Govt eyeing new steps to achieve Rs1trn plus taxation

ISLAMABAD: New taxation measures of Rs 1.2 trillion to Rs 1.3 trillion in coming budget (2024-25) would include enhanced rates of withholding taxes on transactions of non-filers and increased tax rates on buying/ selling of immovable properties, registration of vehicles and revision in income tax slabs for salaried class.

Sources told Business Recorder that the government has proposed the International Monetary Fund (IMF) to increase income tax exemption threshold up to Rs1 million for salaried class.

There is a proposal to rationalise the tax rates for individuals by removing the salaried/ non-salaried distinction and reducing the number of rate slabs.

In addition, the budget makers are considering further increasing the difference of withholding tax rates between filers and non-filers of returns. There is a proposal to increase advance income tax on the import of machinery by 1 percentage point, having a revenue impact of Rs2 billion per month.

The second proposal is to increase advance income tax on the import of raw materials by industrial undertakings by 0.5 per cent, expected collection of Rs2 billion per month.

The third proposal is to raise advance income tax on the import of raw materials by commercial importers by 1 per cent having a revenue impact of Rs1 billion per month.

The fourth proposal is to increase withholding tax on supplies by 1 per cent, expected collection of Rs 1 billion per month.

The fifth proposal is to increase withholding tax on services by 1 percentage point, expected collection of Rs1.5 billion per month, and increase withholding tax on contracts by 1 per cent having revenue impact of Rs1.5 billion per month. The sixth proposal is to raise withholding tax on cash withdrawal from banks by non-filers from 0.6 per cent to 0.9 per cent.

According to sources, the FBR is also considering repealing remaining exemptions for donations and non-profit organisations contained in the Second Schedule (Exemption Schedule) of the Income Tax Ordinance and making them eligible for tax credits The FBR is reviewing the charitable donations tax credit, as well as, the credit for certain persons, to assess whether changes to eligibility requirements would be desirable.

The IMF has proposed that a comprehensive review of the tax incentive regimes should be undertaken with a view to eliminate and streamline unnecessary or duplicative incentives, and to adopt cost-based tax incentives, such as accelerated depreciation, where incentives are absolutely necessary. Rather than having stacked incentives, it is preferable to have a more regular tax system with a lower tax rate supported by a wider tax base.

Other features of the tax system which pose impediments against investments, such as its complexity and high compliance burden, will, when removed, have a positive effect on the investment climate.

Consideration could also be given as to whether the current classical system of taxation that taxes both corporate profit and dividend distributions, resulting in double taxation of corporate income, ought to be replaced by either a one-tier corporate tax system or an imputation system, it added.

The IMF further proposed that present personal income tax rate structure presents several problems. First, while the marginal income tax rate structure is largely progressive, it is only applied to certain types of income, leading to inequities between taxpayers who earn different types of income.

Second, the more preferential tax rates applicable to salaried individuals (as compared to non-salaried individuals) means that individuals could be incentivized to characterise their income as employment rather than business, which may present administrative challenges as it is often not easy to determine if a case falls within an employer-employee or a customer-consultant relationship.

This problem extends to any differences in the final tax burdens imposed on different types of income under the present schedular system, as taxpayers can be expected to engage in tax planning and restructuring to ensure that their income fits within the most tax advantageous category.

Such activities impose economic dead-weight losses as resources are diverted into unproductive planning activities and may cause serious economic inefficiency as taxpayers opt for income-earning activities that may be less efficient, but more lightly taxed, the IMF added.