Overview:This is Part II in a series of articles aiming to analyse and comment on the relevant implications of the changes introduced in the Finance Bill 2015. This part will discuss the major tax relief measures with respect to income tax introduced in the Budget 2015-16 (Budget), excluding the Exemptions.
Background:
Pakistan’s economic growth for the fiscal year 2014-15 was recorded at 4.24% according to the Economic Survey of Pakistan. For the upcoming year the state has targeted a growth of 5.5%-fuelled by the Federal Budget 2015-16 (Budget) with Rs4.5 trillion outlay. It is relevant to know that the growth of 4.24% is the highest since 2008. Favourable expansion conditions do exist at the moment notably lowest interest rates in history, a controlled and falling rate of inflation and projections of robust infrastructure spending.
Tax Deduction for Profit on Debt on House Building Loans
In laymen language, for persons i.e. individuals, if the person has paid any interest or any share in the construction of a new house or acquisition of a house, on a loan taken from a scheduled bank or a Non-Banking Finance Company i.e. House Building Finance Corporation etc. in a tax year, he shall be allowed a Deduction when he calculates his taxable income for the year, to the extent of lower of:
- 50% of the taxable income; or
- Rs1 million
Earlier, the law offered a Tax Credit for similar expenses, under Section 64 of the Income Tax Ordinance 2001. However, earlier the process of computing the credit was slightly complicated, and its impact in providing relief almost negligible owing to the formula mechanics.
On running a calculation to estimate the impact of benefit under the proposed measure, it was found that the proposed deduction may reduce tax incidence by epic proportions. That is to say an enhancement in the Value of Benefit by 30%-40% from the earlier Tax Credit, and resultant reduction in Tax Liability up to 50%.
Tax Credit on Enlistment of Companies
Under the proposed budget, Tax Credit upon enlisting on a stock exchange for companies has been enhanced from 15% to 20%. It is interesting to know that although companies seeking listing on the stock exchanges have several more important ambitions to serve, this credit does serve as a vital incentive. The IPO market remained very active during the financial year 2014 which has continued to this point in the current year also.
On the downside, the only beneficiaries of this credit will be large public corporations.
Tax Credit for Employment Generation by Manufacturing Companies
A Tax Credit has been proposed for tax payers, being a Company, formed or setting up a manufacturing unit between July 1, 2015 and June 30, 2018, equivalent to 1% tax payable for every 50 employees registered with social security institutions i.e. EOBI and schemes, with a maximum capping of 10% of tax payable. Further, the companies shall be registered under the Companies Ordinance 1984 and have registered office in Pakistan and shall not have established the manufacturing unit by splitting up or reconstruction of an entity already in existence.
The above is a very laudable measure proposed which will aim to not only provide relief to the tax paying companies but also help increase social welfare standards in the country. In addition to the former, the benefit extends to both public and private limited companies. Also manufacturing units have been seen to require on an average up to 500 employees and therefore, the benefit may also give rise to employment in the country.
On the negative side, yet again the impact of this relief will be negligible. This is so because firstly it extends to a particular class of tax payers only. Secondly, upcoming manufacturers face a myriad of other issues with respect to filing and registrations. It is also likely that employees will be hired for the sole purpose of claiming the credit and released as soon as they have been registered-an easy circumvention of the law.
Reduction in Tax Rates for Companies other than Banking Companies
The proposed measure will reduce tax rate for companies other than the banking companies from 33% to 32% - a mere reduction of 1% only but a welcoming gesture nevertheless.
Enhancement of Deductions in Income from Property
The Budget has proposed allowed deductions to the extent of 6% of the expenses incurred wholly and exclusively for the purpose of deriving rent when computing tax on income from Property. Previously, such expenses were only limited to collection charges.
Tax Credit on Investment in Shares and Life Insurance Policy Premium
Under Section 62 of the Income Tax Ordinance 2001, a tax credit is allowed to a resident person other than a company for a tax year, either, on account of the cost of acquiring new shares offered to the public by a company listed on stock exchange originally allotted to him or in respect of any life insurance premium paid on a policy to a life insurance company.
An enhancement to one of the components in the computation of the above Tax Credit has been proposed under the Budget, aimed at increasing the value of credit available to the eligible claimants.
Conclusion: A Cause of Concern!
From the above discussion, it can be concluded with concern, that with respect to the income tax majority of the benefits cater to only a particular class of tax payers rather than the general individual tax payers who perhaps need the most relief. But this is nothing novel. Concessions as such as above are generally made on a ceremonial basis to prove there is some “relief” in the budget when there is not.
Further, what is even more interesting to note is that a good proportion of eligible to benefit tax payers would be unable to claim the benefits owing to lack of knowledge, undocumented operations and a lack of referring to the professionals for the purpose of filing the return.
Sources:
- The Federal Budget Speech 2015-2016, Ministry of Finance 2015
- Budget 2015-16: Finance Minister Ishaq Dar unveils Rs4.451 tr budget, the Express Tribune June 5, 2015
- Income Tax Ordinance 2001, amended up to June 2014
- Volkerak Financial Consultants
You can find him on Twitter Mustafa Mustansir or mustafa.mustansir@volkerak.com
No comments:
Post a Comment