Pakistan’s 2nd to None

At a top financial institution with participants after completing a project on  . A long day can be tiring but professionally rewarding if successful.

I’ve always believed and my belief keeps on strengthening that we only need to garner the abilities of our people in a just way while focusing on education.

In terms of brilliance, hardworking people and potential,  is 2nd to none

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ACCA Pakistan “Working Group on Taxation”

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Assalam O Alikum (Peace be on you),

The above is a picture from one of the events launching ACCA’s last pre-budget proposals. We’re planning for a revamp of the ACCA taxation committee and opening up to have some more competent professionals join us with their valuable contributions for the profession, country and their Alma-mater.

Below is the snapshot of a recent email from ACCA to members across Pakistan. Please feel free to share this in your circle and get in touch if you’re the right person.

Dear ACCA Members
ACCA Pakistan MNP has decided to setup a working group under the Taxation Subcommittee. The objective of this working group will be to interact with the Federal Board of Revenue initially and expand its remit to the Provincial Revenue Authorities under the leadership of Omer Zaheer Meer, FCCA, Head of Taxation Sub Committee, ACCA Pakistan and offer the following:

  • Provide regular feedback and suggestions on circulars/policy matters pertaining to taxation
  • Prepare budget proposals (initially federal and later on expand them to the provincial proposals too) and forward them to Federal and Provincial Ministries of Finance.
  • The budget proposals should be prepared in such a way that they present a holistic as well as sectoral suggestions for Pakistan’s Annual Budget
  • Discuss, deliberate and critically evaluate issues pertaining to taxation and present the critical evaluation to Federal and Provincial
  • Profile the ACCA Pakistan Members Network Panel and the subcommittee to the taxation regulators in Pakistan

This working group will consist of 3-5 members working in the taxation sector in strategic positions with considerable experience of the sector. Members with a diverse view point on taxation of different business sectors are encouraged to share their CVs and a personal statement describing their claim to merit for these position with us.

Those members who are keen to join this working group should send us their CV and personal statement by replying to this email. We will look forward to your responses by 24 February 2017.
Haroon A Jan
Regional Head of Member Affairs – MENASA
ACCA Pakistan
61-C  Main Gulberg  Lahore Pakistan

Kind Regards,

Omer Zaheer Meer,

Managing Partner,

Millennium Law & Corporate Company

Announcement of Exceptional Public Value Award by ACCA

Dear Readers,

Peace be on you!

It’s with extreme pleasure that I announce that the prestigious Exceptional Public Value Award is to be awarded to myself by Ms. Helen Brand, OBE, CEO ACCA (the largest accountancy body globally). I’ll share the details with you after receiving the award, Insha Allah.

I’m honored by this privilege and grateful to ACCA for the recognition of my:

“contributions in the field of Budget and Taxation including but not limited to

  • the drafting of Anti-Graft Legislation focused on Undisclosed Foreign Income & Assets which was later adopted by the Treasury,
  • work done on the Regional Research Study on Indirect Taxation across South Asia and UAE,
  • MOU’s with Tax Bars,
  • Collaborations with Chambers of Commerce and Tax Bars,
  • Pre & Post Budget proposals and seminars,
  • continued member education events particularly on Taxation and
  • opportunities created through R&I sessions with key employers.”

Last but not the least, I’m thankful to you all for your support and prayers particularly my parents, siblings, mentors, colleagues and friends.

acca-exceptional-public-value-award

Regards,

Omer Zaheer Meer

Immovable Property Gambit: Impact on Stakeholders

The above titled article was published in the renowned Blue Chip Journal as an Op-Ed in it’s Oct – Dec 2016 edition.

Link to e-edition of the (Blue Chip) publication

Immovable Property Gambit: Impact on Stakeholders

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By: Omer Zaheer Meer

The recent developments in the Federal Budget and later on in the Finance Act 2016 regarding immovable property shook the realty sector within Pakistan which was taken by surprise. Taxation is not just a mean to fund a Government but also a policy tool to impact the national economy, social behaviors, trends and developing institutions. Unfortunately, in Pakistan the impetus has mostly been on using taxation for filling up the coffers of treasury with seriously negative consequences.

