The so-called civilian government, commanded and controlled by army establishment, has shown no willingness in framing a people-friendly tax policy by taking some positive steps to remove the ever-increasing burden of indirect taxes on the poor and taxing the rich and the mighty.
GOALS AND ACHIEVEMENTS: Mr Shaukat Aziz while presenting the budget for 2003-04 in his budget speech expressed a futuristic vision, saying: "The budget for 2003-04 is part of a three year macro-economic framework, covering the period 2003-2006, that sets the goals for major economic variables of the country." The main features for the realisation of the goals set out were:
1. GDP growth will rise to 6% in the year 2005-06; [remarkably it surpassed 8.4%]
2. Inflation, on average, will be contained at less than 4%; [unfortunately it is as high as 9% according to official figures but independent sources estimate at 12% to 15%]
3. Gross investment to GDP ratio will be increased to 18%; [it is 16.9%]
4. Fiscal deficit will decline to 3.0%; [the target has been achieved]
5. Current account deficit will be contained to 1.8% of GDP; [it slipped into red and stood at $1.358 billion this year whereas in the last three consecutive years there were substantial surpluses]
6. Foreign exchange reserves will be maintained for a minimum of 28 weeks of imports.
[In the aftermath of 9/11 there is unprecedented inflow of foreign remittance and reserves touched an all time high figure of US $13 billion]
The Budget 2005-06 has proved his performance beyond anyone's expectation, even far better than what he promised in 2003. He deserves kudos for his extraordinary efforts to achieve what he visualised two years back. However, the cost of higher growth rate and increase in taxes has to be seen in its socio-political perspective as well. One-third of our population is now living below the poverty line.
The provinces, starving and resource-hungry, are critical of the highhandedness of federal "fiscal terrorism". They are constantly deprived of their due share in taxes collected by the federal government.
Despite tall claims by the government, life of the common man is becoming more miserable every passing day. The benefits of "wonderful growth" have not yet trickled down to the poorer sections. They are still "the Earth's Wretched". The rich are enjoying the life of unprecedented luxury and the State authorities are merely serving the interest of the military-civil bureaucracy, politicians and businessmen.
The oppressive tax system, irrational tax policies, renewed emphasis on indirect taxes, enlargement of the scope of Sales Tax and withdrawal of investment-related tax incentives are disturbing realities. There is an urgent need to devise a rational, business and people friendly, consistent tax policy through public debate, after securing the consent of all the stakeholders.
The Finance Bill has nothing to offer in this direction. It dictates the policy guidelines of the IMF and the World Bank aimed at privatisation of national assets, consumerism, free trade in favour of the rich countries and miseries for the poor classes. Our rulers should tell us how these policies are in our national interest.
TAX REFORMS: There has been much emphasis on "tax reforms" for the last many years, but nothing significant has been achieved so far except promulgation of new tax codes. The problems of good governance, transparency and issues relating to protection of taxpayers' rights persist with greater magnitude.
The introduction of new law on Excise duties was never debated in the public or parliament. The government did not learn any lessons from the experiment it did by hastily introducing the Tax Ordinance 2001 on September 13, 2001 which, according to experts and administrators was a useless exercise.
According to Mr Shaukat Aziz the most credit-worthy item of so-called tax reform has been the new Income Tax law in which so far over 900 amendments have been inserted since its promulgation. It is a unique peace of law that was inflicted with massive changes [339 amendments] even before coming into operation on 1st July 2002!
Remarkably the Finance Bills 2003 & 2004 were passed by the National Assembly in the shortest recorded time of Pakistan's parliamentary history and received the President's assent without any delays. In view of this established practice, it can be predicted that Finance Bill will also be approved by the worthy members without reading it!
The most sweeping tax administration reform, according to worthy Minister of State, is restructuring of apex revenue authority, Central Board of Revenue (CBR). The Minister could not elaborate how agenda for tax reform can succeed without the active participation of stakeholders. It is one-sided bureaucratic exercise. In the budget making process there was no input from any committee of the parliament which exposes the claims of "democracy is working well in Pakistan"
The worthy Minister of State has proved himself ignorant and naïve in claiming that the new tax codes represent a revolutionary advance in instituting a modern tax system in the country where discretionary powers of tax authorities are minimised, presumptive and non-adjustable taxes have been gradually removed, self assessment is allowed for all types of incomes, audit is the main instrument of discouraging misreporting and discrimination against different classes of taxpayers has been eliminated.
There cannot be a better example of proving oneself unapprised as well as a simpleton. The taxpayers have already suffered irreparable damage, acute pain, unexplainable agony and financial suffering by unprecedented abuse of section 122 of the Income Tax Ordinance, 2001 by the tax officials. One wonders if the Minister is really aware of the ground realities. The new Income Tax Ordinance gives unparalleled discretionary and arbitrary powers to tax officials.
The litmus test to gauge results of tax reforms (sic) is to determine whether there has been an increase or decrease in litigation. All the available data and indications show that taxpayers have had to pay higher cost of compliance in recent times as new laws, procedures etc are forcing them to engage the services of expensive consultants.
The reform agenda of the Government is proving very beneficial to the tax experts and tax officials, but the same is not true for the taxpayers and the common people. The taxpayers have yet not reaped any benefit of tax reforms and the following are still unrealised dreams:
1. Alternate Dispute Resolution Mechanism.
2. Refund of Income Tax, Sales Tax and Customs Duty.
3. Transparency in Sales Tax audits.
4. Any assistance from State for tax compliance.
The Central Board of Revenue (CBR) failed to produce an authentic version of Finance Bill 2005 on June 6, 2005. The text provided on its website www.cbr.gov.pk and in the printed form contained a lot of errors. The prestigious business and financial daily Business Recorder carried out the following story about the apathy of CBR:
WELL DONE, CBR! The apathy of a government institution can be judged from the fact that budget speech was not available on CBR website till 12 midnight on June 6/7, 2005. On the other hand, Central Board of Revenue had launched an advertisement campaign, particularly for information pertaining to federal budget (2005-06) initiatives from 9.00 am to 9.00 pm on June 6. But, there was no response from the 'helpline 0800-227' given in the ad. Business Recorder correspondent tried his level best to contact CBR officials on other telephone numbers given in the ad, but in vain. Nobody even bothered to receive the telephone call. The tax managers might have been overburdened by the Finance Bill exercise!
THE NEXT DAY CBR CLARIFIED THE ISSUE AS UNDER: "The budget proposals, including Finance Bill 2005-06, SROs, rules and procedures were timely available on CBR official website. However, it was not the responsibility of CBR to place the budget speech on the website, as it did not relate to tax officials".
The CBR, for the first time, had not only given complete set of budget documents to the journalist community on budget evening, but had also given a CD of budget documents. CBR officials also clarified tax proposals to reporters after the announcement of budget speech to ensure accurate reporting of taxation measures by economic reporters.
Obviously, the people interested in the budget speech should either have contacted the Ministry of Finance or PID. CBR officials told Tax Review that over 5,000 people had downloaded the budget from CBR website on June 6, 2005.
In the text of Finance Bill 2005, as posted on website of the CBR, after clause 3(8) there are missing parts. After proposed amendment in section 19A of the Customs Act there is a sudden jump to changes proposed in section 215 [through clause 3(47)]. This is quite baffling. The official website is still showing proposed amendment in the form of 6% withholding tax on locally-manufactured cars and 7.5 percent excise duty on fees and commission being charged by banks for services rendered on issuing letters of credit, guarantees, brokering and foreign currency dealings.
According to Business Recorder of 8th June 2005 both these proposals were part of Finance State Minister's speech but were withdrawn as were not approved by the Cabinet. It shows the indifferent attitude of the high-ups in Ministry of Finance towards a vital assignment to give authentic version of fiscal proposals to Parliament. It badly reflects on the performance of the entire government machinery. On June 7, 2005 at 10.am we managed to obtain the official version from the Cabinet Division, which is now available at our website, www.paktax.com.pk.
Interestingly all the leading newspapers published the official version of Finance Bill 2005 as posted by CBR on its website without taking note of the fact that it contained a number of errors and even those proposed amendments which were not approved by the Cabinet.
ANALYSIS OF AMENDMENT IN DIRECT TAXES:
1. Wealth tax
REPEAL OF WEALTH TAX ACT, 1963: The operation of Wealth Tax Act, 1963 was suspended in 2000. But there existed some doubts regarding its revival as it was not specifically repealed. The Finance Act 2003 provided the repeal of the Wealth Tax Act, 1963 to dispel any doubt of its possible revival in future. Section 3 of Finance Act, 2003 specifically repealed the Act (XV) of 1963 with the following savings:
a) The repeal will not affect the liability of any taxable entity to pay wealth tax, additional tax, penalty, surcharge, fee or any other chargeable sum in respect of any assessment year on or before the 30th day of June, 2001.
b) Any investigation, legal proceedings or litigation already pending.
c) In respect of pending proceedings, the jurisdiction of Wealth Tax authorities will be construed as still in tact notwithstanding the repeal of Act.
The Finance Bill 2005 has proposed certain changes in section 3 of the Finance Act 2003, which seek to provide facility of Alternate Dispute Resolution (ADR) in wealth tax cases. The Bill says that after clause (b) a new clause (c) should be inserted.
The draftsmen have failed to take note that clause (c) already exists in section 3 of the Finance Act, 2003. Legal drafting is waterloo of CBR and Ministry of Law as both lack any expertise in the matter. They should acquire the services of some qualified persons.
The proposed amendment facilitates an aggrieved person to opt for ADR in connection with any matter of tax pertaining to liability of wealth tax, admissibility of refund, waiver or fixation of penalty or fine, relaxation of any time period or procedural and technical condition. He may apply to the CBR for the appointment of a committee for the resolution of any hardship or dispute mentioned in detail in the application.
The Central Board of Revenue, after examination of the application of an aggrieved person can appoint a committee consisting of an officer of income tax and two persons from a `panel consisting of Chartered or Cost Accountants, Advocates, Tax Practitioners or reputable taxpayers for the resolution of the hardship or dispute.
The committee constituted under clause (d) shall examine the issue and may, if it deems necessary, conduct inquiry, seek expert opinion, direct any officer of Income Tax or any other person to conduct an audit and make recommendations in respect of the resolution of dispute as it may deem fit. On the recommendation of the Committee the CBR will pass such order, as it may deem appropriate.
The aggrieved person will make the payment of wealth tax and other taxes as determined by the CBR in its order and all decisions, orders and judgements made or passed shall stand modified to that extent and all proceedings by any authority shall abate.
However, in case the matter is already sub-judice before any authority or tribunal or the court, an order passed by the Board in the light of recommendations of the committee shall be submitted before that authority, tribunal or the court for consideration and orders as deemed appropriate. In case the taxpayer is not satisfied with the said order, he may continue to pursue his remedy before the relevant authority, tribunal or court as if no such order had been made by the Board.
The CBR by notification in the official Gazette may make rules for this purpose.
2. CAPITAL VALUE TAX: With a view to facilitating the process of privatisation, sale of assets of Kot Addu Power Station have been proposed to be exempted from payment of capital value tax and this facility will be deemed to have been available with effect from 27th June, 1996.
3. INCOME TAX:
3.1 SECTION 2(1) - DEFINITIONS: A grammatical error has been removed. The word "includes" was originally used with the expression "accumulated profits", whereas it should have been "include". We pointed out this mistake in our books and CBR, after three years took note of it! Anyhow it is better late than never.
3.2 SECTION 2(1A) - AMALGAMATION: This proposed amendment aims at extending the scope of benefit of amalgamation to all the companies. Presently it is available only to banking companies, non-banking financial institutions or insurance companies. It will promote the culture of amalgamation/mergers/acquisitions. The time-frame has also been waived and condition for availing the benefit till 30th June 2006 is proposed to be deleted. With this amendment the regime has been liberalised which was the need of the hour to promote corporatisation in the country.
3.2 SECTION 2(3A)-(3C) - APPROVED ANNUITY PLAN/FUND: Three new clauses [(3A), (3B), (3C)] have been proposed. These have wrongly been mentioned as sub-sections in the Bill. Section 2 has no sub-sections. This mistake has been repeated time and again. It is hoped that the Act will be free of this mistake.
