The government and representatives of the service sector on Saturday reached a “win-win” agreement over the 8% minimum income tax that authorities had imposed on the sector, irrespective of their actual profit.
The agreement was reached during a meeting between Finance Minister Ishaq Dar and representatives of a dozen associations from the sector.
Under the new agreement, which will be implemented through the promulgation of a Presidential Ordinance, services sector companies will have to pick one of the two agreed options.
Under the first option, a company will pay a minimum 2% tax and be subject to an audit, said Special Assistant to the Prime Minister on Revenue Haroon Akhtar Khan. Under the second option, the company will pay 8% adjustable tax and will have the option to carry forward the loss and tax for a period of five years, he added.
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In the last 96 hours, the government has managed to reach agreements with two out of the three protesting sectors of the economy.
Earlier, the government agreed to give some concessions to the protesting traders over the issue of withholding tax on banking transactions. The Budget 2015-16 created ripples among many businesses, including the services sector that contributes over half to the total national output.
For tax purposes, the services sector will be treated under Section 153 of Income Tax Ordinance that deals with charging taxes on supplies of goods and services. From July through September this year, the FBR collected Rs12.2 billion under section 153, which was Rs2.12 billion or 21% higher than the collection made in the comparative period of last fiscal year.
Through Finance Act of 2015, the federal government had imposed 8% minimum tax on all service sector companies regardless of the company’s actual profit.
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The revised agreement is, in fact, reverting to the pre-June 30 position with the only difference being that the minimum tax rate would now be 2% against the earlier 1%.
Before June 30, they were paying 6% adjustable withholding tax in addition to 1% minimum tax. The government not only increased the tax but also declared it a minimum liability.
“Cognoscenti affirmed the ‘win-win situation’ in entangling the corporate sector services tax,” said Ashfaq Tola, a top chartered accountant and a member of the five-member committee that proposed the solution.
Dar constituted the five-member committee to find a solution to the problem after the services sector refused to accept the levy. Haroon Khan headed the committee that included Shahid Hussain Asad, member Inland Revenue of FBR, Ashfaq Tola, Abid Shaban and Habib Fakhruddin.
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Most of the associations had complained that they were operating only on 3% margins, thus paying 8% of their revenues in taxes was equivalent to closing their business. However, the FBR was of the view that the profits of service providers were very high.
Dar realised the FBR overlooked many aspects while making 8% as minimum liability, said Pakistan International Freight Forwarding Association President Moeen Malik.
He said the revised arrangement will be effective from November 1 till June 30.
Published in The Express Tribune, October 18th, 2015.
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