Before proceeding with our topic, this writer will briefly define some of the vital concepts and then move onto the core issue; cover the current taxation regime for the realty sector particularly as governed by the Federal Government before concluding with an analysis of the major impact on key stakeholders including investors, property dealers, general public, traders and the Government.

Key Concepts:

Following are some of the vital concepts which are important to understanding the topic of this write-up:

  • Income Tax – a tax levied on the income of an individual or organization which varies with the level of income and is subject to local laws and regulations.
  • Capital Gains Tax – a tax levied on the gains accumulated on the sale/disposal of capital assets subject to certain conditions
  • Capital Gains – a gain arising on the disposal of a capital asset by a person in a tax year.
  • Depreciable Asset –means any tangible movable property, immovable property (other than unimproved land), or structural improvement to immovable property, owned by a person that —
  • has a normal useful life exceeding one year;
  • is likely to lose value as a result of normal wear and tear, or obsolescence; and
  • is used wholly or partly by the person in deriving income from business chargeable to tax,
  • Filer – a person who has filed his income tax return irrespective of the income and/or tax declared.
  • Non Filer – a person who is not a filer.
  • Capital Assets: – Section 37(5) of Income Tax Ordinance 2001 states:

 “capital asset” means property of any kind held by a person, whether or not connected with a business, but does not include —

  • any stock-in-trade [ ], consumable stores or raw materials held for the purpose of business;]
  • property with respect to which the person is entitled to a depreciation deduction under section 22 or amortisation deduction under section 24; [or]
  • any movable property [excluding capital assets specified in sub-section (5) of section 38] held for personal use by the person or any member of the person’s family dependent on the person[.]

Tax Avoidance Culture:

Unfortunately there is a widespread tax-avoidance culture in Pakistan with people not seeing value or duty in paying due taxes. To put things in perspective, out of a population of 200 million, just over a million taxpayers file returns in Pakistan which comes up to about 0.5% of the population. Even out of this, a large number files Nil tax returns.

Salaried individuals end up paying their due taxes, not by choice but as a result of being bound by the law requiring their employers to deduct the due income tax on their salary in advance.

On the other hand, the rich and powerful segments are either exempt by law (large landowners) or pay miserly taxes as compared to their lifestyles and incomes. This includes influential people from almost all segments of society be it politicians, bureaucrats, journalists, generals, professional or others. This leads to a culture where tax is seen as an unnecessary and avoidable burden instead of a duty and cost of living/doing business.

Reasons for the Prevailing Culture:

There are many reasons for this unfortunate prevailing trend. The key ones are listed below:

  • lack of trust in Government
  • lack of public facilities
  • lack of quality health, education and law and order facilities
  • corruption of Government officials
  • harassment by taxation officials
  • structural issues within the taxation system
  • regressive taxation policies
  • high incidence of taxes on a very low tax base
  • no or minimum tax paying culture by the rich and the powerful
  • culture of law violation
  • perception that it is better and easier to remain outside the documented economy

 

Filer and Non-Filer Differentiation:

To address some of the above issues and in order to entice masses to become part of the documented economy, the FBR and thereby the Government came up with a productive and results-oriented strategy. For the past two years, there’s been a growing policy of differential tax rates for filers and non-filers.

This introduces an incentive for the people to start filing their income tax returns. Moreover, as even a nil return (where no income is reported and/or no tax is due) serves the purpose, this further increases the incentive.

However, due to the issues listed above, a majority of the people believe it to be better to avoid filing returns and becoming part of the system, more so for the fear of harassment by tax officials. So, as outlined many times before, unless structural reforms are carried out within the taxation system, such measures will not achieve the full results they’re aimed at.

The Issue:

Despite the presence of the concept of Fair Market Value in the taxation laws, for too long immovable property has been valued in Pakistan at the rates commonly referred to as the “DC Rates”. These rates are heavily undervalued. For example a property in DHA Lahore maybe selling for PKR 25,000,000 but the DC rates would be around PKR 6,000,000.

As a result of this, the capital gains taxes were either avoided or paid on extremely low values at low rates. This led to the creation of an attractive opportunity for undocumented, untaxed and black money to be “parked” in the realty sector which led to large-scale trading of properties rather than actually building houses and property units despite a serious shortage of over 9 million housing units as per State Bank of Pakistan presenting a huge business opportunity. Although local investors and families did construct housing units but the bulk of the investment went to mere trading to drive up property prices and create non-sustainable profits for the investors.