The amendments propose definitions of annuity plan which is to be approved by the Securities and Exchange Commission of Pakistan (SECP) to offer pension funds for the benefit of employees and other persons. We have already published a detailed article on the subject in our Weekly Tax Journal which can be viewed at www.paktax.com.pk
3.3 SECTION 2(13B) - CONTRIBUTION TO APPROVED PENSION FUND: Proposed amendment by way of an approved pension fund vide section 2(3C) is linked with this amendment to provide that contribution in such a fund will be as defined in rule 2(j) of the Voluntary Pension System Rules 2005. However, an upper ceiling of Rs 5000 in a tax year is provided.
3.4 SECTION 2(19A) - ELIGIBLE PERSON: For the purpose of Voluntary Pension Fund the eligible person is defined as an individual Pakistani who has obtained a valid National Tax Number. It excludes any individual who is entitled to get benefit under any other approved pension or annuity scheme.
3.5 Section 2(24) - financial institutions
The term "financial institution" was wrongly defined to mean an institution notified under the Companies Ordinance 1984. We pointed out in our book, Law and Practice of Income Tax that there are no such institutions notified under the said law. Now the word "notified" is proposed to be substituted with "as defined".
3.6 SECTION 2(29) - INCOME: In the word 'income' there is a reference of section 156 (deductions on prizes and winnings). The proposed amendment substitutes the word and figure "and 156" with figures and letters "150, 152(1), 156, 156A, 233 and 233A". Proposed inclusions are related to dividends, certain payments to non-residents, petroleum products, brokerage and commission and collection of tax by the Stock Exchanges.
According to the official version, the purpose of this amendment is to include certain categories of income in the definition clause not previously mentioned.
3.6 SECTION 2(29B) - INDIVIDUAL PENSION ACCOUNT: It is defined as an account maintained by an eligible person [2(19A)] with a pension fund manager [2(40A)]approved under the Voluntary Pension System Rules 2005.
3.7 SECTION 2(29C) - INDUSTRIAL UNDERTAKING: This expression has been defined first time in the new Ordinance in the definition clauses. The implication is simple that it will apply to the whole of the Ordinance wherever this expression is used unless there is anything contrary in the subject or context. The definition has been taken verbatim from section 48 of the repealed Income Tax Ordinance 1979.
In addition to specific definition mentioning certain conditions, the CBR is empowered to notify any other industrial undertaking for the purpose of this definition.
3.8 SECTION 2(40A) - PENSION FUND MANAGER: This expression has been borrowed from Finance Companies (Establishment and Regulation Rules 2003) as well as from Insurance Companies Ordinance 2000. An asset management company or a life insurance company as authorised by the SECP can act as pension fund manager.
3.9 SECTION 2(47)(A) (B) - PUBLIC COMPANY: At present, a company in which any number of shares are held by a foreign government, or a foreign company owned by a foreign government falls in the category of public company. The amendment proposes to put the condition of having at least 50% of shares to qualify for this definition.
3.10 SECTION 2(59A) - SMALL COMPANY: The proposed new definition is very significant as such a company will have a preferential tax rate of 20%. Small company is defined to mean a company registered on or after 1st July 2005 under the Companies Ordinance 1984 having paid-up capital plus undistributed reserves not exceeding Rs 2.5 million and has an annual turnover not exceeding Rs 200 million. To qualify under this category the company should not be formed by the splitting up or the reconstitution of the business already in existence.
There has been a demand to promote corporate entities in the country to encourage formal and documented businesses. This is a positive move towards corporatisation of economy.
However, the conditions required for qualifying as small companies are quite stringent and businesses within this range are paying much lower rate of tax on their profits.
3.11 SECTION 22 - DEPRECIATION - REMOVAL OF LIMIT OF RS. 1.0 MILLION: Since limit of claim for depreciation in respect of a passenger transport vehicle at Rs 1 million is removed, consequently the method of calculation of terminal profit/loss on disposal in this sub-section is also proposed to be deleted
3.12 SECTION 57A - SET-OFF LOSSES ON AMALGAMATION: The scope of set-off of business losses consequent to amalgamation has been extended two-way and the scope is enlarged in respect of any scheme of amalgamation under any court order.
3.13 SECTION 59B - GROUP RELIEF: In the scope of undertakings entitled to group relief, the undertakings engaged in providing services have also been included.
3.14 SECTION 62 - INVESTMENT IN SHARES: The limit in investment in shares is proposed to be enhanced to Rs 150,000 from Rs 100,000.
3.15. SECTION 63 - CONTRIBUTION TO AN APPROVED PENSION FUND: The proposed substituted section 63 covers a wide range of contributions in respect of an eligible person as defined in section 2(19A) who derives income under the head "Salary" or "Income from Business", to get rebate for such contribution.
SECTION 80 - PERSON: A new clause (ix) is proposed to include a "small company" as defined in section 2(59A).
3.17 SECTION 113B - TAX ON INCOME OF CERTAIN RETAILERS: Proposed new section extends the scope of presumptive taxation on certain retailers. It seeks to levy final tax @ 1% of turnover on retail sales of textile fabrics and articles of apparel, including ready-made garments or fashion wear, articles of leather including footwear, carpets and sports goods by an individual or an AOP, if the turnover exceeds Rs 5 million for any tax year.
3.18 SECTION 114 - RETURN OF INCOME:
Amendment seeks to relax the condition for mandatory filing of return by omitting reference to telephone subscribers, owners of motor cars, members of clubs and persons who undertake foreign travel. A new sub-section (2A) is proposed facilitating electronic filing of return. This is a great leap towards modern on-line tool that is already in use in many advanced countries. Confirmation of digital signatures will now be possible with the establishment of competent authority. The CBR has rightly and timely proposed this amendment to keep pace with the changing times.
3.19 SECTION 115 - PERSONS NOT REQUIRED TO FURNISH RETURN:
Salaried persons have been absolved from filing a certificate if his employer has furnished the annual statement of income tax as prescribed. This will save a lot of unnecessary paper work and duplicate filing of the same particulars.
In sub-section (4) of this section the category of new retailers covered under 113B have also been included.
3.20 SECTION 120 - ASSESSMENTS:
A new sub-section (1A) is proposed empowering a CIT to select a person for audit under section 177 after return is accepted as declared.
3.21 SECTION 124 - APPEAL EFFECT ORDERS:
A proviso is proposed after sub-section (2) to the effect that limitation shall not apply where appeal or reference has been preferred against the order setting aside assessment passed by a Commissioner (Appeals), Tribunal or a High Court.
3.22 SECTION 129- DECISION BY COMMISSIONER (APPEALS):
The Commissioner (Appeals) is authorised to set-aside an assessment order. This power is proposed to be taken away. In case this amendment is approved by the Parliament, the Commissioner will not be able to set-aside any case even where some procedural lapse is committed by the assessing officer. In this instance he will have to cancel or annul the assessment which will be a great blow to the Department. It appears that CBR has realised that orders creating obnoxious demands are set-aside by the Commissioners for de novo consideration whereas these should either be confirmed or cancelled. It is a strange move as it can be detrimental because Commissioners (Appeals), being under the direct control of CBR will be more inclined to confirm even the most obnoxious orders under the pretext of no power to set-aside the same.
This proposal may be well-intentioned but under the existing state of affairs the Commissioner (Appeals) may be at a loss to annul orders involving huge revenue even though such orders may be arbitrary. Any categorical decision is no doubt required to bring certainty but justice demands that the first appellate authority exercising such power should be independent of administrative control of CBR.
3.23 SECTION 133 - DIRECT REFERENCE TO HIGH COURT:
The existing section is proposed to be modified to the extent of direct reference instead of going through the Tribunal.
3.24 SECTION 134 - APPEAL TO SUPREME COURT:
Omission of this section is proposed with the official version that it aims at "removing superfluous right of appeal to the Supreme Court". The intention appears to be that since Article 185(3) of the Constitution of Pakistan provides appeal against such orders of the High Court there is no need to provide a similar kind of appeal through certification process of the High Court.
