ISLAMABAD: The Federal Board of Revenue (FBR) has proposed a uniform income tax rate of 15% on profit earned by placing money in banks and giving loans but is facing resistance to the plan of withdrawing some tax concessions got by billionaires, who earn tax-free profit on foreign currency accounts.
The FBR’s proposal was aimed at ending distortion in the income tax regime that could also fetch about Rs26 billion in additional taxes in next fiscal year 2020-21, provided the government ended the preferential treatment given to a few people, sources told The Express Tribune.
However, the State Bank of Pakistan (SBP) is not in favour of changing the tax regime for foreign currency accounts and the money placed in Special Convertible Rupee Accounts (SCRA), which are being used to invest hot foreign money in Pakistan.
Fixing a uniform income tax rate, charged as withholding tax, is also a demand of banks that face problems in determining tax liabilities due to varying tax rates, depending on the income and nature of deposit and loan.
The proposal is part of the revenue measures that the Pakistan Tehreek-e-Insaf (PTI) government plans to take to achieve next fiscal year’s tax collection target of Rs5.1 trillion.
The government will unveil the budget on June 12 – the third budget by the ruling party. No final decision on setting a uniform income tax rate had been made yet, said the sources.
The finance adviser is facing a situation where he has to take measures to revive the stalled International Monetary Fund (IMF) loan programme and at the same time protect people and businesses from heavy taxes due to the Covid-19-sparked health crisis.
It can be second major change in the withholding tax rate applicable to the profit on debt. In June last year, the PTI government had increased the tax rate in the range of 33-50%, setting the lowest withholding tax at 15% and the maximum at 20%. This has significantly increased the government’s tax revenues.
Currently, where the profit on debt does not exceed Rs5 million, the withholding tax is 15%. On up to Rs25 million annual profit on debt, the withholding tax is 17.5% and where the profit on debt exceeds Rs25 million but does not exceed Rs36 million the tax is 20%. In addition to that, there are also reduced rates.
The FBR has proposed that the government should abolish the three slabs and instead introduce a single 15% tax. But this will reduce tax liability of the highest earners by 25% and those earning annual profit of Rs25 million by 14.2%.
In order to compensate for the losses and bring some rationality in the tax regime, the FBR proposed that various individuals and entities that had been exempted from the withholding tax on profit on debt or enjoying concessionary tax rates, should be charged a uniform tax from July, said the sources.
“There should be a level playing field and the government should charge a single withholding tax without exemption for any class of persons,” said Dr Ikramul Haq, a leading tax consultant and lawyer of the Supreme Court of Pakistan.
Haq, however, said for widows and senior citizens the government should set the annual exemption limit at Rs1.2 million for profit on debt and any earnings above that threshold should be subject to taxation.
The proposal is also in line with the IMF that is seeking an end to the discriminatory and concessionary tax regime in Pakistan. However, the FBR’s proposal may face resistance from influential individuals, who have been enjoying tax-free profit on debt for years.
The withholding tax on profit on debt is applicable to payable or receivable of any profit, yield, interest, discount, premium or other amount or any service fee or other charge in respect of a debt, including any fee or charge incurred in respect of a credit facility which has not been utilised, according to the Income Tax Ordinance 2001.
However, the FBR has created exceptions by excluding various individuals from the levy.
These people and entities are protected under the Second Schedule of the Income Tax Ordinance that grants exemption from the income tax law. Currently, the withholding tax is not applicable to any profit on debt payable to a non-resident person in respect of such private loan to be utilised on such a project in Pakistan as may be approved by the federal government, having regard to the rate of profit and terms of repayment of loan and the nature of project on which it is to be utilised.
The loan in foreign exchange against the export letter of credit, which is used exclusively for the export of goods manufactured or processed for export in Pakistan, is also exempt from the withholding tax.
Similarly, a foreign individual, company, firm or association of persons in respect of a foreign loan, as is utilised for industrial investment in Pakistan, provided that the agreement for such loan is concluded on or after the first day of February 1991, and is duly registered with the SBP is exempt from the tax.
Interestingly, any profit on debt derived by Hub Power Company on or after the first day of July 1991 on its bank deposits or accounts with financial institutions directly connected with financial transactions relating to project operations is exempt from the withholding tax.
Under clause 78 of the Second Schedule, the profit on debt derived from foreign currency accounts held with authorised banks in Pakistan or certificate of investment issued by investment banks in accordance with Foreign Currency Accounts Scheme introduced by the central bank for citizens of Pakistan and foreign nationals residing abroad, foreign association of persons, companies registered and operating abroad and foreign nationals residing in Pakistan are exempt from the withholding tax.
Not only that, any profit on debt derived from a rupee account held with a scheduled bank in Pakistan by a citizen of Pakistan residing abroad, where deposits in the said account are made exclusively from foreign exchange remitted into the said account is also exempt from with the withholding tax.
Similarly, any profit on debt derived by any person on bonds issued by Pakistan Mortgage Refinance Company to refinance the residential housing mortgage market, for a period of five years with effect from the first day of July 2018, is also exempt from the withholding tax.
Published in The Express Tribune, May 28th, 2020.