7 Financial Benefits of becoming a FILER

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Below are the seven (7) major financial benefits of becoming a Filer in Pakistan:

  1.  Lower rates of advance income tax deducted at source by banks (on interest/profits) and on banking transactions
  2. Savings on withholding tax deducted when registering and transferring motor-vehicles
  3. Lower rate of tax on sale/purchase of property transactions
  4. Rebates/reduction in tax on payment for goods, services and contracts
  5. Lower tax on dividend
  6. Reduced withholding tax on capital gains accrued on sale of securities
  7. Reduced rate of withholding tax on prize bond winnings and decreased rate of collection under commission and brokerage.

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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

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