federal Budget: An Objective View

By: Omer Zaheer Meer

The wait is over. One of the most awaited events of year, the federal budget was announced on Friday, 05th June 2015. The incumbent government has claimed it to be a historic one as all governments do while the opposition saw only red as the oppositions normally do. The reality however lies somewhere in the middle. There have been some positive steps that should be appreciated while others are left to be desired.

To understand the current budget better we need to review the performance of the last fiscal year as per the Economic Survey 2014-15 released by the finance ministry. As per the data released, inflation has reached the lowest level of this decade with substantial improvements in the foreign exchange reserves. This has resulted in State Bank of Pakistan reducing the discount rate at 7%, the lowest in last four decades.

While the issue of sukuk bonds and receipt of loans and donations were a direct result of governmental decisions, the improvements mentioned above were largely due to a key factor not affected by the governmental policies, that was the reduced oil import costs and resultant reduced inflation in the country due to material reduction in oil prices in the international market. Furthermore, manufacturing and agriculture sector which are the prime drivers of economy and employment opportunities haven’t shown the improvements expected. Private sector is sluggish and the cherished dream of the Tax-GDP ratio in line with the developed economies remained a dream.

With this backdrop and an economic growth rate of 4.24% the federal budget 2015-16 was supposed to overcome the shortcomings mentioned above and in several article before. Some key proposals were provided on these pages on Monday, 1st June 2014 in an article titled “Budgetary Dreams”. It was good to see some of the proposals getting implemented like the announcement of rebate on solar-panels and provision of concessionary loans to small farmers for some solar-powered projects. Similarly the incentives to the construction industry and rebates announced for the rice manufacturers are positive steps too. What’s interesting is that incentives announced has been for small farmers owning less than 12.5 acres of landholding, thereby substantiating the perspective that those over this threshold should have been brought within the tax net.

On the other hand, the critical proposals including bringing agricultural sector within the tax net and using the proceeds to subsidize provision of free or low-cost water and electricity to the sector has been ignored. Creating a new body for providing seeds, fertilizers and all other necessities to farmers at discounted prices due to the volume of business with the mandate of buying all crops from the farmers at the Government approved rates and supplying them to various industries and markets, thereby ensuring the farmers getting their dues while the stockists’ induced shortages and inflation getting stemmed out has not been implemented either.

While almost a 14% increase has been announced in the federal budget for education, which must be appreciated, the promised level of 5% of budget still remains a dream. Similarly the research and human resource development proposals have not been incorporated into the budget despite their importance for a modern national economy. As elaborated in previous write-ups, the impact of this allocation may not have been very drastic in terms of volume post 18th amendment but it would have been a strong signal and precedent for the provinces to pursue.

There was a hue and cry over a paltry 7.5% rise in the salaries of federal employees particularly considering the inflation levels. While the finance ministry has defended this citing certain limitations, there is much left to be desired and an increase of at-least 15% was very much realistic and achievable.

However the most shocking oversight was yet again ignoring the proposals of broadening tax base that has been presented to the various ministry officials for over a decade now. Once again the computerized national identity card (CNIC) has not been declared as the National Tax Number (NTN) and Sales Tax Registration Number (STRN) for all citizens. This could not only have made it extremely easy for any Pakistani to start a business having both the NTN and STRN, hence promoting a culture of entrepreneurship but would also have helped broaden the tiny existing tax base as the number of filers and ultimately taxpayers are forecasted to increase with the increasing documented nature of the businesses.

Continuing from this, the proposal of focusing more on a progressive direct tax regime is deferred once again. While there is no substantial change in the ratio of the direct taxes to indirect taxes, the positive reductions on the focus on indirect taxes is missing. The current policy of relying more on indirect taxes in the shape of customs duty, sales tax, federal excise duty, petroleum levy, gas infrastructure cess, natural gas surcharge and others will give rise to inflation and increased productivity costs leading to lower exports and purchasing power. The costs of this policy certainly outweigh the benefits. Similarly the volume over tax rate policy could have helped increase the tax net and the tax to GDP ratio by substantially reducing the tax rates, making it economically feasible to pay taxes instead of using the costly means to avoid them.

Although the budget is supposed to be a benchmark to act as both a planning and a control tool, this has not been the case for quite some time now. With all sorts of mini-budgets and flexible forecasting, the budget has been reduced to a mere constitutional formality that is met every year. Let us hope that the most important proposals not incorporated in the proposed budget may get the attention of our lawmakers and make way into any policy changes.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk