FBR’s tax laws for SMEs are counter-productive

According to the recent article by Business Recorder published on May 18, 2022, Small-medium enterprises and self-employed individuals seem disappointed by the taxation policies of FBR. In the case of salaried individuals, annual taxable income of Rs. 75M and above are taxed at 35%. However, the SMEs and self-employed individuals are taxed at 35% over and above Rs. 6M of their annual taxable income.

The self-employed individuals include professionals like doctors, dentists, lawyers, engineers, accountants, beauticians, fashion designers, tailors, etc. They operate their private ventures as clinics, beauty salons, boutiques, shops, or businesses on sole-proprietorship or partnership.

The provincial governments have also imposed a sales tax rate of 13%-16% on the revenue generated from services. While the federal government has imposed a minimum fixed withholding tax rate of 7% on the revenue generated from these services.

These taxes are imposed upon revenue, and not the income generated from that revenue. The vendors have to pay taxes from their collections before accumulating the amount and managing other finances from that amount.

With that many taxation measures weighing upon the service providers, they have to bear the loss even if they don’t make any income for the year while paying the respective 13% GST and 7% Withholding Tax (WHT) from their savings.

Looking at the burden faced by the SMEs, the FBR has reduced the WHT to 3% from 7% on many services along with the continuation of 13%-16% sales tax. But it is still insufficient as it is getting continuously hard for the professionals to operate the services business profitably.

There is a huge disparity between the taxability of the salaried class and small-medium enterprises. The salaried class is taxed above the annual income of Rs. 600,000 whereas the self-employed class is taxed above an annual income of Rs. 400,000. The self-employed class pays 30% tax on income above 4-6Mn, a further 35% on income above that, and the salaried class pays 20% tax on income above 3.5-5Mn. 

If we add other tax metrics like 13-16% GST then the total tax proportions would be around 50%-70%, and they are barely left with minimum disposable income that would result in making a loss instead of striking a profit. Befiler provides tax consulting and advisory services. The services include NTN, STRN, GST, PST, Company registration, tax returns filing, withholding statement filing, US company formation, and much more. If you are looking for any consultancy and advisory services regarding taxation and compliance then we are just  one step away