The size of the black money involved is conservatively estimated at PKR 6 to 7 trillion. Unsurprisingly, due to heavy investments in realty sector, property prices for the past many years sky-rocketed, growing at astronomical but non-sustainable rates, lacking economic fundamentals. This, coupled with the “tax-efficient” black money parking, created a very alluring and largely undocumented investment opportunity as people even started trading “files” without transferring properties in their names to avoid the taxes altogether.

The Initiative:

In view of the issues and strategies discussed above, this year the Federal Government on behest of the FBR decided to move a step further, this time targeting the real estate sector.

Furthermore, with the idea of a massive increase in tax revenues, possibility of bringing part of the seven trillion Rupees wealth within the documented economy and most importantly the pressure for international lenders providing the necessary motivation, the Government decided to take an initiative.

The Finance Act 2016 made an amendment in the Income Tax Ordinance 2001 by introducing the concept of Fair Market Valuation of immovable property by a panel of valuers notified by State Bank of Pakistan, one of the stronger regulators in Pakistan, as taxable value.

Moreover the requisite holding period for Capital Gains Tax exemption was increased from 2 to 5 years and higher rates of Capital Gains Tax were introduced.

Outcry:

This caused severe panic and fear amongst investors, property traders and dealers. Most important for them was the message and the manner in which the new taxation policy was decided without taking them on board. They feared that the intense focus on realty sector would lead to them being asked about their existing wealth and past transactions and consequently they anticipated heavy penalties and tax liabilities on account of the past transactions.

The key issues which made the realty sector anxious were as below:

  • higher taxation
  • hassle and harassment by FBR
  • a valid concern that the valuation by SBP’s valuers would be highly subjective and non-standardized.
  • Section 111 of the Income Tax Ordinance 2001 regarding unexplained income and assets may be invoked regarding past transactions.

This resulted in almost a suspension of property trading and protest preparations across the country.

Capital Flight:

As one would expect, the situation resulted in a capital flight. Besides other destinations, most of the capital flight was destined towards UAE by some of the investors. To put things in perspective, as per Dubai Land Department, Dubai had already seen Pakistanis investing US $ 4.9 billion in last 2.5 years. Now with this increase flight and market panic, the Government feared a melt-down not previously taken into account properly.

Negotiations:

This led to the Government initiating a series of negotiations aiming at reaching a middle ground with the key stakeholders as the consequences seemed to be more than those predicted by the decision makers.

After a series of repeated rounds of negotiations, a compromise was reached between the Government and the key stakeholders, which was implemented by way of an Ordinance.

Settlement:

The compromise reached resulted in the current position which is as below:

  • FBR in consultation with the representatives of various organizations from the realty sector has agreed valuation for major towns. These valuations are above the DC rates but still much below the current market valuations.
  • These FBR valuations will be used as a basis for taxation of immovable property. Where these are not available, the DC rates will continue to be used. FBR will revise these rates from time to time.
  • The holding period for exemption from CGT is reduced from 5 to 3 years with the CGT charged at different rates in three slabs for each of the holding period.
  • A differential treatment has been introduced for immovable property acquired before or on and/or after 1st July 2016.
  • Exemptions from CGT and Advance Income Tax on immovable property, for families of Shahuda and Government officers have been introduced.

Compromise on Fair Market Valuation:

The amendment to introduce State Bank of Pakistan’s approved valuators has been amended in favor of valuations issued by FBR in consultations with key stakeholders and giving FBR the powers to revise these rates in future too.

FBR issued 22 SROs covering valuations for residential and commercial properties in Karachi, Lahore, Islamabad, Gujrat, Jhang, Bahawalpur, Sahiwal, Hyderabad, Jhelum, Rawalpindi, Multan, Sukkur, Quetta, Abbottabad, Peshawar, Sialkot, Mardan, Gujranwala, Sargodha, Gwadar and Faisalabad effective from 31st July 2016.

