Minimum Revenue Tax Death Knell for Service Industry

Leading companies from across the Pakistani services sector convened in Lahore – with attendees video-conferencing from Karachi and Islamabad – to discuss the impact of the revised Minimum Revenue Tax upon their businesses.

The meeting was attended by companies and industry association leaders from multiple sectors, including freight forwarders, cargo agents, Information Technology services, professional services, marketing agencies, custom clearing agencies, security agencies, and other services providers.

In the latest Federal Budget 2015, the 8% withholding tax on payments to service providers is to be considered a Minimum Tax – regardless of whether the service provider is profitable or loss-making in the year. As such, for loss-making companies, this tax will be paid from their capital reserves, effectively becoming a ‘capital tax’ and a ‘loss penalty’ for those investing in the services sector in the country.

Service tax is being imposed regardless of whether a provider is profitable or not

The newly formed ‘Services Sector Action Group’ (SSAG) unanimously agreed that the imposition of 8% Minimum Tax posed an existential threat for a large number of companies in the services sector. It was further agreed that despite communicating this to the Government, no steps have been taken to provide any release. The meeting further decided that until due relief was provided, a number of companies would discontinue provision of services, adding that formal announcements in this regard would be made soon. The Group is also considering legal options in this regard.

Commenting on the matter, Mr Abbas Ali Khan, partner with Abacus Consulting, said, “We appreciate that the government has taken many steps in recent years to promote the technology and services sectors. Unfortunately, the imposition of this minimum tax will undo much of what has been achieved and hinder the progress of companies providing services.”

Until the tax is revoked, a number of companies will discontinue provision of services

He added, “This will especially impact start-ups, SMEs – many of which operate on narrow margins. As such, we plead that the Government review this matter immediately, demonstrating its continued support to the services sector.”

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