The tax proposals of the 2019 Budget to promote large scale investments along with a scheme to exempt upfront import taxes on major investments are business and investment-friendly measures that will boost investor confidence on the country. However, certain non tax issues impacting businesses need urgent attention, said Partner, Tax Services, Ernst & Young, Nishtar Sulaiman in an interview with Business Observer.
Excerpts:
Q: How do you see the overall tax proposals of the 2019 Budget in enabling the government achieve its revenue targets for the year?
A: Of the tax proposals to raise revenue in the 2019 Budget, one of the most significant proposals is the taxes imposed on vehicles. The expectation is to raise Rs. 48 billion from such taxes which primarily consist of an increase in Excise Duty on the import of vehicles and the introduction of a luxury tax on vehicles.
While the increase in Excise Duty ranges from 10% to 15% of such duty on most vehicles the introduction of the luxury tax would have a more significant impact. The luxury tax would be imposed on vehicles exceeding a CIF value of Rs. 3.5 million for petrol and diesel vehicles for example and the rate of tax would be at 100% (petrol) to 120% (diesel) on the amount of the CIF value that exceeds Rs. 3.5 million.
While there was an amendment to the Finance Act to provide certain exemptions from the proposed Luxury Tax on certain vehicles below a particular engine capacity, we understand that these exemptions are likely to be removed. If these exemptions are removed, the Luxury Tax would have a significant impact resulting in the importation of high value vehicles becoming prohibitive.
As a result, while the increased revenue from Excise Duty may be achieved as the increase is not very material the targeted revenue from the Luxury tax may get affected if imports of vehicles that attract the Luxury tax see a sharp decline.
The other significant revenue proposal is the imposition of ESC (Economic Service Charge) on most imports at 0.5% at import point. ESC is basically an advance payment of income tax and therefore, ESC paid at import point can be ultimately set off against a person’s income tax liability. It would not be a revenue source if all of the ESC paid at import point is claimed against income tax.
Given that this has been identified as a revenue sources in the budget, this suggests that the ESC to be collected would not be set off against the importers income tax liability for whatever reason.
These reasons could be that the importer is exempt from income tax, is loss making or is not registered for income tax and is not in the tax net.
The other significant revenue proposals are taxes imposed on liquor and tobacco and increases in fees and levies which are likely to be collected. The underlying issue with regard to achieving revenue collection targets is of course the implementation of these proposals and the speed in which such proposals are made law and the commencement of the actual collection of such revenue. Based on past experience this has been a significant challenge.
Q: Are the tax proposals progressive or regressive in nature and do they help to build a tax friendly culture that has been spoken of for a long time in the country?
A: Unlike in previous years a positive aspect with regards to the tax proposals is that there are hardly any change to the main tax statutes namely, income tax, PAYE taxes, VAT, NBT and ESC. If at all the major change has come from the import based taxes. While import based taxes do affect cost at theimport point, the scarcity of major changes in the direct and indirect tax systems is certainly a good start to build a tax friendly culture.
Q: Has the Budget made an attempt to reverse the tax ratio to increase revenue from direct taxes?
A: Almost all revenue proposals in this year’s budget are an increase in import-based taxes, Excise duties and levies which are all an increase of indirect taxes which are imposed regardless of ones ability to pay.
There are virtually no revenue proposals to increase direct taxes and this may primarily be due to the introduction of the new Inland Revenue Act from last year.
This was a fundamental change in the country’s direct tax system.
We are yet to see the effects of the new Act which we would be able to assess this year and is likely to have a significant impact on direct taxes. While the Budget proposals are primarily indirect tax based, the effects of the new Inland Revenue Act are likely to contribute to a significant increase in direct tax collection this year.
Q: Are the tax proposals business and investment friendly? Could you elaborate?
A: The tax proposals have recognised the importance of promoting large scale investments and have proposed a new scheme to exempt upfront import taxes on new large scale investments approved by the BOI.
These concessions are in addition to the investment relief granted for large scale projects which are similar to a tax holiday scheme. There is also a proposal to grant accelerated deprecation to existing companies on new investments encouraging businesses to invest. These proposals are certainly investment friendly.
However, there are issues facing certain businesses in the existing tax statutes that are not business or investment friendly. There are also non tax issues that certain businesses face when it comes to obtaining approvals and clearances.
These need to be addressed through continuous discussions with these businesses / industries on a continuous periodic basis to ensure the business and investment climate is improved and made even more attractive for future investments.