ISLAMABAD:
In a double jeopardy for businesses hit by the super tax court judgment, Pakistan has informed the International Monetary Fund (IMF) that it will recover over Rs100 billion in late payment surcharge from firms that went to the courts and did not make timely payments.
The development comes in the midst of the Prime Minister Shehbaz Sharif’s decision to seek the IMF’s nod to abolish the super tax in order to lower the tax burden on wealthy individuals and the corporate sector that are penalised for making profits.
The Federal Board of Revenue (FBR) apprised the global lender of its decision as part of negotiations aimed at convincing it about the government’s plans to meet this fiscal year’s tax targets, government sources said. In certain cases, the per annum surcharge could go as high as 25% of the total annual liability because of the 22% Karachi Interbank Offered Rate (Kibor). The surcharge value is linked to interest rates.
The estimated earnings in two separate cases — the 2015 super tax imposed to raise money for internally displaced persons and the 2022 super tax introduced to generate additional revenues for meeting IMF targets — are in the range of Rs100 billion to Rs150 billion, FBR officials said. They added that the exact earnings cannot be determined at this stage.
Section 205 of the Income Tax Ordinance empowers the FBR to recover the late payment surcharge in cases of any sort of default.
The law states that if any person fails to pay any tax on or before the due date for payment, they shall be liable for default surcharge at a rate equal to 12% or Kibor plus 3% per annum, whichever is higher, on the tax, penalty or other amount unpaid. The surcharge is computed for the period commencing on the date the tax, penalty or other amount was due and ending on the date it was paid. The Supreme Court has determined in the past that late payment surcharge is mandatory to recover in cases where the decision goes against taxpayers, according to FBR officials. They said companies did not pay taxes, went to the courts and invested that money in their businesses to generate profits.
Many firms had approached the courts against the government’s decisions to impose these taxes over and above their standard corporate income tax rates. Both levies were introduced during the tenures of the Pakistan Muslim League-Nawaz (PML-N) government in 2015 and 2022. At the time of imposing these taxes, the government had promised that the levy would be imposed only for one year due to peculiar circumstances.
However, the government is now earning between Rs500 billion and Rs550 billion per annum from the super tax.
Pakistan is among the heaviest tax jurisdictions, where individuals pay up to 45% of their income in taxes, salaried persons up to 38%, and corporations up to 60% of their income in taxes. Despite this, the state remains unable to provide basic services.
In January, the Federal Constitutional Court upheld the validity of the super tax, declaring it constitutional.
FBR Chairman Rashid Langrial last month told a parliamentary committee that the ruling secured about Rs216 billion in revenues.
The Federal Constitutional Court also held that setting tax rates is Parliament’s exclusive, non-justiciable domain. The court declared that Sections 4B, relating to rehabilitation of displaced persons, and 4C, concerning high-earning persons and companies, were within Parliament’s constitutional powers. The government charges 4% to 10% super tax from companies, and the decision to collect the late payment surcharge will particularly impact firms in the banking, cement and energy sectors. Sources said that after the court’s ruling, the FBR collected about Rs150 billion on account of outstanding super tax dues.
An FBR official said the tax machinery was facilitating companies and was not demanding payment of the principal amount in a single tranche. The FBR has facilitated companies by dividing their outstanding liabilities into three tranches, he added. For the current fiscal year, the government and the IMF have given the FBR a Rs14.13 trillion tax target. Collections have already fallen short of the original target by Rs640 billion and of the downward revised target by Rs429 billion during the first eight months of the fiscal year.
The Rs8.125 trillion collected during July-February included Rs225 billion recovered in various court cases, including the super tax, officials said. IMF Mission Chief to Pakistan Iva Petrova said during these meetings that such one-off payments may be excluded from the next fiscal year’s tax base to determine a relatively realistic target, saidsources.
Tax authorities are of the view that the remaining super tax collection will become part of the next fiscal year’s tax base. This sum will be included in the calculation of advance income tax.
The effective super tax rate is more than 10%, as the FBR includes other taxes, such as dividend tax, in its calculation of the super tax.
