Central Board of Revenue(CBR) devises new policy to take away tax exemptions

ISLAMABAD (December 29 2005): The Central Board of Revenue (CBR) has devised a new policy for taking away income tax exemptions in 2006-07 budget, with special focus on withdrawal of those exemptions which could yield maximum revenue.

Outlining salient features of the new 'policy', official sources told Business Recorder on Wednesday that the CBR has started compiling a comprehensive proposal on existing exemptions, including business/sector-wise details of companies/industries enjoying exemptions under Income Tax Ordinance 2001.

The CBR is also working out total expected revenue, in case all income tax exemptions are withdraw. This exercise would determine the total revenue to be generated if there were no exemptions.

A study on power sector would be conducted vis-à-vis its share in tax-GDP ratio. It would be carried out keeping in view the existing income tax exemptions available to the power sector.

The CBR will also conduct an analysis to calculate cost of exemptions to the national exchequer and international comparison with other countries for pinpointing common exemptions.

On the income tax side, the exemption expenditure mainly relates to allowances, capital gains, pensions, provident funds and superannuation funds. The income tax exemptions related to charitable activities and non-profit educational institutes are common in both developed and developing countries. The position with regard to the basic threshold of income for charging taxes is similar.

Income tax department will propose amendments in the Income Tax Ordinance 2001 on the basis of these recommendations, which would be submitted to Finance Ministry during the budget exercise.

The CBR is also compiling database on income tax exemption certificates issued to different industrial sectors. The exercise includes computer analysis of import data, matching import figures with the exemption certificates and refund issued. This would help the CBR in developing a strategy to effectively deal with the companies obtaining exemption certificates at the import stage and development of a system to check and countercheck exemption certificates issued by the department.

Besides exemptions, the CBR would also conduct a study on companies, which declare tax losses every year. The returns filed by the corporate sector for the 'tax year 2004' showed that 3,888 (39 percent) of return filers had declared business income in their returns, while 2,994 (30 percent) had shown business losses, and an equal number had submitted nil statement.

Out of 12,526 return filers, only 3,888, or 31 percent paid income tax, and the rest 69 percent taxpayers either declared business losses or there was nil income to declare. The field income tax officials would conduct case study on companies declaring tax losses for developing a strategy for the next financial year.

The CBR will also analyse revenue generation from Capital Value Tax (CVT). The CVT regime would be analysed on the basis of revenue potential and actual collection made in current fiscal year.

Officials said that all viable suggestion would be incorporated in the Finance Bill for next fiscal year.

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