22/06/2024
LAHORE: The Lahore Chamber of Commerce and Industry (LCCI) has highlighted numerous measures in the federal budget 2024-25 for the next financial year that will affect exports, manufacturing, increase inflation and called for their revocation. Some of the measures , it added, also run counter to efforts to document the economy, improve tax collection, expand manufacturing industry for exports and spur economic growth. It also opposes certain proposed changes in the tax laws, which would widen the trust chasm between the government and the business community of the country.
In a detailed representation sent to the Anomaly Committee Business, LCCI President Kashif Anwar has urged the authorities to withdraw its decision to apply the normal income tax regime on exporters, saying this change in the decades old tax regime will adversely impact competitiveness of our exports as the cost of doing business is already higher when compared to regional competitors. “Hence, this proposal to remove exports from Final Tax Regime must be dropped from the Finance Bill 2024-25 to prevent further deterioration of trade deficit and resulting pressure on foreign exchange reserves,” he pleaded.
At present, the persons deriving income from exports have to pay 1pc tax on their export proceeds which is the final tax. The Finance Bill 2024-25 proposes a 1 pc Advance Tax on exporters and furthermore, the income from exports be subjected to normal rates with one percent tax collection on their export proceeds treated as minimum tax.
Likewise, he pointed out that the proposed flat 15 percent rate of tax on gains from the disposal of immovable property by filers regardless of the holding period and FED on commercial properties and first sale of residential properties at 5pc would hamper the growth of the construction and real estate sectors, which will have ripple effects on more than 40 other allied sectors, and adversely impact remittance flows. In the same way, the increase in the rate of FED on cement from Rs 2 per kg to Rs 3 per kg is also anticipated to increase construction costs, affecting both commercial and residential development.
The chamber is also critical of withdrawal of power to issue any type of exemption certificate from the Commissioners, saying this proposal will result in piling up of refunds and would squeeze the liquidity of businesses. “It should be reviewed especially in cases where income is exempt from tax or where there is a 100pc tax credit,” the LCCI president said.
He called for review of the proposed enhancement in reduced rate of sales tax from 15pc to 18pc on supplies made by the POS retailers dealing in leather and textile products as it is feared to lead to a decline in domestic demand and reduce profitability of both garment and leather industries, undermining efforts to document these important sectors. He also said the 3 pc incentive provided to POS-registered persons in certain sectors must be restored.
Kashif Anwar also criticised the increase in advance income tax to be collected from retailers from 0.5 pc to 2.25 pc, saying it will increase the cost for retailers and discourage documentation.
The chamber urged the government to withdraw the proposal to raise the Petroleum Development Levy from Rs 60 per litre to Rs 80 per litre since it would further burden the inflation stricken masses and stoke more inflation. The exorbitant hike in tax slabs for salaried individuals (up to 35 pc) and non-salaried individuals (up to 45 pc), the president said, will affect a significantly large segment of the population.
According to the LCCI, the Finance Bill 2024-25 proposes to revamp the definition of “tax fraud” by significantly expanding its scope. The explanation reverses the onus onto the registered taxpayer, imposing a harsh and cruel mechanism that will complicate business operations and potentially lead to widespread corruption without enhancing revenue. Additionally, many irrelevant omissions have been categorized as tax fraud. Even minor issues, such as issuing a tax invoice in violation of rules, have been made offences, which is excessively harsh. “These omissions should not be termed as tax fraud. It is proposed that the original definition before the Finance Act 2024 be restored,” Anwar said.
He also opposed the legislation to give the FBR power to seal business premises that don’t register under the Tajar Dost Scheme. “Such legislation will result in discouragement and will enhance distrust between the business community and the FBR. It should be abolished and benefits should be given to encourage the businesses to come into the tax net.”
Other sector specific anomalies pointed out by the LCCI are as under:
Packing Material: The local supply of raw materials and packing materials, component, sub-component, assembly and sub-assembly for the manufacturers have been subject to sales tax. This measure will increase the cost of doing business and inflation and hence it needs to be reviewed.
Stationary: All stationery items, and pharma raw material have deleted from 8th schedule i.e. from 1% they are now chargeable at standard rate of sales tax (18%). This measure will increase the cost of doing business and inflation and hence it needs to be reviewed.