These have been divided into 3 categories:

  • Residential (including flats)
  • Commercial Area
  • Industrial Area

4 measuring parameters have been used for different areas based on per:

  • Acres
  • Marlas
  • Square Yards
  • Square Feet

Compromise on Holding Period:

The holding period required for exemption from Capital Gains Tax has been reduced from the proposed five (5) years to three (3) years.

Compromise on CGT Rates:

The new table of Capital Gains Tax rates is as below:

Exemptions and Reductions:

For immovable property allotted to the following persons, the CGT would be 0% irrespective of the holding period:

  • A seller, if the seller is dependent of:

(i) a Shaheed belonging to Pakistan Armed Forces; or

(ii) a person who dies while in the service of the Pakistan Armed Forces      or the Federal and Provincial Governments; and

(b) to the first sale of immovable property which has been acquired or allotted as an original allottee, duly certified by the official allotment authority.”

Moreover, Capital Gain Tax have been reduced by 50% in case of first sale of immovable property acquired or allotted to ex-servicemen and serving personnel of Armed Forces, Federal and Provincial Governments, being original allottee of the property and duly certified by the allotment authority.

Calculating CGT:

Gain arising on the disposal of immovable property by a person in a tax year (none after holding for three years), shall be chargeable to tax in that year under the head Capital Gains at the rates specified in Division VIII of Part I of the First Schedule.]

The gain (and thereby the CGT) arising on the disposal of a capital  asset by a person shall be computed in accordance with the following formula, namely:–

(A – B) x T, where

A         is the fair market value as determined under sub-sections (4) or (5) of Section 68 of INCOME TAX ORDINANCE 2001; and

B         is the cost of the asset.

T         is the applicable CGT rate

For the purposes of determining component B (the cost of the asset) of the formula amount shall be included in the cost of a capital asset for any expenditure incurred by a person –

  • that is or may be deducted under another provision of Income Tax Ordinance 2001; or
  • that is referred to in section 21 (Deductions not allowed).

NB: Any selling expenditures and ancillary costs of acquisitions are included in B.

Current Immovable Property Taxation Regime:

Currently both federal and provincial governments have levied their taxes on the realty sector.

The federal taxes (impacted by the changes introduced) are as below:

  • Advance Income Tax (Adjustable) on Buyer (Section 236K of INCOME TAX ORDINANCE 2001)
  • Advance Income Tax (Adjustable) on Seller (Section 236C of INCOME TAX ORDINANCE 2001)
  • CGT (Section 37 & 38 of INCOME TAX ORDINANCE 2001)
  • Fair Market Value (Section 68 of INCOME TAX ORDINANCE 2001)
  • Unexplained Income or Assets (Section 111 of INCOME TAX ORDINANCE 2001)
  • Valuation of Assets (Rule 228 of Income Tax Rules 2002)

The provincial taxes (unaffected by the changes discussed) are as below:

  • CVT (Capital Value Tax)
  • Stamp Duty
  • Property Registration Fee
  • Transfer of Immovable Property Tax (TMA)

Federal vs Provincial Domains:

The matter of levying taxes on realty sector is controversial as post 18th Amendment Capital Gains Tax has effectively fallen in the Provincial domain whereas trading income remains in the Federal domain. However, FBR is of the view that this is well within their domains.

The matter is currently in litigation and decision of the honorable courts will have a serious impact on the future outlook.

Out of Sight Real Issue:

More important than CGT rates or holding period is the classification of income earned from the realty sector. Investors frequently trading properties may find themselves in a tougher spot re taxation as their gains will likely be classified as income from business which is taxed at much higher rates.

Therefore, the classification of the gains from realty should have been taken up as a more important priority than Capital Gains Taxes.

Clearing Misunderstandings:

  • While proceedings cannot be initiated under Section 122 of the Income Tax Ordinance 2001 as per decision of Honorable SCP (2009 PTD 1279), Commissioners Inland Revenue can ask to explain the source of any explained income or asset (investment made in immovable property) on the basis of other information (undisclosed bank account, property, e.t.c.)
  • Hence this section can be applied and is a major concern for those affected.
  • Opportunity to be heard and provide and explanation are given
  • So practically, section 111 of INCOME TAX ORDINANCE 2001 may still be invoked.

