KCCI proposes tax rate alignment to plug revenue leaks

KARACHI: Karachi Chamber of Commerce and Industry (KCCI) has proposed to the government to tackle tax evasion and revenue leakage by eliminating disparities in sales tax and withholding tax rates, and rationalizing further taxes.

In its budget proposals for the upcoming fiscal year, the chamber recommended reducing the rate of Further Tax to 1.5 percent for sales to unregistered entities, which will discourage evasion and drastically curtail the fake and flying invoices, resulting in the full recovery of sales tax revenue for the Federal Board of Revenue (FBR).

"All manufacturing units are easily identifiable through their commercial electricity connections. They may be brought into the tax net through registration based on electricity bills," the chamber said. "Leveraging existing data within the FBR to identify and register unregistered persons engaged in taxable activities promotes tax compliance without resorting to punitive measures."

The KCCI also proposed to the government the levy of 1.5 percent Value Added Tax (VAT) on commercial importers in case of sales to unregistered persons. VAT may be waived when the name and CNIC of unregistered persons are provided by the seller, and a .5 percent Further Tax may be levied on commercial importers in case of sales to unregistered persons.

"Establishing consistent tax rates is essential for closing loopholes, curbing tax evasion, and minimizing revenue leakage," it added. "By eliminating variations in rates, incentives for fraudulent activities like fake and flying invoices will be mitigated, thus fortifying the integrity of the tax system and fostering higher compliance rates."

Despite amendments and clarifications, the chamber pointed out that SRO 350(I)/2024 exacerbates compliance challenges, fosters harassment and corruption, and dissuades sales tax registrations.

The KCCI recommended withdrawing these changes and, before introducing any new measures to curb tax evasion through flying invoices, it is crucial that a thorough consultation process is undertaken with stakeholders, including businesses and tax experts.

"This will help in crafting regulations that are effective without being excessively burdensome. Furthermore, we need to abandon this myopic SRO culture and pivot towards a model grounded in robust research and informed policy-making."

The chamber suggested that the government assess all imports of Polyethylene and Polypropylene (HS Codes 3901 and 3902) from Iran based on weekly reports from the S&P Polymer Scan Report (which is in practice by Customs stations at Karachi, Port Qasim, and Dry Ports), treating them as prime grade materials regardless of their declared status and to cease importing Recycled Plastic from Iran, as the country already produces significant volumes of plastic waste and scrap, which are recycled locally.

KCCI also proposed that WHT should be reduced to 1 percent for filers and that it should be adjustable. It should be distributed across the supply chain and 1 percent may be recovered at each stage. For other sectors such as wholesalers and retailers, the chamber recommended that the rate of sales tax should be rationalized.

To address the evident anomaly in tariff rates for similar products, KCCI proposed revising the CD and ACD rates for reactive dyes to align with their status as a basic raw material for the export-oriented textile industry by reducing Customs Duty (CD) from 16 percent to a maximum of 3 percent and by eliminating Additional Customs Duty (ACD) entirely.