3.25 SECTION 134A - ALTERNATE DISPUTE RESOLUTION:
Amendments have been proposed in this section to the following effect:
(a) The condition of notifying a panel is removed.
(b) It is clarified that if a taxpayer is dissatisfied with the order of the CBR he may continue to pursue his remedy before the relevant authority, tribunal or court as if no such order has been made.
3.26 SECTION 148(9) - DEFINITION OF "INDUSTRIAL UNDERTAKING":
The definition of an "industrial undertaking" for the purpose of section 148 is omitted as the same is proposed in section 2.
3.27 SECTION 153 - PAYMENTS FOR GOODS AND SERVICES:
The term "service providers" is clarified, separate treatment for power projects and turn-key projects is abolished and "small company" as defined in section 2(53A) is absolved from withholding tax on payments.
It also proposes to omit manufacturers/suppliers of goods from the presumptive tax regime.
3.28 SECTION 156B - WITHDRAWAL OF BALANCE UNDER PENSION FUND:
Proposed insertion of this new section aims at providing withholding tax in case of withdrawal of balance under pension fund before the retirement age. Retirement age, not being defined, can be a future source of litigation.
3.29 SECTION 176 - NOTICE TO OBTAIN INFORMATION:
Proposed amendment aims at removing the lacuna that information can only be sought in respect of tax imposed and not leviable. Now information can be required related to any tax leviable. The person from whom information is required is proposed to communicate the same electronically in any computer-readable format.
3.30 SECTION 231A - CASH WITHDRAWAL FROM A BANK:
Proposed section imposes withholding tax liability for cash withdrawal exceeding Rs 25,000. The rate will be 0.1% of the amount withdrawn. Waiver is provided to the Federal Government, provincial governments, diplomats and persons producing certificates that their income during the tax year is exempt. This is an adjustable tax and aims at broadening the tax base.
3.31 SECTION 233 - BROKERAGE AND COMMISSION:
Proposed substitution of section 233 does not intend any material change and is merely aimed at rephrasing the provision making it more simple to comprehend.
3.24 SECTION 233B - PURCHASE OF NEW MOTOR CARS:
Advance collection of tax was proposed at the rate of 6% of the amount paid as price on purchase of a new motor car from a local manufacturer. However, the Cabinet did not approve the proposal from the CBR. The text of Finance Bill at CBR's website continues to show it a proposed amendment.
3.33 SECTION 239 - SAVING:
Proposed amendments in this section are either aimed at removing drafting errors or in respect of sub-section (12) and (13), to confirm that notifications issued under section 50 of the repealed Ordinance shall remain in force unless amended or modified.
3.34 AMENDMENT IN FIRST SCHEDULE:
The following significant amendments have been made in the First Schedule:
a) Concessional tax rates in the case of salaried persons are now provided in the form of a new table and rebate concept in Part III of the Second Schedule has been merged in this Schedule.
b) Uniform tax rate of 20% is provided in the case of small company as defined in section 2(53A).
c) Reduced rate for cotton supply is omitted.
d) For the purpose of uniformity of rates on contracts, 6% tax is to be withheld from the gross amount payable to a resident person, PE of a non-resident person.
e) 5% withholding tax in the case of indenting commission agents, advertising agents and yarn dealers. In all other cases 10% from the gross commission or brokerage.
f) In the case of pre-paid telephone cards, 10% of the amount of sale price of the card and in the case of post-paid telephone bill where the monthly bill exceeds Rs 1000, 10% of the amount.
3.35 AMENDMENTS IN SECOND SCHEDULE:
In Part I of the Second Schedule the following significant amendment has been made:
a) New clauses (53A) is proposed exempting the perquisites of an employee by way of concessional passage provided by airlines to their members and their dependents, free or subsidised food provided by restaurants to their employees during duty hours. In the like manner free and subsidised education provided by an educational institution to the children of its employees and free or subsidised medical treatment provided by a hospital or clinic to its employees. The CBR is entitled to notify any other perquisite or benefit for exemption under this clause.
b) In clause (57) exemption is extended to a pension fund approved by the SECP.
c) In clause (61), the concept of direct deduction in respect of donations has been proposed rather than allowing rebate/allowance on average tax rate. Certain relief funds no longer in operation have been omitted. A proviso is proposed at the end of the clause aiming at limiting donation in the case of an individual or AOP up to 30% of the taxable income for the year; and in the case of a company 15% of the taxable income.
d) A new clause (133A) is proposed exempting any income derived by an individual from transfer of his membership rights or shares of a Stock Exchange in Pakistan to a company between 1st July 2005 and 30th June 2006.
