The imposition of new taxes exposes the tall claims of the PTI government
The passage of Finance Bill 2020 by the National Assembly on June 29, amid protest by the Opposition; the Federal Board of Revenue’s (FBR) claim of exceeding the revised collection target for fiscal year 2019-20 (Rs 4,126 billion gross and Rs 4,000 billion net collected provisionally against revised target of Rs 3,908 billion); and the target fixed by the government for FY 2020-21 at Rs 4,963 billion, generated heated debates during the last week.
The government claimed that it had presented a budget without any “new tax” in view of the economic toll of Covid-19 endemic.
Prior to Covid-19 outbreak, the FBR was behind the revised target of Rs 5,238 billion (originally it was Rs 5,555 billion) after first review by the IMF under its $6 billion Extended Fund Facility (EFF) programme. The target was later revised to Rs 4,803 billion on the eve of incomplete second IMF review, held prior to Covid-19 pandemic, and after coronavirus outbreak, finally reduced to Rs 3,907 billion.
In the Finance Bill 2020 presented on June 12, the government did in fact introduce a new tax. It is the tax on luxury houses in Islamabad Capital Territory. This, it withdrew quickly, succumbing to the pressure of the rich and the mighty. The Senate in its recommendations said “it should be omitted” without giving any reasons.
Critics say that withdrawal of this tax, successfully levied by through Section 8 of the Punjab Finance Act, 2014 and upheld by Lahore High Court, confirms that the PTI is not inclined to tax the rich. It has decided instead to extract exorbitant sales tax that takes away a larger slice from people with meager incomes while businesses make more money by passing it on to the end consumers without depositing the entire collection in the treasury.
The draft of Tax on Luxury Houses in Islamabad Capital Territory that could have fetched substantial amount for improving the lot of the poor living in Islamabad Capital Territory (ICT), is reproduced here:
On residential buildings:
In case of two kanal to four kanal with covered area of more than 6,000 square feet: Rs 100,000 per kanal
In case of five kanal or above with covered area of more than 8,000 square feet: Rs 200,000 per kanal.
On farm houses having four kanal including area under farming:
A farm house with covered area between 5,000 and 7,000 square feet: Rs 25 per square foot of the covered area per annum.
A farm house with covered area between 7,001 and 10,000 square feet: Rs 40 per square foot of the covered area per annum.
A farm house with covered area of more than 10,000 square feet: Rs 50 per square foot of the covered area per annum.
On farm houses having more than four kanal including area under farming:
A farm house with covered area between 5,000 and 7,000 square feet: Rs 60 per square foot of the covered area per annum.
A farm house with covered area between 7,001 and 10,000 square feet: Rs 70 per square foot of the covered area per annum.
A farm house with covered area of more than 10,000 square feet: Rs 80 per square foot of the covered area per annum.
Critics say that withdrawal of this tax, successfully levied through Section 8 of the Punjab Finance Act, 2014 and upheld by Lahore High Court, confirms that the PTI is not inclined to tax the rich.
The above was not applicable in the case one self-occupied house of widows. The tax was to be collected by the Ministry of Interior through its attached departments and deposited directly in the Federal Consolidated Fund, not becoming part of distribution under Article 160 of the Constitution. The imposition of such a progressive levy directly affecting the prime minister and the moneyed elite having expensive properties in the ICT would have sent a wonderful signal. The failure to carry the legislation through has exposed PTI’s claim that it is committed to establishing an egalitarian system.
Meanwhile, the Finance Act has enhanced taxes that may harm businesses and industry, already affected badly by Covid-19 endemic and lockdowns. According to a report [Govt imposes Rs 200b worth of additional taxes, Express Tribune, June 13, 2020], “in the midst of recession, the federal government slapped at least Rs 200 billion worth of additional taxes aimed at achieving Rs 4.963…..”
The following are details of some the additional and new taxes imposed through the Finance Act:
The permanent establishments of foreign companies have been brought into the ambit of minimum income tax of 1.5 percent under Section 113 of the Income Tax Ordinance, 2001, yielding an estimated additional revenue of Rs 27.2 billion.
3 percent income tax imposed on non-residents in respect of various services akin to resident taxpayers expecting additional yield of billions.
Depreciation allowance is restricted to 50 percent.
Electricity expense will be disallowed against business income on certain prescribed conditions.
Expenditure of foreign companies on interest to be taxed as their income under initiative of Organisation for Economic Co-operation and Development (OECD) having additional potential of Rs 4 billion.
Additional about Rs 80 billion through imposition of General Sales Tax (GST) and through increase in rate of Federal Excise Duty (FED) on several items.
Amendment in the Eleventh Schedule to the Sales tax Act, 1990 to collect 17 percent GST on supplies to non-registered persons expecting to generate additional tax of Rs 35 billion.
Amendment in withholding tax rule under Sales tax Act, 1990 to charge 17 percent GST from unregistered persons on sale to government departments with an estimated extra yield of over Rs 100 billion.
7.5 percent FED ad valorem has been imposed on locally manufactured double cabin (4x4) pick-up vehicles and at 25 percent in the case of imported ones.
Raise in appeal fee [500 percent in company and 250 percent in non-company cases for first appeal and 250 percent for second appeal].
So how can the government claim that this is a no-tax or no-new-tax budget? FBR’s Rs 4.963 trillion collection target could (an increase of 20 per cent) not have been met by simply plugging leaks and through administrative reforms, use of technology and data mining.
There are enhancements of rates and new tax measures within the existing tax codes. If only 40 percent of the taxes waived/forgone in fiscal year 2019-20 were recouped, there would have been fiscal space for Rs 600 billion to reduce taxes rather than enhancing them at a time when the economy is in deep recession and needs an impetus for revival.