Resolving the Banking Transactions’ Tax Crisis

The following article has been published in Daily Nation, dated 3rd August 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-08-03/page-9)

(Onlinehttp://nation.com.pk/business/03-Aug-2015/resolving-banking-transactions-tax-crisis)

Resolving the Banking Transactions’ Tax Crisis

Prof Dp

By: Omer Zaheer Meer

As discussed on these pages before the controversial decision of levying a withholding tax on all banking transactions for non-filers (0.3% till September and increasing to 0.6% thereafter) with the underlying aim of broadening the tax base has not been able to gain acceptance in the presence of serious flaws within the taxation system along-with prevalent corrupt practices. Even if one ignores the increase in the inflationary pressures in the economy and the penalization of ordinary salaried class, the reservations of traders alone are sufficient to make this highly controversial. The disagreement on this matter has now reached a dead-lock between traders and the incumbent Government. So exactly what are their reservations and how can they be possibly addressed? Is there any possible solution for the same?

First of all the withholding tax introduced is more of a transactional tax then an income tax. But more importantly the issue at hand is one of a lack of trust in the system. Not only do the traders fear to be targeted unfairly once they bring themselves in the system to avoid the transactional tax, they haven’t seen the remedial procedures effectively providing relief in an event of witch-hunting by FBR either. Many economists are of the view that introducing new taxes to compensate for FBR’s failures is simply not the answer to Pakistan’s economic and tax woes. The reasons for FBR’s failures are numerous ranging from dissatisfaction amongst FBR’s employees to structural inefficiencies in the taxation system. They’re however not the topic for today and will be discussed at another time.

For now the issue of the trust deficit particularly in the business community is discussed. Besides very high rates of both direct and indirect taxes, the harassment by FBR and blockade of due refunds are often used as tactics by FBR officials to meet their targets. This actually puts off many genuine businessmen who would otherwise like to contribute their dues to the society. Therefore they claim to resort to the alternate in doing charity and stressing that they evade getting within the ambit of the formal documentation to avoid the horrible experiences many of their fellow traders have endured in their dealings with the FBR. None of these issues are of a nature which cannot be positively addressed. Infact this writer has repeatedly proposed several structural reforms including the ones addressing these very issues.

For example the policy of volume over rates can be pursued. It’d entail reducing all the taxation rates to single digits making it economically prohibitive to evade due to the higher costs of engaging professionals as well as fulfilling the demands of the corrupt officials within the tax apparatus. The focus will be to broaden the tax base using indirect taxes for this purpose while direct taxes can be applied on a progressive basis, increasing with the income brackets. If tunnel vision can be shunned then the positive potential of this can be envisioned. Currently less than 0.5% of the population files a return. The number has declined over past four years despite all the “efforts” for broadening the tax base. If this number can be increased to several millions with a consequential increase in the tax base and tax payers, one can envision the positive impact on tax collections.

It’ll be interesting for the readers to know that the honorable finance minister Mr. Ishaq Dar himself used to be a proponent of this proposal during his days of serving the Lahore Chamber of Commerce and Industry. Surprisingly, now that he’s in a position to actually enforce this much needed reform, he’s shying away from it. Moreover the effective implementation of the relief mechanisms and laws can help assure the tax payer. The time limits for deciding the disagreements should also be enforced. For a change, the tax officials can be trained to respect the tax payer instead of treating them as an assumed criminal. Such measures can go a long way to win over the trust of the taxpayers in the system.

Even in the past negotiations between traders and Government officials, the issue of the undue nuances caused by FBR to genuine businessmen resulting in most businesses staying out of the system to avoid these troubles has been raised. Similarly promises were made with traders to review the exorbitantly high rates of withholding taxes deducted in advance. Some of these taxes are treated as non-adjustable even in case of a loss. Even those that are considered adjustable are extremely hard to recover as the FBR seems to have an unwritten rule regarding refusing even the genuine refunds to loss-making businesses when they need their cash the most. However the same FBR seems content to issue refunds to or defer recovery of tens of millions from influential parties. Such behavior doesn’t instill the trust in the business community.

The latest on this issue is the breakdown of the negotiations between Government and traders resulting in strikes been called and social media campaigns been setup. The reduced rate of 0.3% till September has also been turned down by the business community for the reasons discussed above. A successful strike was already observed with the traders threatening to go all out towards a civil disobedience. Government on the other hand has ordered investigations into the affairs of top leadership of traders.

Possible ramifications of this standoff can be damaging for the national economy and the issue needs to be resolved amicably. One possible solution can involve doing away with this transactional tax and reducing the withholding and sales tax rates immediately pending a review of other structural reforms in return for voluntary registration of a minimum number of businessmen. There are many other possible proposals to this effect too. The ball is now in Governments’ court to decide whether it is serious about introducing reforms to win over the tax payer and broaden the tax base or if it simply believes in coercive measures which may seem beneficial in meeting short-term targets but will surely cause damage in the longer-term.

