Tax Incentives for Agriculture, Manufacturing, Construction and Aviation Sectors:
Finance Minister, Pakistan Ishaq Dar on Friday presented the government’s mid-term budget, which focuses on revival of the economy by announcing tax incentives for agriculture, manufacturing, construction and aviation sectors in the shape of tax exemptions and duty-free imports of plant, machinery and equipment, which will result in job opportunities for the youth.
The minister announced major tax relief for businesses affected by war on terror in Khyber Pakhtunkhwa. The Economic Survey 2014-15 reveals that the country suffered $ 4.5 billion losses due to the war against terrorism, which mainly effected businesses in the restive province of KP.
In a surprising development, the government has imposed 35 per cent income tax on the banking companies’ profit as well as income from dividends and capital gains. For tax cuts, banks divide their income but the tax rate differential is proposed to be removed.
The government has taken aggregate revenue measures of Rs 253. 2 billion out of which income tax (IT) will provide Rs 142.2 billion, sales tax (ST) Rs 54 billion, customs duty (CD) Rs 42 billion while Rs 15 billion will be generated from administrative measures during the next fiscal year.
For the last two financial years, the government was being criticised for its fiscal stabilisation which has stagnated economic growth and no job opportunities for the youth, especially in the rural areas of the country. Unemployment in rural areas was attributed as the major reason for growing extremism in the country.
FOCUSING ON AGRI SECTOR:
The government has focused on the agriculture sector that has the shortest gestation period. The incentives for agriculture sector will increase the goodwill of the ruling party in rural areas as well as provide base for collection agriculture income tax in future.
The government announced an income tax (IT) holiday for agricultural cool chain for 3 years for new industrial undertakings in setting up cold chain facilities, and operating warehousing facilities for storage of agriculture produce.
TAPPING HALAL MARKET:
The IT exemption for four years has been promised for Halal meat production companies which set up Halal meat production plant and obtain Halal certification by December 31, 2016. The potential of Halal meat export remain enormous for Pakistan if hygiene standards are implemented. It will create employment opportunities in the livestock sector in South Punjab, KP and Balochistan.
RICE MILLS FACILITATED:
The government has also proposed relief to rice mills suffering from low global demand, exemption from minimum tax for the tax year 2015. The rice mills are holding rice stocks for the last two crops due to the significant decline in international rice prices.
Exemption of supply of fish from withholding tax will also have a positive impact on the coastal areas of the country.
To promote farm mechanisation and enhance productivity, nonadjustable sales tax is reduced at rate of 7 per cent instead of existing rate of 17 per cent on the local supply of plant and equipment.
Custom duty (CD) and sales tax (ST), which range from 28 to 43 per cent at present on the import of agricultural machinery, has been reduced to 9 per cent. Interest-free loans up to Rs 1 million for solar tube wells will facilitate small growers and reduce heavy expenditure on diesel.
INCENTIVE FOR BUILDERS:
The government has provided a tax incentive package for construction sector as it has a ripple effect and impacts 16 other sectors. It will create economic growth in the urban areas leading to job provision for the youth and allied small businesses. The minimum tax on builders leviable for the business of construction and sale of residential and other buildings is being suspended for a period of three years.
Mark-up on housing loans obtained by individuals from banks and other institutional lenders for construction or buying a house to be allowed as a deduction against income up to 50 per cent of taxable income or Rs 1 million.
Capital gains of any person who sells a property to a REIT development scheme formed for the development of housing sector will be exempt from IT up to June 30, 2018. If a development REIT Scheme for the development of housing sector is set up by June 30, 2018, for the first three years the rate of IT chargeable on dividend income of such REIT shall be reduced by 50 per cent.
Supply of bricks and crushed stone will be exempted from ST for three years up to June 30, 2018. A proposal for reduction in customs duty on import of used construction machinery to 10 per cent.
BACKING UP MANUFACTURING SECTOR:
For employment credit to manufacturing units set up during next three years and employs more than 50 employees duly registered with Social Security and Employees Old Age Benefit Institution, an employment tax credit equal to 1 per cent of the income tax payable for every 50 employees shall be provided to the company, subject to a maximum of 10 per cent.
Exemption to greenfield projects is being extended up to June 30, 2017. Moreover, domestic production of solar and wind energy equipment manufacturers has been exempted from IT for 5 years.
Items used in aviation sector have been exempted from CD and ST. It will promote connectivity of remote areas with major economic hubs. For promoting air routes in Gilgit Baltistan, Makran Coastal Belt, Azad Jammu and Kashmir, Chitral and FATA, these are proposed to be exempt from payment of FED and withholding tax.
To revive the economy of Khyber Pakhtunkhwa a five years IT holiday on all new manufacturing units set up in the province between July 1st, 2015 and 30th June 2018. KPK exporters allowed to export perishable goods fruits, vegetables, dairy products and meat in Pak currency to Afghanistan. Quota for ghee and vegetable oil under DTRE for export to Afghanistan and Central Asia is being enhanced from 1000 metric ton per 90 days to 1000 metric ton per month. The minimum tax payable on turnover under the previous KP package available for tax years 2010to 2012 shall be resolved.
By reviewing the concessionary SROs, the government plans to take back concessions worth Rs 132 billion during the next fiscal year. The maximum CD tariff rate of 25 per cent reduced to 20 per cent. To curb the menace of under invoicing, specific penal provision introduced for ensuring compliance of mandatory condition of invoice and packing list.
