OICCI demands abolishing GST on branded milk, tea whitener

ISLAMABAD: Overseas Investors Chambers of Commerce and Industry (OICCI) has given a 10-point charter of demand to finance minister for abolishing general sales tax (GST) on branded milk and tea whitener in the budget for 2024-25.

The OICCI takes stance that the steps announced for bringing retail and wholesale trade in the tax net are insufficient and that agriculture income, accounting for one fourth of the GDP, has been left out of the income tax net yet again this year.

In a letter, written to Finance Minister Mohammad Aurangzeb, the OICCI said they extended congratulation for some of the bold and decisive measures, presented in the Finance Bill 2024-25 on June 12.

The OICCI offered full support in achieving the ambitious revenue target of Rs12.9 trillion in 2024-25, thereby helping to raise the tax-to-GDP ratio to over 13 per cent in the next few years.

The OICCI appreciated that its proposals had been implemented by the government relating to broadening the tax base, especially on the real estate, penalising the non-filers and, to some extent, narrowing the opportunity to hide untaxed income.

It was, however, noted with concern that this year’s budget finalisation process was the least engaging with the key stakeholders including the largest tax-paying body of foreign investors, OICCI. “As such, we have observed that the proposed tax proposals include a few items which are highly counterproductive, briefly listed below, for retaining or attracting foreign investment.”

The OICCI letter said “we believe it is crucial to reconsider, delete or modify these proposals to ensure they align with the broader goals of fair taxation and sustainable economic progress:

“The proposed amendment relating to reinstatement of commissioner’s power to reject advance tax estimate [Section 147], may lead to unnecessary harassment of advance taxpayers, primarily from the organised corporate sector, including listed companies with available published/ audited accounts. “Additionally, it will be impractical to provide detailed documentary evidence for estimated future turnover, expenses, or deductions, especially in the current challenging economic environment, which must be based on business forecasts and projections.”

The letter said that the proposed amendment relating to disallowance of 25pc of total expenditure on sales promotion and advertisements [Section 180] is highly arbitrary and subjective, as the criteria for admissibility of an expense including sales and promotion must go through a test of reasonableness, business need and its relevance to the turnover and profits being derived in a particular tax year.

It is pertinent to note that this brand building and development is a constant process, of innovation and improvement. As you are already aware, the payments on account of Royalty and Technical Services Fees are governed through an agreement, duly ratified by State Bank, after conducting a thorough due diligence and are also subject to withholding of income tax, in accordance with respective, Avoidance of Double Taxation Treaties, between Pakistan and many other countries.

The proposal relating to withdrawal of commissioner’s power to issue withholding exemption certificates [Section 153 and 159] will aggravate the already alarming refund positions (Rs94 billion refunds) of OICCI members and will result in further buildup of huge refunds/ blockage of funds which will be threatening to sustainability of taxpayers, especially for retirement funds and non-profit organisations which does not have any tax liability under other provisions of the Income Tax Ordinance. Even for the corporate taxpayers with huge pending tax refunds will collapse their cash flows.

The removal of branded milk and tea whiteners from zero-rated sales tax regime will, in addition to induce inflation, threaten the sustainability and growth of packaged milk industry and will hamper their goal to provide safe milk, especially in an environment well known to harbour unhygienic milk suppliers.

The proposal to increase the advance tax on distributors, wholesalers and retailers to 2pc and 2.5pc (earlier 0.2pc and 1pc), respectively, is merely shifting the burden of non-compliance by these parties to existing businesses. Measures should be taken by the government to bring them into the tax net, as withholding agents are already providing their details to the FBR. The distributor of certain businesses e.g. pharmaceuticals, Oil Marketing Companies and FMCG have already been given reduction in minimum tax keeping in view the nature of their business, and therefore, applicability of 2.5pc across the board will not only increase hardship for the taxpayer but also administrative hassle for the tax collector, in the form of huge refunds.

Income tax deducted on export proceeds is proposed to be changed from ‘Final’ to ‘Minimum’ tax [Section 154] resulting in exporters paying tax at higher of 29pc of taxable income, 17pc of accounting profit or tax deducted on export proceeds (currently @ 1pc). Further, super tax is to be also applicable at maximum rate of 10pc based on income threshold. Severe competition is already being faced in international markets due to increased cost of doing business in Pakistan particularly on account of energy cost which is highest in the region. With this change, exporters will further loose competitiveness which will have adverse impact on country’s export and foreign exchange reserves.

Sales tax at reduced rate (i.e. 8.5pc / 12.75pc) on locally manufactured hybrid electric vehicles, as specified and agreed under auto policy (AIDEP 2021-26), is proposed to be withdrawn through omission of Sr. No 73 of the 8th schedule of Sales Tax Act, 1990. This measure will hurt ongoing localisation projects in progress that are bringing FDI and hybrid technology to the country. Abrupt changes in approved policies shake foreign investor’s confidence in government policies.

The petroleum products have been proposed to be classified from zero rated to exempt under sixth schedule. This will result in input tax on services for OMC business not to be allowed/claimed and resultantly would force them to absorb it as cost, as it cannot be passed on to consumers because it is a regulated industry.

“To avoid misinterpretations and removal of doubt, we request to add clarification in Sub-Rule 6A of Rule 6C of the Seventh Schedule to the Income Tax Ordinance, 2001, that the gross advances to deposit ratio refers to gross advances and deposits appearing in financial statements of banking company as on last day of the year,” added the letter.

“To enhance holding company structures and facilitate business operations, we propose restoring relief from double taxation of Intercorporate Corporate Dividends (ICD) between group companies as per international norms,” added the letter.