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

Minimum & Banking Transactions’ Tax

The following article has been published in Daily Nation, dated 27th July 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-07-27/page-9)

(Onlinehttp://nation.com.pk/business/27-Jul-2015/minimum-banking-transactions-tax)

Minimum & Banking Transactions’ Tax

By: Omer Zaheer Meer

With the stated aims of supporting the entrepreneurship culture, facilitating businesses and increasing the numbers within the ambit of formally documented economy, one would expect steps by policymakers to incentivize the masses to this effect. Notwithstanding several positive developments, some recent steps have actually served in contradiction of the above aims of the incumbent Government.

Before diving into the specifics let’s briefly discuss some important building blocks. First of all, most of the modern economies have moved away from been solely or greatly based upon agriculture or manufacturing to a greater focus on service sector, then be it financial, IT, educational, telecommunication or other services within this sector. Even those with a large base of agriculture or manufacturing have modernized to include service industry as a significant part of their overall GDP. It is therefore essential for a successful modern economy to promote service sector with the underlying GDP growth and employment opportunities acting as prime motivators. Similarly in a country like ours where, as per some studies, the black monies and illegal economy outweigh the documented formal one, reforms are required to incentivize people to come within the ambit of documented economy.

With the above been clarified let us move onto some extremely important issues with serious ramifications for our economy. First up a minimum tax on service companies has been levied from fiscal year 2015-16. But what does a minimum tax mean? For our tax dilettante readers, it means that the advance tax paid by service companies will not be refunded in the event of them ending up in losses at the financial year end. This is not only unjust but would have serious negative implications for the service sector growth. Moreover it also has the potential to entice this sector towards “creative accounting” to avoid paying any more taxes then the minimum they have to since they will not be getting any refunds due to them in the past in their hour of need.

This “creative accounting” argument was actually floated as an initial reason for attempting to introduce the minimum tax on service sector several years ago under pressure from international lenders. This was done in a controversial manner despite an existing section of the Income Tax Ordinance 2001 already dealing with the minimum tax on companies. The matter led to serious misgivings from the tax payers and after long heated debates the last finance bill included a proposal to restore the original position before the controversial insertion in section 153. The original position was that any tax paid in advance was adjustable against the final tax liability. Unfortunately at the last moment the policy makers again succumbed to certain pressures and instead introduced the minimum tax. In doing so the long term impact on tax net and GDP growth was ignored in favor of the short term cash accumulation to meet annual targets.

Several responsible officials have shared in private that this amendment was based on the underlying assertion that all mobile companies, a sub-sector within the service industry, were preparing falsified accounting records to avoid due tax and thereby causing losses to the national exchequer. Even if we accept the notion, this observation was based upon a sub-sector only and it was therefore inherently unjustified to “punish” an entire sector for that. Moreover this was equal to declaring that since some- murderers are able to deceive with the judicial system therefore all accused from now on would have a body part amputated as a presumed minimum punishment. Not very just, is it?

Instead an overhaul of the system with effective implementation along-with introduction of stringent penal clauses would have served the purpose more effectively. Last but not the least, even the existing audit provision, if implemented properly was sufficient to deal with the problem. We therefore propose and expect the policy makers to review this matter positively with a strategic view of expanding the GDP and broadening the tax-base rather than diminishing it. Volume over margin is the way forward for a progressive taxation regime.

Next up is perhaps the most controversial issue of the imposition of advance tax on banking transactions by non-filers. After a lot of uproar from the business community, the negotiations with finance ministry officials resulted in the concession that the levy of 0.6 percent withholding tax was reduced to 0.3 percent till end of September 2015. Any non-filers after that date would be liable to the rate of 0.6 percent again. However, a section of business community has rejected this and is planning to force a change by strikes and protests.

While the underlying aim seems fairly positive in that the non-filers are incentivized to come within the ambit of documented economy, there are certain qualifications to that. Firstly many individuals particularly salaried ones get their tax deducted at source and as such do not file income tax returns. This is despite them paying more than their due shares of taxes if all the indirect taxes on their consumption are taken into account. A lack of awareness and the bureaucratic difficulties within our taxation apparatus are the biggest reason for this trend. Secondly the lack of trust in the authorities and Governments by the business community is a big barrier.

Some of the concerns leading to the lack of trust are seemingly genuine and warrant corrective actions. A case in point is the undue relief given to influential tax payers while the ordinary one having to waste material resources in order to get their genuine rights like refunds due to them. Moreover the undue nuances caused to even genuine businessmen by certain elements within the taxation apparatus cements the belief that it’s beneficial to stay out of the system to avoid these troubles. Moreover taxing every transaction over Rs. 50,000 at 0.6%, when aggregated, takes the total cost to inexplicable levels making it attractive to avoid banking channels for those not bound to. The crux is that trying to impose a reform like taxing banking transactions without addressing the inherent limitations and problems of the taxation system may not be the most effective way to address the issue of widening the tax-net and should be re-considered.

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

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