TAXES AND JOBS UPDATES

FBR URGED TO ABOLISH FTR TO BRING HARMONY IN TAX SYSTEM

Federal Board of Revenue (FBR) has been recommended to abolish Final Tax Regime (FTR) in order to bring harmony in the tax system in line with the international best practices.

The Institute of Chartered Accountants of Pakistan (ICAP) in its proposals for budget 2018/2019, said that there is unanimity of the view that policy framework for FTR was in principle, introduced to cater for certain negative aspects of Pakistani tax culture.

FTR that was introduced in 1990 as Presumptive Tax Regime (PTR) needs a serious policy review for a sustainable growth in tax base. Nevertheless, this was not a sustainable model. It was a ‘stop-gap’ arrangement.

There was a need to incorporate and institute provisions which would check aforesaid abuses.

Over a period of more than two decades, concrete measures have not been adopted to curb the abuses that led to introduction of FTR. Accordingly, PTR has continued and in certain cases, it is being promoted.

Withholding taxation with normal taxation necessarily requires refund, if the tax liability determined on net income basis is less than tax withheld. There were serious abuses of refund provisions. Accordingly, checks to that effect were introduced by way of FTR.

The institute said that an effective tax system can only work where there are identical tax procedures and processes are consistent for similar nature of business activities. There should be no discrimination in incidence on one sector over the other. FTR has disturbed both these aspects. There is a need to review FTR in that context.

Presently, certain sectors / goods are being taxed under Presumptive / Value Added / Fixed Tax Schemes. Presumptive tax (FTR) is an acceptance by the government’s inability to pursue the undocumented sector.

Frequent changes, inconsistency, lack of long-term perspective and weaknesses in compliances with the tax policy incentivizes unorganized sectors, de-industrialization and anti- corporatization.

Direct taxes in indirect tax mode commonly known as Presumptive/Fixed Tax Regime (FTR) which constitutes of approximately 40 percent of direct taxes. This FTR regime for all economic purposes is an indirect tax. It is not based on ‘Net Income Basis’.

True profit based direct taxes comprise of only 26 percent which is paid by very few taxpayers mostly corporations. Positive steps have been taken for opting out of final tax regime (FTR) in respect of sale of goods, execution of contracts, services of stitching, dying, etc. commission or discount of petroleum products, brokerage and commission, import and export of goods, subject to certain conditions, which is highly appreciated.

However, the rates of minimum tax prescribed for opting out of final tax regime in some cases are same as of final tax and in other cases the difference is negligible to attract taxpayers to opt out of final tax regime.

In its recommendations, the ICAP suggested that all Presumptive / Value Addition / Fixed Tax Schemes should be abolished and all such sectors / goods may be brought under the uniform tax regime to promote the culture of income-based taxation rather than receipt-based taxation;

The scope of opting out of final tax regime be expanded to cover all incomes falling under FTR; and

The rates of minimum tax for opting out of FTR be reduced to raise the difference between final tax and minimum tax by at least one percent.

Giving rationale, the institute said the recommendations are principally a stop-gap arrangement to shift from final tax regime to normal tax regime.

Regards,

Nadeem Butt - (FCA), FPFA, B.com

Chartered Accountant

20+ Years experience as Professional Author and Teacher of Taxation

Financial Adviser of DAWAT-E-ISLAMI

Chairman LTBA - Tax Academy (2017-18)

Member Publications Committee of ICAP (2017-18)

Member Practice Support Committee of NRC of ICAP (2017-18)

Member Finance,Taxation & Sales Tax Committee of LCCI (2017-18)

Vice Chairman LTBA - Tax Academy (2016-17)

Member (Special Invitees) Taxation Committee of LCCI (2012-13)

Audit and Tax adviser of all Pakistan Cottage Industry & Small Traders Association 

Principal of Institute of Taxation and Finance

Ph: 042-35408638

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