Valuations for the Purposes of Section 111 of ITO:

FBR’s valuation tables are to be used for the purposes of Section 111 (Unexplained Income or Assets) of Income Tax Ordinance 2001. Where not notified by FBR, the valuation of Immovable property for the purposes of Section 111 shall be as below:

in the case of open plot, the value determined by the development authority or government agency on the basis of the auction price in respect of similar plots in the area where the plot in question is situated or in case where such value is not determined, the value fixed by the District Officer Revenue or provincial authority authorized in this behalf for the purposes of stamp duty;

in the case of agricultural land, the value equal to the average sale price of the sales recorded in the revenue record of the estate in which the land is situated for the relevant period or time; or

in the case of constructed immovable property, value shall be determined at the fair market value as defined in section 68 or the value fixed by the District Officer (Revenue) whichever is higher.

Income Tax on Builders:

The taxes on builders and developers by FBR are different. A tax is levied on the profits and gains of a person deriving income from the business of construction and sale of residential, commercial or other buildings at the rates  specified  below (Division VIIIA of Part I of the First Schedule):

(A) Karachi, Lahore and Islamabad (B) Hyderabad, Sukkur, Multan, Faisalabad, Rawalpindi, Gujranwala, Sahiwal, Peshawar, Mardan, Abbottabad, Quetta (C) Urban Areas not specified in A and B
For commercial buildings
Rs. 210/ Sq Ft Rs. 210/ Sq Ft Rs. 210/ Sq Ft
For residential buildings
Area in Sq. ft Rate/ Sq. Ft Area in Sq. Ft Rate/ Sq. Ft Area in Sq. Ft Rate/ Sq. Ft
Up to750 Rs. 20 Up to750 Rs. 15 Up to 750 Rs. 10
751 to 1500 Rs. 40 751 to 1500 Rs. 35 751 to 1500 Rs. 25
1501 & more Rs. 70 1501 and more Rs. 55 1501 and more Rs. 35


Income Tax on Developers:

Similarly a fixed tax is levied on the profits and gains of a person deriving income from the business of development and sale of residential, commercial or other plots at the rates below (Division VIIIB of Part I of the First Schedule):

(A) Karachi, Lahore and Islamabad (B) Hyderabad, Sukkur, Multan, Faisalabad, Rawalpindi, Gujranwala, Sahiwal, Peshawar, Mardan, Abbottabad, Quetta (C) Urban Areas not specified in A and B
For commercial Plots
Rs. 210/ Sq Yd Rs. 210/ Sq Yd Rs. 210/ Sq Yd
For residential Plots
Area in Sq. Yd Rate/ Sq. Yd Area in sq. Yd Rate/ Sq. Yd Area in Sq. Yd Rate/ Sq. Yd
Up to 120 Rs. 20 Up to 120 Rs. 15 Up to 120 Rs. 10
121 to 200 Rs. 40 121 to 200 Rs. 35 121 to 200 Rs. 25
201 and more Rs. 70 201 and  more Rs. 55 201 and more Rs. 35


Common themes of Tax on Builders & Developers:

  • It shall be computed by applying the relevant rate of tax to the area of the residential, commercial or other plots for sale.
  • The above tables applies to projects undertaken for development and sale of residential, commercial or other plots initiated and approved after the 1st July, 2016.
  • The aim is to introduce an “incentive” to declare real value of immovable property as the taxes by builders and developers are “fixed” by area, though one can argue as to the attractiveness of this “incentive”.

Major impact on key stakeholders:

As a result of the measures introduced by the Federal Government discussed above, the realty market in Pakistan has become stagnant. There has been capital flight and some correction in prices in a few areas. Let us briefly analyze the impact upon each of the major stakeholder group identified in the beginning:

Investors:

The investors are the one hit hard if not the hardest. They’ve virtually stopped further investments into the realty sector and most are holding onto their existing investments, pursuing a wait and see policy in the hopes of an impending amnesty scheme, expected to ease off the fears and therefore the pressure on the real estate market.

Property Dealers:

The magnitude of the property deals and thereby the business, for property dealers fell significantly. There are still some needs based transactions but not at the levels prior to July 2016.

Moreover, as many property dealers were also acting as investors or partial investors, they’re also negatively impacted in that area too.

