Major overseas investors, in their taxation proposals for the upcoming budget for fiscal year 2024-25, have asked the federal government to consider taxing the untapped sectors which have a high potential and a huge share in the country’s gross domestic product (GDP).
These sectors include immovable property, undocumented non-corporate businesses, transport and construction businesses, which enjoy the advantage of not being appropriately taxed.
The Overseas Investors Chamber of Commerce and Industry (OICCI) elaborated that broadly there were two types of immovable properties – agricultural property and non-agricultural property.
In the first place, details of both types of properties should be acquired by the Federal Board of Revenue (FBR) and matched with the wealth statements of taxpayers to identify the undeclared properties and their owners.
It suggested that the withholding tax on immovable property (including agricultural land) should be collected along with property tax by provinces every year at 0.5% of the property value evaluated by the FBR. This tax collection would be adjustable against the tax liability of the property owner, ie, income tax credit on agricultural land can be given against the agricultural income tax collected by provinces.
In this respect, small properties may be excluded from the purview of the withholding tax. “This will not only result in documentation but also the identification of the undeclared property,” the OICCI said.
Furthermore, the FBR should offer exemption from capital gains tax on the sale of immovable property, after keeping them for four to six years, to only those who have declared the property following its acquisition. Such exemption should be provided for one property in three years.
Other potential sectors include the undocumented non-corporate businesses, which mostly comprise sole proprietorships or the Associations of Persons, and rely on cash transactions.
The OICCI pointed out that there was no law which could regulate such businesses therefore corporate law should be amended to incorporate the businesses surpassing certain financial thresholds.
Additionally, the withholding tax on non-corporates should be enhanced significantly, like the increased tax rates applicable to the inactive persons, so such business setups could become costlier than the taxpaying corporate sector.
In the case of builders, the tax rate for a 3,000-square-foot commercial building is Rs80 per square feet, totalling only Rs240,000. As all know the value of a flat in Karachi, the OICCI said, a 3,000-square-foot flat could not cost less than Rs30 million, which meant that the builder had to pay only 0.8% tax.
On the contrary, the salaried class pays taxes up to 35% while corporates contribute taxes up to 29% plus 10%.
To bring the transport sector into the tax umbrella, the OICCI underlined the need to understand that there were primarily two types of transporters – those who transport goods and those who transport passengers.
Advance tax on the purchase and transfer of vehicles does not apply to these transporters as they pay the annual advance tax (collected with motor vehicle tax), which is substantially low.
For instance, a 20-seat air-conditioned vehicle pays Rs30,000 in income tax per annum while the tax rate is double at Rs60,000 if the vehicle owner is a non-filer of tax return.
The chamber recommended the application of advance tax on (purchase/transfer of) goods and passenger transport vehicles to be collected at the rate of 10% of the vehicle’s value.
Published in The Express Tribune, May 22nd, 2024.
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