LAHORE: The businessmen from the service sector have termed the eight percent un-adjustable withholding tax on “revenue” from July 1, 2015, a draconian tax law which is aimed at destroying the service sector that contributes over 53 percent of the GDP.
The TUV AUSTRIA Bureau of Inspection and Certification’s Chief Executive Rashid Mehr in a statement on Monday said the controversial law of 8 percent tax on “revenue” has put the sustainability of the “service sector” at stake in this country where cost of doing business is already very high. Contrary to this, all industries have been facilitated by reducing the corporate tax to 32 percent.
He said the government has totally ignored the fact that with the implementation of this law, it has actually discouraged new start-ups and future investments in the service sector. It is a principle that new businesses are not taxed when they are in their infancy all over world.
All service sectors including information technology, certifications and inspections, public relations, advertising, marketing, event management, telecom and freight forwarding & clearing, facilitate economy at large will be collapsed in 6 to 8 months that would jack-up both the inflation and unemployment rate. It is noteworthy that banks, insurance and private transport companies have been exempted from this tax, he added.
Rashid Mehr said the taxation rule of thumb is that tax deductions are made on profits only. As per the previous practice, all payments received by any service provider were subject to deduction of five percent Withholding Tax (WHT) which was later increased to six percent and subsequently to minimum eight percent WHT on receipts of payment, he added. However, all service providers could adjust the withheld tax against their actual tax liability. It is shocking that the new amendment to the law requires all service providers to pay minimum eight percent WHT on “revenue”, he maintained.
Rashid Mehr said the service sector is already paying 32 percent corporate tax and were recently slabed 16 percent and 14 percent GST in Punjab and Sindh respectively thus making the service sector more uncompetitive. From July 1st 2015, a corporate tax of 32 percent is applicable to all sectors/ industries except for the “service sector.
Whereas the service sector is 53 percent of the Pakistan’s GDP and has created numerous employment opportunities while making a significant contribution to the national tax kitty. Why has the government discriminated towards the service sector whereas all other sectors have been facilitated by reduction of the corporate tax from 35 percent to 32 percent over the past few years? he questioned.
He said the Withholding Tax is not considered as full and final settlement anywhere in the entire world and is always adjustable against tax liability. To the best of our knowledge the maximum rate of WHT around the world is not more than five percent as well and is adjustable. Under the new tax law, a minimum of 8 percent tax on “revenue” will be withheld regardless of the whether the service company is profitable or loss-making.
As the average net profitability is 6-8 percent after tax in most businesses, an increased rate of minimum 8 percent Withholding Tax on “revenue” (even if it was adjustable against tax liability) had put companies into liquidity crises and consequently they were unable to pay their debts timely. By imposing a minimum 8 percent WHT on “revenue” to be considered as minimum tax liability the government has ignored the profitability of small to medium size companies, he added.
Rashid Mehr said the government has also ignored another very important aspect while levying this tax i.e. the difference between a company that has low profit margins with high revenue and a company with high profit margins with low revenue. As such, this tax law failed to bring equality for different types and scales of businesses.
The law would force people to rather put their money in banks and earn interest, this amalgamates hoarding with inflation and has an adverse effect on the economy as well as this tax regime will be producing property dealers & shopkeepers but not entrepreneurs.
The amendment of the new law would only give way to financial malpractice of undervaluing the revenue just to save something that belongs to the rightful hard working owners, he added. If this law is not undone immediately, hardly any company could survive and would be forced to close down its operation, he maintained.