General Public:

The impact on general public is more complicated. There are those that were involved in the business of or held immovable properties and are negatively impacted by the current situation.

However, with a shortage of nine million housing units as per SBP and the bulk of realty investment going in trading rather than actual construction, further fuelling the price bubble of property beyond economically justifiable fundamentals, the current pressure on realty sector is viewed with a sense of relief.

The masses hope that if the trend continues, ultimately the trading investors will have to liquidate their investments and move away which can lead to a down-ward correction in the property prices. Furthermore, hopefully atleast part of the investment may end up in the actual construction sector addressing the severe shortage of housing units in the country.

Traders/Businesses:

Ordinary traders are also impacted in more than one ways. Firstly the drop in realty sector’s attractiveness may open up more capital access for other business opportunities.

However, as there is a possibility of a snowball effect in the economy, if not properly managed the negative effects can spillover from the realty sector into other economic areas too.

Last but not the least, many of the traders are themselves invested in the realty sector too which makes them exposed to the same concerns as other investors.

Government:

The Federal Government is hoping to achieve several goals. They believe if there is a proper implementation, their initiatives can lead to the following:

  • down-ward adjustment in immovable property prices making them relatively affordable for masses
  • increased taxation revenue for the Government
  • investment diversion towards more “productive” segments such as construction and other businesses within the country due to the realty sector losing its’ previous attractions and the other sectors becoming more economically viable for investors

Proposal:

In order to achieve the desired purposes of an increase in the tax base and a better documented economy along-with a focus on actual construction of housing units rather than just mere trading of plots, the Federal Government should:

  • bring structural reforms within the taxation regime
  • do away with the overwhelmingly subjective powers of tax officials in favor of objective ones
  • follow volume over margin policy by introducing a single digit tax rate to minimize the cost of tax avoidance
  • introduce tax rebates and a tax-free period for the construction sector
  • address the fears of the stakeholders positively to bring them on board
  • run a campaign to educate masses about the importance of taxation backed by actions to tax the rich and the powerful

Another Amnesty:

There’s been news of another impending amnesty scheme doing rounds in the power corridors. The aim is to address the concern of the property investors re past transactions and unexplained income and assets. The basic structure of such a scheme is proposed to allow whitening of the past wealth by paying a meager single digit tax.

However, it may meet the same fate as the now infamous “Voluntary Tax Compliance Scheme” launched for traders earlier this year if it does not address the key concerns of the realty sector stakeholders. They are currently more in favor of the new law applying to future transactions and blanket amnesty re all past transactions without any cost to them.

How things pan out in the future will depend a lot on this scheme and how things shape up. Only time will tell if the boom in the realty sector is over or the powerful investors and stakeholders in this key sector of economy will be back with a bang!

The author is Managing Partner of Millennium Law & Corporate Company and 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 and can be reached at ozmeer@mlcc.pk

Formal Launch of My Youtube Channel

Dear Readers and Friends,

Assalam O Alikum! (Peace be on you),

The constant suggestion by many of you to launch a formal Youtube channel covering my key public and/or professional engagements with a dimension of educating and enlightening has been turned into a reality.

It is with pleasure that I announce on this auspicious day of Friday that my team has successfully launched the same. The channel can be accessed at:

There are already some very interesting videos covering some of the key current issues and opportunities such as Immovable Property Taxation Issues, CPEC, Budget Proposals, Finance Act, e.t.c.

We aim to constantly update our channel with valuable knowledge sharing videos. Your feedback and appreciation would be the fuel to keep us going in this effort. I hope you find this useful and wish you all the best in your lives and careers.

Take Care,

Omer

Finance Act 2015-16: Dissecting major reforms – II

The following article has been published in Daily Nation, dated 21st July 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-07-21/page-9)

(Onlinehttp://nation.com.pk/business/21-Jul-2015/finance-act-2015-16-dissecting-major-reforms-part-ii)

Finance Act 2015-16: Dissecting major reforms – II

Prof Dp

By: Omer Zaheer Meer

We’ll continue to discuss some important reforms carrying on from where we left in the first part on the above topic on 13th July and conclude the write-up today. The need for a structural overhaul has been lauded for years now. While many concrete proposals for reforms continue to fall on deaf ears, a few have been implemented in the finance act. This indeed is commendable and something to expand upon.

