However, there is no in-built check in Section 65D to control investment made by existing units in the name of new industrial undertakings established under section 65D. The scheme does not distinguish between new and old investments in cases where existing units are making new investments with different credentials to avail tax concessions. If tax-free raw materials/inputs are imported by existing units, who have also invested in new units, the same imported items may be used or consumed by the existing units. For example, edible oil imported by a new unit could be sold in local market or consumed by the existing unit that has also set up a new unit under Section 65D of the Ordinance 2001. In the absence of a foolproof preventive mechanism, it is difficult to effectively implement Section 65D of the Ordinance 2001 to attract investment. The existing units might have invested in new industrial undertakings for availing tax exemptions under the said provision of the law.
Thus, the FBR has to check investment made against the basic spirit of the scheme under the cover of new investors under Section 65D of the Ordinance 2001. This is only possible by putting an effective enforcement and monitoring mechanism in place for the new investors.
The revenue implications regarding the misuse of the Section 65D of the Ordinance 2001 would be quite high in case any existing undertaking tries to consume exempted raw materials imported under the cover of the investment scheme. Sources said the FBR is also analysing the applications of tax exemptions received under Section 65D of the Ordinance 2001 to ascertain the revenue implications of the provision to attract investment. However, government''s taxation arm is also examining the possibility of any misuse of the provisions by the existing industrial undertakings under the rubric of new investment.
Details show that Section 65D has been inserted in the Income Tax Ordinance 2001 through Finance Act 2011; according to which, a new industrial undertaking "shall" be given a tax credit equal to one hundred percent of tax payable, on account of minimum tax and final tax payable under any of the provisions of ordinance for a period of five years beginning from the date of setting up of the unit or commencement of commercial production, whichever is later.
As per sub-section (2) of the Section 65 D, the tax credit shall be admissible to the company incorporated and industrial undertaking set up between the first day of July, 2011 and 30th day of June, 2016, and the industrial undertaking is managed by a company formed for operating the said industrial undertaking and registered under the Companies Ordinance, 1984 having its registered office in Pakistan. Moreover, the industrial undertaking is not established by splitting up or reconstruction or reconstitution of an undertaking already in existence, experts said.
It is also mandatory for availing tax credit under Section 65D that an industrial undertaking is set up with one hundred percent equity, provided a relaxation that short-term loans and finances obtained from banking companies or non-banking financial institutions for the purposes of meeting working capital requirements "shall not disqualify the taxpayer from claiming tax credit under this Section." Although Section 65D was inserted in the Ordinance through Finance Act, 2011, few provisos were managed vide Finance Act 2012 to make it more lucrative to attract investment in new undertakings. Federal Board of Revenue (FBR) through its circular no 7 of 2011, dated July 01, 2011 clarifies that a Section 65D has been introduced to provide incentives to investments in new industrial undertakings in Pakistan.
Tax experts added that with the provisions of Section 65 D, investment in industrial undertakings would be materialised within the first year of production, therefore, the tax credit should not be more than 10 percent in any case, they argued. Edible oil is liable to WHT @ 5% at in ''Minimum Mode'' at import stage under presumptive tax regime regardless whether the import is of commercial or industrial nature. Earlier, the industrial imports were enjoying the reduced rate of WHT @ 3% as against 5% leviable on commercial imports. FBR observed that the facility of a reduced rate of 3% was grossly misused by industrial concerns, selling their imported edible oil in open market at commercial rates. Resultantly, that reduced rate facility was withdrawn vide S.R.O 14O(I) dated 26 February, 2013 across the board on all imports of raw material; consequently, a uniform rate of 5% is now applicable on both types of imports.
Sharing a new development, sources said some Regional Tax offices have reportedly referred the exemptions applied under section 65-D to FBR for want of processing the exemptions cases, which is still pending for a decision. Tax experts forecast that the exemptions may be misused, in addition to a huge shortfall in collection of revenue. They maintain that instead of blanket exemption only those sectors whose manufacturing facilities are absent such as mobile phones, IT and medical equipment and other hi-tech gadgetry, which are not manufactured in Pakistan and are import dependent, should have been offered the incentive.
Meanwhile, ghee and cooking oil industry informed the FBR that vide Section 65 D of the Income Tax Ordinance, 2001, inserted by the Finance Act, 2011, the industrial undertakings set-up between July 2011 and June 2016 shall be given a tax credit equal to one hundred percent of the tax payable in both modes - Minimum and Final.
The edible oil to the tune of 2.0 million tons is imported in Pakistan per annum by the manufacturing units in settled areas and FATA/PATA. The imports are subject to WHT @ 5% vide section 148(8) of Income Tax Ordinance, 2001. Moreover, FED @ Re 1/kg in value addition mode vide notification no. S.R.O 24(I)/2006 dated 7th January, 2006 is also applicable in addition to FED @ 16% ad valorem in sales tax mode vide Table I, First Schedule to Federal Excise Act, 2005. All the duties of customs are levied and collected on edible oil at import stage.
Vegetable ghee/cooking oil manufactured in Fata/Pata is supplied to settled area markets on the same price as of said items manufactured by units located in settled areas, thereby making it impossible for settled areas units to compete with Fata/Pata by virtue of advantage of WHT @ 5% in ''Minimum Mode''. The imports of Fata/Pata manufacturing units have increased manifolds in recent past and are projected to gradually increase in future as well. Likewise vide section 65-D of the said ordinance blanket exemption of Income Tax has been granted to industrial undertakings, which "shall" continue for five consecutive years from the date of commissioning. The exemption "shall" incur a loss to the national exchequer to the tune of Rs 11.85 billion per annum and the projected loss for five years shall be Rs 59.23 billion at-least.
It is pertinent to note that at present, the cumulative installed capacity of refining and manufacturing sector is over 5 million tons against a requirement of around 3 million tons per annum; consequently most of the units are struggling and surviving next to verge of closure. Under given circumstances there exists no room for installation of new units and would be a mere wastage of national resources and hard earned foreign exchange being consumed for import of plant and machinery, experts said.
One such unit has already availed the facility of tax credit under Section 65D and more or less eight others shall apply in the last quarter of current year. Likewise, 10-12 more units would enter into production by mid 2014 and so on. In this backdrop it is imminent that existing over 100 units would go out of production and only 20-25 units of Fata/Pata and those units enjoying the advantage of section 65D would monopolise the entire sector.
In order to safeguard the national exchequer and discourage the flight of precious foreign exchange reserves, it is strongly recommended to partially replace WHT @ 5% with Federal Excise Duty (FED). Therefore, the industry proposed under Option 1 that the rate of WHT to be reduced from 5% to 2% and proportionately FED be enhanced from existing Re 1/kg to Re 5/kg. The national exchequer would receive additional revenue to tune of Rs 8.36 billion per annum. Under Option 2, it has been suggested that the rate of WHT could be reduced from 5% to 1% and proportionately FED be enhanced from the existing Re 1/kg to Re 6/kg. The national exchequer would receive an additional revenue of Rs 4.46 billion per annum, they added.