The budgetary measures also include rationalisation of ST on steel sector melters, re-rollers and ship breakers. The rate of further tax for supplies to unregistered persons is being enhanced to 2 per cent.
Increase in the rate of ST on mobile phones to Rs 300, 500 and 1000, from Rs 150, 250 and 500, respectively, depending on features in the mobile set.
The rate of Federal Excise Duty (FED) on locally produced cigarettes has been enhanced from 58 per cent to 63 per cent.
Moreover, FED on aerated waters has been enhanced from 9 per cent to 12 per cent of the retail price.
The electronic monitoring system is proposed to be introduced to monitor the production of cigarettes, beverages, cement, fertilizer and sugar; and also to monitor the sales of restaurants.
The limit of utility bills for cottage industry is being enhanced from Rs 700,000 to Rs 800,000 for the promotion of cottage industry. ST tax exemption on appliances for colostomy, colostomy / urosotomy bags and tubular daylight devices is being granted.
Input tax adjustment on pre-fabricated buildings being allowed. The provisions of temporary registration are being inserted in the Sales Tax Rules, 2006, whereby a manufacturer shall be able to import machinery without having to wait for completion of procedural formalities. The refund on monthly basis will also be allowed to persons making reduced rate supplies under SRO 1125(I)/2011 dated December 31, 2011.
Continuing with the policy of reducing corporate tax rates, the rate is being further reduced to 32 per cent for tax year 2016.
Moreover, exemption to Electricity Transmission Projects for a period of 10 years is being given, provided that the project is set up by June, 2018.
TAX CREDIT FOR NEW INVESTMENT IN SHARES:
To encourage saving and investment in new companies quoted on stock exchange the limit for individual investors is being enhanced to Rs 1.5 million.
At present, a 15 per cent tax credit is available to a company, if it opts for enlistment in any registered stock exchange in Pakistan. To encourage enlisting of companies on stock exchange, the credit is being enhanced to 20 per cent.
Moreover, a reduction in withholding tax on token tax and transfer of vehicles has been ensured. The limit of capital at Rs 25 million for qualifying as a small company is proposed to be enhanced to Rs 50 million.
Salaried taxpayers earning taxable income from Rs 400,000 to Rs 500,000 are chargeable to tax at a rate of 5 per cent and to provide relief is proposed to be reduced to 2 per cent. Non-Salaried individual taxpayers and association of persons earning 10 taxable incomes from Rs 400,000 to Rs 500,000 are chargeable to tax at a rate of 10 per cent and is proposed to be reduced to 7 per cent.
The rate for capital gains tax on securities held up to a period of 24 months is 15 per cent, if held up to a period from 12 months to 24 months the rate is 12.5 per cent while if held up to a period from 2 to 4 years, 7.5 per cent rate will apply.
The scope of the distinction between a compliant and non-compliant taxpayer has been broadened by prescribing higher withholding tax rates for those not filing income tax returns.
Adjustable advance income tax at the rate of 0.6 per cent of the amount of transaction is proposed to be collected on all banking instruments and other modes of transfer of funds through banks in the case of persons who do not file IT returns.
Presently, tax rate of 35 per cent is applicable to banking companies from all sources except income from dividend and income from capital gains. Rate differential for different sources is proposed to be removed.
The present rate of tax of 10 per cent on dividend income is on the lower side as compared to most other countries. It is proposed that the rate be increased to 12.5 per cent.
Consequently, in case of non-filers, the rate of tax is proposed to be increased from 15 per cent to 17.5 per cent, of which 5 per cent shall continue to be adjustable. For Mutual Funds the existing rate of 10 per cent will continue.
WHT ON ELECTRICITY:
Due to substantial reduction in electricity prices it is proposed that the threshold of deduction of withholding tax on electricity consumption be reduced from Rs 100,000 to Rs 75,000 per month.
At present there is no withholding tax on either use or right to use of commercial, industrial and scientific equipment or on renting out of machinery. It is proposed that a 10 per cent withholding tax be imposed on renting out machinery and for use or right to use commercial, scientific or industrial equipment, in case of residents also, and be treated as final tax liability.
In order to encourage public-listed companies to distribute dividend which would encourage investment in stock markets, it is proposed that in the case of a listed company, other than a scheduled bank or a modaraba, which does not distribute cash dividends within six months of the end of the said income year or distributes dividends to such an extent that its reserves, after such distribution, are in excess of hundred per cent of its paid up capital, the excess amount may be taxed at the rate of 10 per cent.
TAXING THE RICH FOR TDPS:
To meet enhanced revenue needs for the rehabilitation of temporarily displaced persons (TDPs), it is proposed to levy a one-time tax on the affluent and rich individuals, association of persons and companies earning income above Rs 500 million in tax year 2015 at a rate of 4 per cent of income for banking companies and 3 per cent of income for all others.
It is proposed that exemption from withholding tax on payments to electronic and print media in respect of the advertising services may be withdrawn.
It is proposed that cash withdrawals by exchange companies may be subject to withholding tax at a reduced rate of 0.15 per cent instead of being exempt. Withholding tax at the rate of 12 per cent as is applicable to commission agents, however, tax on commission of advertising agencies is withheld at a reduced rate of 7.5 per cent. It is proposed that this rate be increased to 10 per cent.