In our budget proposals we have suggested the relevant authorities to allow the use of CNIC as both the NTN (National Tax Number) and STRN (Sales Tax Registration Number) on these pages. Section 181 has now declared that for individuals the CNIC will be used as the NTN. Although it is only for individuals as of now but it is a step in the right direction. By removing the hurdles in tax registrations by allowing the above mentioned proposal not only can the FBR expand the tax-net but also assist in promoting the entrepreneur culture by removing unnecessary formalities.

Similarly another positive reform has been introduced in section 114 of the Income Tax Ordinance 2001. The requirement of obtaining prior approval from the Commissioner for filing a revised return is now dispensed away with if the revised return is filed within 60 days of filing of the original return. This would remove the long-standing complaint of many tax payers faced when a genuine mistake resulted in tax losses to them.

Yet another change introduced via Finance Act 2015-16 is regarding the income earned from property. Now, any expenditure incurred whether wholly or exclusively for the purposes of deriving rental income including the administration and collection charges shall be admissible as allowable expense with a cap of 6% of rent chargeable. While it’s a positive move it is certainly not sufficient considering the levels of inflation increasing the repairs and maintenance as well employee costs.

Moving onto another significant change we’ll briefly discuss Section 37A and Division VII of Part 1 of the First Schedule dealing with Capital Gains Tax on securities disposed off. A revised status of tax on Capital Gains on disposal of ‘securities’ under section 37A has been prescribed as below:

         Holding period                            Tax Year

                                                            2016     2015

  • < 12 months                               15%      12.5%
  • 12 months to < 24 months          12.5%   10%
  • 24 months to < 48 months            7.5%     0%
  • > 48 months                                  0%        0%

This revision is multi-dimensional. Firstly the rates have been revised upwardly while at the same time the holding period for taxable gains has also been increased. This enhancement of holding period will effectively apply retrospectively as gains for holding period between 24 to 48 months which were exempt from tax prior to Finance Act 2015 will now fall under taxable incidence. The motivation for this is to incentivize investors to hold onto their investments for longer while at the same time trying to balance off avoiding disillusioning the small investor. How much has the finance ministry succeeded in this will only be reliably known with the passage of time and the results of the stock markets.

Next up is an extremely important issue with serious ramifications. Minimum tax on service companies is that hotly contested issue. Under pressure from international lenders, Government of Pakistan decided to introduce a controversial insertion in section 153 few years back. The way this was done raised serious questions as there were arguments that despite an existing section dealing with the issue the insertion was done against the prescribed way and even leaving the existing provisions intact, hence creating a gulf of confusion. Furthermore a series of conflicting SROs were then issued further complicating the matter.

As per the insertion introduced, despite the existing section 113 dealing with minimum tax on service companies, the corporate service companies were made liable to a minimum tax. What this meant was that even if any company in the sector incurred losses they’d not be able to claim a refund of any tax already paid by them. The reason this is problematic is that service companies particularly during startup years are susceptible to losses. This led to calls of review and resulted in Clause 79 in Part IV of the Second Schedule being added to clarify the matter and declare that minimum tax would not be liable on service companies. The implication was in effect from tax year 2012 onwards.

The initial proposal in finance bill 2015 was to clarify the matter since 2009 but instead the government decided to introduce the minimum tax on service companies from tax year 2015 onwards while the clause 79 mentioned above was also deleted. This has led to serious reservations by corporate sector and is part of the package being negotiated between finance ministry officials and traders.

Furthermore a minimum tax of 2% has been levied on land developers. This 2% shall be levied on the value of the land as notified by the authorities for stamp duty. This would increase the revenues for the exchequer and can be seen as an indication of the policy direction.

We hope that the policy makers would also consider our other proposals in future budgets for the betterment of economy and that these write-ups have been enlightening to our readers. We shall continue to apprise our readers on relevant developments in the future too.

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

Education: The neglected step child?

The following article has been published in Daily Nation, dated 15th June 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-06-15/page-9)

(Onlinehttp://nation.com.pk/business/15-Jun-2015/education-the-neglected-step-child)

Education: The neglected step child?

