Taxatio reforms in Khyber Pakhtunkhwa

Taxation reforms in KP
By Tahir Ali
The Khyber Pakhtunkhwa government several has suggested several amendments to the relevant laws and revised the ratio of taxes in the 2014-15 budget.
It wishes to amend the first schedule of the sales tax act which will enable it to bring some more sectors in the tax net.
Rather than going for robust industrial revival and economic growth to increase its revenue, KP has opted for raising the ratio of tobacco development cess, land tax, agriculture income tax, professional tax and other taxes, levies, fees, duties and royalties such as the stamp duty, parking fees, route permits and royalties on forests for the purpose.
KP will generate provincial own receipts (PORs) of Rs28.78bn against current year’s Rs20bn. The PORs consist of tax receipts of Rs19.45bn (67.6%) and non-tax receipts of Rs.9.327bn (32.4%). Tax receipts include 11.8% direct taxes and 88.2% indirect taxes.

However the PORs will only be seven per cent of the total revenue receipts of the province as usual. PORs are projected to increase to Rs32.5bn and Rs36.6 in the next two years.

PORs include direct taxes like taxes on agriculture, property, land revenue etc, indirect taxes like GST on services, provincial excise, motor vehicle tax, stamp duties etc, and non tax receipts like income from property and enterprises, civil administration and economic, community and social services.

To improve tax collection, tax facilitation centres to be set up in Peshawar and other big cities. And Patwaris, who play pivotal role, have been given 50 per cent pay raise and Rs500 stationary allowance to discourage corruption and improve agriculture/land tax collection.

Agriculture tax
KP has been collecting direct taxes -Land Revenue (water tax or Abiana), agriculture income tax (AIT) and Land tax (LT) –and non tax heads (user charges) from farming community.

AIT/LT is collected by the Revenue and Estates department while LR is collected by the irrigation department through the patwaris from the farmers.

The AIT is collected on different rates from the owner, mortgagee or lessee or the tenants and levied on income from cultivated land while LT at a fixed rate over and above the exempted 12/5 acres of land under crops and orchards. Their rates have however been revised.

Target for AIT/LT and LR has been fixed at Rs79mn and Rs1.4bn against Rs22mn and Rs1.1bn budget estimates of the current year.

The exemption from AIT has been raised from Rs0.1mn to Rs0.4mn. 5 percent AIT would be collected from every owner of agriculture land if his income is over Rs0.4mn but doesn’t exceed Rs0.55mn. Where income exceeds Rs0.55mn but not Rs0.75mn, land owners will pay Rs7,500 plus 10 percent on the amount over Rs0.55mn. And when the income goes above Rs0.75mn but not Rs0.95mn, the owner will pay Rs22,500 plus 10 percent tax on the amount exceeding Rs0.75mn.On agriculture income between Rs0.95mn and Rs1.1mn, Rs42,500 plus 15 percent tax on the exceeding amount. And a land owner will pay Rs65000 tax plus 17.5 percent if his income exceeds Rs1.1mn.

Similarly, the rate for LT has been increased from Rs72 per acre over and above the exempted 12/5 acres of land under crops to Rs225-340 and to Rs900 from Rs300/acre for orchards.

Urban immoveable property (UIP) tax

The government has also revised and extended the scope of property tax. A proper survey will be conducted to properly determine property tax.
Earlier, 2 per cent capital value tax had been imposed on the transaction of UIP (residential flats and multi-storey buildings) but the 2 per cent tax had not to be less than Rs10 per square feet of constructed area. The condition has been waived and it will now be levied according to the classifications of constructed area.
Similarly, the ‘low’ ratio of UIP tax on houses of 15-20 marlas will be increased for houses on 18 marla or above.
Immovable properties have been divided into 12 categories. An owner of upto 5 marlas house (other than self-occupied) in category A, B and C (townships) in Peshawar will pay Rs1000, Rs 900 and Rs750 in UIP respectively. Owners of over 5 marlas will pay UIP tax of Rs1700, Rs1600 and Rs1500, owners of 10 marlas will pay Rs2200, Rs2100 and Rs2000, owners of 15 marlas house will deposit Rs3300, Rs3200, and Rs3000 while those with 18-20 marlas houses and flats will pay UIP tax of Rs10000, Rs9000, Rs8000 the three categories respectively.
Any land or building used for mobile towers or antennas which pays UIP tax at flat rate of 20 per cent of their annual rent will give Rs40000 annual tax in provincial, Rs30,000 in divisional and Rs20000 in district headquarters.
Critics opine that for the first time in the history of Pakistan, UIP tax will be extended to the suburbs at the district level in the KP budget (however this decision has been withdrawn in the finance act, 2014-15 passed by the provincial assembly)
The employees of grade 1-5 have been exempted from the tax. All government employees from scale5-22 will be giving annual tax between Rs100 and Rs2000.
Professional tax
Almost all professionals, business and services, with exclusion of lawyers, like chartered accounts, transporters, money changers, jewellers, cable operators, tobacco whole sellers, and businesses like petrol/diesel/CNG stations, real estate shops/ agencies vehicle service stations, printing presses etc will be in the tax-net now.
The professional tax threshold has been increased from Rs6000/pm to Rs10000 a month but as minimum monthly pay has also been fixed at Rs12000/pm ( as per the finance act, the minimum pay has been increased to Rs15000), practically all are to be taxed.
Those earning Rs10,000-Rs20,000/month will pay professional tax of Rs330 while the tax will be Rs435, Rs600, Rs800 and Rs1,000 respectively for those earning Rs20,000-Rs50,000, Rs Rs50,000-Rs100,000, Rs100,000-Rs200,000 and Rs200,000-Rs500,000/month.
The private limited companies, modarbas and mutual funds etc with paid-up capital and income of Rs10mn per annum in the previous year will pay tax of Rs18000 and Rs100000 if their income is over Rs200mn.
Persons owning factories, commercial establishments, private educational institutions and private hospitals will also pay tax. Any commercial establishment having 10 or more employees will pay tax of Rs10000 and private hospitals with 50 employees will pay Rs50000 tax a year.
Private business education institutes with 100 students will pay Rs70000 tax. Private law, medical and engineering colleges running degree programmes will pay Rs100000 tax, while educational institutes taking Rs5000 monthly fee from students have to pay Rs100000 annually.
Holders of import/export licence who earn Rs50000 in previous year will pay Rs4000 tax. A clearing or custom agent will pay Rs10000 and restaurants/guesthouses owners, professional caterers, travel agents and hajj/tour operators will pay Rs15000 tax while wedding halls owners Rs30000 annual tax.
Specialist doctors will pay Rs20000 while dentists Rs15000 professional tax a year. Diagnostic and therapeutic centres and pathological and chemical laboratories will also be taxed.
Experts say by directly collecting income tax from professionals and commercial entities, the KP government is intruding into the domain of the federal government which is exclusively authorised to collect income tax.
It is still not clear whether these taxes on employees and professionals would be in addition to the income tax?
It is merits mentioning that under the Finance Act 2013, KP had finalised arrangements to impose the infrastructure development cess but could not do so following objections from the federal government.
After the 18th amendment, excise duty on oil was to be imposed under Article 161(1)(b) of Pakistan’s constitution but it is yet to be levied. Khyber Pakhtunkhwa could receive Rs14.6bn on this count.
While the government claims it wishes to provide relief to the poor and collect tax only from the rich, these measures may ultimately burden the common men and will be resisted by the businessmen, farmers and the working class impacted by slump in business and price-hike.