Senate Committee Supports Limiting Sales Tax Exemption in Former Tribal Areas

ISLAMABAD: A proposal from the business sector to limit the sales tax exemption in the previously Federally Administered Tribal Areas (ex-FATA) beyond June 30, 2025, received backing from the Senate Standing Committee on Finance and Revenue on Wednesday. The existing sales tax exemption for these areas is scheduled to lapse on that date.

Committee Chairman Saleem Mandviwalla expressed concerns that the exemption puts formal industries, including steel and ghee/cooking oil, at a competitive disadvantage. “We acknowledge the problem, have reached a decision, and will provide a recommendation,” he stated.

The committee convened on Wednesday to commence pre-budget consultations for 2025-26 with various stakeholders, such as the Federation of Pakistan Chamber of Commerce and Industry (FPCCI), Chambers, and Associations.

Key Issues Raised by Business Leaders

Jawed Bilwani, President of the Karachi Chamber of Commerce and Industry (KCCI), drew attention to the unique tax structure in the former FATA region, noting that a significant amount of tea imports are channeled through this area due to considerably lower taxes. He also addressed the issue of reduced duties and taxes on raw plastic industry materials, specifically polyethylene. He asserted that manufacturers are incentivized to import larger quantities of raw materials due to these low taxes, which they then sell at inflated prices.

Bilwani also voiced his concerns regarding the delayed sales tax refunds, which take approximately nine months, despite claims from the Federal Board of Revenue (FBR) that refunds are processed within 72 hours. He emphasized that these delays and advance taxes have significantly escalated the cost of conducting business.

Mandviwalla responded that the FBR had previously informed the committee about its 72-hour refund policy for sales tax. The committee resolved to address this issue during upcoming budget discussions.

Recommendations from Exporters

To alleviate liquidity pressures and streamline operations, exporters advocated for the reinstatement of zero-rating on local supplies to registered exporters under the Export Facilitation Scheme (EFS). They further suggested considering zero-GST on utilities (electricity and gas) for exporters registered in the EFS to improve the availability of necessary liquidity and facilitate smooth cash flow. This measure aims to boost exporter confidence, enhance export capabilities, and strengthen relationships with foreign partners.

Tax Regime Concerns

The business community voiced concerns that the Finance Act 2024’s shift of exporters from the Final Tax Regime (FTR) to the Income Tax Regime (NTR) has increased compliance burdens. They proposed restoring the FTR for exporters to simplify FBR audits, citing the board’s limited capacity. This change would improve ease of doing business and encourage growth in documented sectors.

Additional Issues Raised
  • The Lahore and Gujranwala Chambers of Commerce and Industry addressed the matter of advance tax on exports, stating that the State Bank charges a one percent tax, plus an additional one percent on remittances, proposing a rationalization of this tax.
  • The Sialkot Chamber of Commerce and Industry raised concerns about the elimination of tribunals for sales tax matters up to Rs2 million and income tax matters up to Rs1 million, highlighting the lack of suitable appellate forums for smaller taxpayers. The Committee assured the chamber that it would address this issue in the upcoming budget and emphasized the need to support the rising number of young entrepreneurs, with 600 to 700 new registrations annually.
  • The Rawalpindi Chamber of Commerce and Industry (RCCI) proposed a 15 percent GST in the upcoming budget to aid struggling industries. RCCI President Usman Shaukat suggested providing tax incentives to export-based industries that meet export targets and offering financial support to small and medium enterprises.
  • The Islamabad Women Chamber of Commerce and Industry (IWCCI) urged the government to allocate specific funds for women entrepreneurs in the next budget and called for a reduction in the Rs5 Crore revenue threshold for corporate women, asserting that the existing limit hinders many women entrepreneurs from formalizing and growing their businesses.
  • The Paper and Stationery Association appealed for the removal of taxes on stationery items, recalling a previous government promise to eliminate these taxes. They requested the government to fulfill this commitment to ensure affordable access to educational materials for students.
IT Sector Concerns

The President of the Faisalabad Chamber of Commerce noted that Information Technology (IT) businesses are relocating to Turkey and the UAE due to the lack of a payment gateway, which is negatively impacting export remittances. The committee learned that 30 IT companies from Faisalabad have already moved. He stated that while the country celebrates $2.4 billion in IT exports, the potential is $10 billion and could reach $20 billion if these issues were resolved.

Senators Sherry Rehman, Anusha Rahman Ahmad Khan, Fesal Vawda, and representatives from the Rawalpindi, Karachi, Sialkot, Faisalabad, and Lahore Chambers of Commerce and Industry were in attendance.