KARACHI: Institute of Chartered Accountants of Pakistan (ICAP) has proposed solution to resolve problems in obtaining exemption certificates at import stage for raw material and capital goods.
The ICAP in its proposals for budget 2018/2019 said that procedures and rules for obtaining exemption certificates for import of plant & machinery and raw material by taxpayers has serious restrictions which causes hardship and increases cost of doing business.
The issues are listed below:
- Current income tax rules do not support issuance of exemption certificate for import of raw material by manufacturers starting new business, gone into expansion in the current product or launched a new product etc. These restrictions are hindering industrial growth in the country.
- For qualifying for exemption, maximum import of raw material is restricted to the extent of 125 percent of the material previously imported and consumed.
- In order to qualify for exemption, the law requires minimum tax (equal to higher of last two years tax liability) to be paid before qualifying for exemption. This means that in the case of lower taxable profits due to expansion or operational reasons, the taxpayer will inevitably have a tax refundable in the current year.
- In case of newly established undertakings, tax credit under section 65D is not being allowed by the department while working out tax liability of the las two years.
- Coupled with a high rate of withholding at 5.5 percent these restrictions badly affect working capital of the manufacturers.
- Currently, certificate of exemption from withholding tax on imports u/s 148 is not allowed to persons who are importing raw material, plant, machinery, equipment and parts for its own use unless they qualify as industrial undertaking. The tax paid at import stage on such imports by persons other than the industrial undertaking is treated as a final tax.
To address the issues faced in respect of claim of exemption under section 148 of the Income Tax Ordinance, 2001 the ICAP recommended following amendments:
- Restrictions in respect of issuance of exemption certificate for new projects / capacity expansions / formula and process changes may be removed which will allow industrial growth in the country.
- Maximum volume restriction be at least enhanced to 150 percent of last year’s raw material imported.
- Requirement to meet the tax payment equal to previous two tax years be abolished and may be linked with payment of advance tax liability for the respective period (as in the case of exemption under section 153).
- Amendments may be made to allow tax credit under section 65D while working out previous year’s tax liability for newly established undertakings already under immense cash-flow burden. This would help eliminate piling up of unnecessary refunds for newly established undertakings.
- The rate of tax on import of raw material and plant & machinery may be gradually reduced to 1 percent.
- Clause (a) of sub-section (7) of Section 148 should be amended as under:
(a) raw material, plant, machinery, equipment, parts or any other goods by any person for its own use.
The recommended measures will help in decreasing the cost of doing business and would also have a positive impact on profitability, which will ultimately contribute to more taxes.
Fresh industries need to be supported for industrialization and job creation therefore these measures will ease their working capital requirement and in turn allow them to invest such funds in productive activities rather than being stuck in refunds.
Whilst the provisions of Section 148(7) is abundantly clear that the tax required to be collected under Section 148 shall be a final tax on the income of the importer arising from the imports subject to sub-section (1).
The Commissioners have been treating the tax collection from all the imports meant for own use as a final tax, which is exactly opposite of the express provision and spirit of sub-section (7).
The amendment is necessary to treat the tax collected u/s 148(1) as final tax only on the income of any person arising from the imports, which are meant for sale, i.e. commercial imports.
