The services sector has issued a joint appeal to the federal government to reconsider taxation. Companies from all sectors including freight forwarding, manpower outsourcing, labor contractors, security and software houses have asked the government to save them from immediate shutdown.
Before 1st July 2015, the situation was as follows:
- The minimum tax rate was 1%, the same as any other industry or sector.
- Withholding tax of 8% deductible by withholding agents was allowed to be offset against the final income tax liability.
- After compliance of relative requirements, Commissioner of Inland Revenue was empowered to grant exemption certificate to service provider companies for non-deduction of withholding tax.
The situation after Financial Act of 2015 is as follows:
- Minimum tax rate increased from 1% to 8% of turnover
- Minimum of 8% tax applies, regardless of whether the company is making profits, bearing losses, final tax income liability being being payable on refundable.
- Deletion of clause 79 part IV from Second Schedule of Income Tax Ordinance, 2001 leading to non-adjustability of withholding tax deductible at source
According to the public appeal, not updating the taxation rules could have disastrous consequences.
- With the levy of 8% minimum turnover tax would lead to an effective tax rate of 200% of profits earned as compared to the corporate tax of 32% for all sectors.
- Immediate industry shutdown – will badly impact overall trade imports, exports and functioning of business.
- Levied 8% of turnover tax for companies bearing losses effectively becomes a Capital Tax and Loss Penalty.
- None of the service industries will be able to sustain and continue their business activities leading to an eventual shutdown of operations.
As we have discussed before, this decision will impact the software industry and startups the most. These startups will have to pay 8% of the revenues in tax, even if they are in loss, or making less than 8% profits. Its typically the profits that are taxed, but taxing the revenues — regardless of the expenses — is a mindless approach.
What’s concerning is that PASHA, the people responsible for being the voice of software houses across Pakistan, let this slip under their noses. So far they have issued only a press release and that’s pretty much all that they have done to block this new tax.
It shouldn’t take an appeal in all media to bring this issue to light.