Over the weekend, Pakistan’s Finance Minister Ishaq Dar issued an ultimatum on Saturday to service providers: either they present their accounts for auditing purposes or pay a minimum of 8 percent tax.
If service provides choose to hand over their accounts for auditing purposes, then they will have to give an undertaking of paying 2 percent tax. Irrespective of which road they decide to pursue, service provides will have to pay the tax.
These decisions will be implemented from November 1, 2015. According to a source, Ishaq Dar chaired a meeting that comprised of 12 representatives belonging to the service sectors and stated that they have a choice between one of the two options in order to complete their tax liability.
If companies choose to present their accounts, then under the Income Tax Ordinance 2001, they will have to give an undertaking in the form of writing on the date specified by the government for tax year 2016.
Under this agreement, they will not be allowed to pay less than 2 percent tax of their gross turnover. Coming to the second option, if service companies choose to pay 8 percent of tax for the gross turnover, then they will have to pay the amount if it exceeds the actual tax payable after close assessments of their accounts. This process will be carried up to a maximum of five years.
The 12 corporate service sectors have been listed below:
- Freight forwarding services (for sea based operations)
- Air Cargo services
- Courier services
- Manpower outsourcing services
- Hotel services
- Security guard services
- Software services
- Tracking services
- Advertising
- Share registrar
- Engineering
- Car rental
Taxation will also be reviewed under section 153(1)(b) of the Income Tax Ordinance 2001. A five member committee will be spearheaded by Haroon Akhtar Khan, who happens to be the special adviser to the prime minister on revenue. The source states that the aforesaid service sectors operate on very thin margins and applying 8 percent of tax is a burden that cannot be sustained by them.
After the committee discussed this issue with 12 representatives, they were able to submit their final report to the finance minister.
Option 2 is out. Take it from me nobody will opt for 8% of revenue as minimum tax even if it is adjustable. It means that pretax profit margin needs to be 24% and for many industries this is simply not going to be the case ever so adjust-ability is just a farce.
Option 1 can be acceptable to some but it is (1) illogical because it doesn’t have adjust-ability. If your profit margin is less than 2% or you are making a then you have to borrow or raise capital to pay this tax. (2) it sets a very dangerous precedent because next year they will make it 3% and so forth till is is 8%.
Mr. Dar please apply these tax rules to the cement, banking, sugar and textile sectors which your friends own, then others will gladly accept it.
Don’t know about other sectors but banks are going to pay 4% tax this year. Further , banks are fully documented, means they have nothing to hide.
Stupid Daaaaaaaaaaaaaaaaarrrrr putting tax on masses while giving subsidies to his family ltd companies.
I have been reading all along that this regime is a business friendly one, those who (and their trade unions) have put up the efforts to bring them in power. The irony is two taxation moves this summer, that has send shivers down those tranders’ spines – advance income tax (AIT) on banking transactions of non-filers, and the the AIT withheld on payment for services made a minimum tax.
Tax withheld on payment for services was a minimum tax for individuals and partnerships, reasons being that doctors, lawyers, accountants, engineers and consultants have very high profit margins. Thanks to pressure from Transparency International and on recommendation of the Federal Tax Ombudsman, FBR was forced to remove exemption from this clause (withholding being minimum tax) available to companies. Now, AIT is withheld on gross bill amount, which includes reimbursable expenses recoverable from the client and GST. In the case of clearing agents, their own services charges are hardly 1/2 percent of the amount they bill. The law demands 8% withholding as minimum tax, which amounts to taxation of such agents at say 800% – Earn 1 rupee but pay us 8 rupees as tax. Makes any sense to you???
Telecom, courier, banks etc. work on net profit margins that hover around 3 to 5%, and they earn profit through volume business. Paying taxes at 8% would mean, that they would make a loss of minimum 3/4% on their investments each year, merely because of taxes. Good luck trying to bring in DFI into Pakistan on those terms. Already due to energy, fuel and security issues, we have seen local capital being eroded out elsewhere. This tax may be the last nail in the coffin of local service industry.