Pasteurized milk: In the Finance Bill, the Government has imposed 18% sale tax on pasteurized milk, which was exempted before. Now the exemption is available only to unbranded milk which is also called open milk in general parlance. This way the companies engaged with the production of safe and healthy milk will lose their market share and this measure will discourage investment, expansion and innovation in this and allied sectors. Hence this needs to be reviewed.
Polyester Staple Fiber: The polyester staple fiber is used as an important raw material in textile spinning and home textiles. The registered manufacturers of polyester staple fiber supply a major portion of their production to the authorized users of Export Facilitation Scheme (EFS). Under the EFS scheme, all local inputs procured by the authorized exporters are entitled to zero rating under S.No.21 of the 5th Schedule of the Sales Tax Act. On import, similar raw-materials are exempt from sales tax under S.No.162 of Table-I of 6th Schedule to the Sales Tax Act.
The Finance Bill 2024-25 has omitted S. No 21 which has created an anomaly whereby locally manufactured polyester staple fiber is subjected to 18% sales tax whereas the same material is exempt from sales tax on import. This anomaly would result in putting the local polyester staple fiber at a clear disadvantageous position as compared to the imported fiber. The exporters would prefer importing this fiber free of sales tax instead of procuring 18% sales tax laden local fiber.
It is therefore recommended to rectify this issue and withdraw the proposed omission of S.No.21 in clause 5(20) of the Finance Bill 2024-25.
Gems and Jewellery Sector: The exporter of Gems and Jewellery sector have expressed their concern about the withdrawal of sales tax exemption by FBR, which was provided to them under SRO 760(I)/2013. They are of the view that incoming gold is supplied by foreign buyers for the purpose of making and subsequently exporting jewellery within 120 days. Therefore, it should be treated as imports and the standard sales tax rate of 18 percent should not be applied to it.
Since the Gold imported under SRO 760 is for subsequent export, therefore, it is recommended that PCT 99.29 may be inserted in Clause 167 of the Sixth Schedule of Sales Tax Act through Federal Budget 2024-25. As a result an 18% entry in Sales Tax Column of PCT 99.29 of Custom Tariff (Custom Act 1969) may be substituted by 0.
LED Lighting Sector: The Finance Bill 2024-25 has proposed a 20% regulatory duty on tungsten filament incandescent bulbs due to their inefficiency in power consumption. However, LED bulbs and LED bulb parts, which are highly efficient and energy-saving, are also affected by this regulatory duty because they share the same HS codes. This creates an anomaly that needs to be rectified. It should be clarified that the proposed 20% regulatory duty applies solely to tungsten filament bulbs and their parts, excluding LED bulbs and LED bulb parts. The relevant HS codes are 8539.2190, 8539.2200, 8539.2990, 8539.9010, 8539.9020, and 8539.9090.
Electro-medical Devices: The Finance Bill 2024-25 proposes to abolish the sales tax exemption previously provided to electro-medical devices and equipment under heading 112 of the 6th Schedule of the Sales Tax Act 1990. These items have now been removed from the 6th Schedule and added to the 5th Schedule. Most medical devices are complex, expensive, and not manufactured locally. Imposing an 18% sales tax on electro-medical devices will significantly impact the healthcare sector by making surgical treatments expensive for average citizens. This proposal needs to be reviewed to prevent adverse effects on public health.
Confectionary, Juices & Beverages: The Finance Bill 2024-25 proposes the imposition of a Federal Excise Duty (FED) of Rs 15 per kilogram on the supply of sugar to manufacturers. This measure will adversely affect the competitiveness of local manufacturers in the confectionery, juices, and beverages sectors by increasing product prices and contributing to inflation. Therefore, it is essential to review this proposal.
The federal government, through the Finance Act 2020, included “Toll Manufacturing” under the definition of supplies, making it subject to income tax withholding under section 153(1)(a) at a rate of 4%, which has since increased to 5% to incentivize manufacturers. However, the Finance Bill 2024-25 proposes to raise the withholding tax rate on toll manufacturing from 5% to 9%, an 80% increase. This significant hike would place additional financial strain on an industry already operating with low profit margins. Therefore, this proposal requires reconsideration to avoid squeezing the manufacturing sector further.