By: Omer Zaheer Meer

For almost four decades after independence, Pakistan was economically ahead of its’ arch-rival and estranged neighbor India despite the huge market and mass of the latter. 1990’s brought about the reversal with India leaping ahead and now reaching a situation where it has placed itself much ahead of Pakistan economically. While we often refer to the economic exploits of India and commonly cover reasons such as the IT boom and missed opportunities by Pakistan, have we ever thought that perhaps the real reason was education?

Yes, education that has been neglected by every succeeding Pakistani government. On the other hand, the Indian policy makers realized the importance of quality education and ensured appropriate steps were taken to develop their huge human resources, on the basis of which their current economic apparatus is booming. Their continuous investment in education bore fruits and placed India as a leader in IT outsourcing from where it really took off. Rather than becoming stagnant, Indians continued to invest in education with substantial results in bio-technologies, medical and education industries besides others.

On the other hand, while Pakistanis continue to outshine Indians and most of the world on an individual level, the overall state of affairs of its education sector, particularly public sector education, remains dismal. While we often criticize the rising unemployment levels, the lack of quality human resource availability remains a concern for local businesses. Most business owners complain that even the available human resource is not up to the international standards they’re competing against. Add to this the high illiteracy and we are faced with a dire situation demanding immediate corrective measures.

Infact, if you look at all major economies, with the exception of most Gulf countries relying on oil, they’re based on educated and trained human resources. Gone are the days when hard labor alone could turnaround national economies. Without continuously developed and upgraded education, no nation can hope to compete on the modern global stage. What’s more inspiring is that being a Muslim seeking education is mandatory even at the cost of hardships.

Furthermore as the right to education is a fundamental right of every human being recognized by the United Nations, perhaps the member countries should sought to deliver this key right to their citizens. The good thing is that the decision making circles in Pakistan have started saying the right things about education, of late. The problem is the lack of implementation.

All major political parties in Pakistan acknowledge the above facts and affirm their commitment to improving the human resources development in the country via education to ensure less disillusioned youth are attracted to extremism fuelling law and order problems for the nation. Similarly owning to political competition when Mian Shahbaz Sharif led Punjab government proposed substantially increasing the education budget, a feat it did not actually achieve, the PPP’s federal government proposed a budgetary allocation of 7% which was again something of a political statement which was not implemented.

However, it were the high hopes from the electoral promises of Mian Nawaz Sharif led PMLN in the 2013 general elections campaign with promises of 4% allocation of the GDP (not the budget) to the education sector that made segments of intelligentsia excited. Unfortunately it was again not to be. While the 14% increase for education in the 2015-16 budget proposed through the finance bill is a positive step in the right direction, the promised height of 4% of GDP still remains a dream.

Infact the manifestos of all major national parties including PTI and PPP committed to increasing the budgetary allocations for education. The upcoming Sindh and KPK budgets would reveal how much of those promises would be kept. Moreover, post 18th amendment the education sector has largely been within the ambit of provincial governments. This is not to make light the significance of a proper federal allocation to education sector setting a precedent and direction for the provinces to pursue.

What’s tragic is that although it is an established fact that investment in education lays the long-term foundation for economic prosperity and reduction in acute poverty, none of the parties in power have been able to meet their promised increases for the education to date. Unfortunately, election promises have become wish lists. Revenue constraints are almost always cited as a major constraint despite under-utilized budgetary allocations in several sectors including developmental. While one can respect the genuine constraints, perhaps better management of available resources can free up additional revenues for the neglected education sector. Similarly the ever increasing allocations to political gimmick based schemes can serve the nation well if utilized in educational sector.

Rightly or wrongly, some argue that given the improved quality of life, political awareness and a demanding populace resulting from a higher outlay on education, the traditional political class particularly from the rural belts across all political parties, ensure that the declared goals to invest in education by their respective parties are not met. Their common interests in this case ensure an unwritten alliance across the board. It is upto the policy makers and top leadership of these parties to take corrective measures to dispel this notion.

One thing is for sure, if we want to develop Pakistan into a sustainable and independent modern economy, there is no other option but to invest heavily in education and human resource development. This in due time will rid Pakistan of the both extremes it is currently facing as a properly educated nation would realize and implement the way of balance being the best course, as told to us by the greatest leader of all times, Prophet Muhammad PBUH.

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