IN PART II:
(a) Clauses (1), (7) and (8) are proposed to be omitted.
(b) In clause (3) reduction of tax in respect of engineering contracts is proposed to be withdrawn.
(c) Clause (9) is proposed to be substituted to provide 1% withholding at import stage of all fibres, yarns and fabrics excluding pure cotton or its yarn or fabric.
(d) Substitution is proposed for clause (13) to collect tax at importation of edible oils at the rate of 3% and in the case of condemned ships at the rate of 1% as increased by Customs and Sales Tax, if any.
(e) New clause (22) proposing reduction of income tax by 1% in respect of companies getting enlisted on any Stock Exchange of Pakistan from 1st July 2005 to 30th June 2006.
IN PART III:
(a) Deduction in tax liability of salaried person available is omitted as the same is incorporated in the First Schedule.
b) In respect of researchers or full time teachers rebate is enhanced from 50% to 75%. Interestingly the words "equal to 75% of the tax payable after the afore-said reduction" are faulty because after the proposed omission of sub-clause (1) of Part III the words "after the afore-said reduction" has lost its meaning.
c) For a taxpayer aged 65 or more reduction of 50% of tax payable was restricted if his taxable income did not exceed Rs 300,000. This limit is proposed to be enhanced to Rs 400,000.
IN PART IV:
a) Provisions relating to exemption of unexplained income or assets have been provided at one place by proposing substitution of clause (5).
b) Clause (11) is proposed to be substituted bringing at one place the companies/persons to which section 113 regarding minimum tax shall not apply.
c) Many clauses stand omitted after these proposed substitutions/re-arrangement.
d) Clause (40) proposed to be omitted keeping in view judicial pronouncements that no tax could be recovered from importers-cum-suppliers once tax is deducted at import stage.
e) All clauses concerning non-application of section 148 have been grouped together resulting in omission of some clauses.
f) Waiver from section 205 is provided to telecom companies for default of not collecting tax under section 236 on sale of pre-paid cards during tax year 2004 if the amount not collected is deposited within three months.
g) Provisions regarding non-application os section 151 have been grouped together.
3.36 AMENDMENTS IN THIRD SCHEDULE:
(a) Proposed amendments seek to change the entire rate structure of depreciable assets.
(b) Different rates are now provided at a uniform rate of 10%.
(c) Rate on furniture (including fittings), plant and machinery (not otherwise specified) enhanced from 10% to 15%.
(d) Rate of technical and professional books reduced from 20% to 15%.
(e) Different rates for ships in accordance with aging have been uniformed at 15%.
3.37 AMENDMENTS IN FOURTH SCHEDULE:
New clause (6A) is proposed providing exemption to insurance companies in respect of Capital Gains up to tax year ending on the 30th June 2007 in respect of shares of listed companies, modaraba certificates, vouchers of PTCL issued by the Government of Pakistan and instruments of redeemable capital.
3.38 AMENDMENTS IN SEVENTH SCHEDULE:
Various proposals seek to restructure different categories of exports for the purpose of application of different reduced withholding tax rates.
SALES TAX ACT, 1990: In the Sales Tax regime the government has not reduced the exorbitant rate of 15% that is causing inflation and is pushing the middle class below the poverty line. The amendments proposed are conventional in nature and do not reflect any positive thinking to make VAT a rational tax in the Pakistani scenario. We have prepared an executive summary of amendments proposed in the Sales Tax Act 1990. Detailed section-wise analysis will be presented after adoption of the Finance Bill by the Parliament.
1. SECTION 2(2A)--CONCEPT OF "DEFAULT SURCHARGE":
1.1 In clause (2A) of section 2, for the words "additional tax" the words "default surcharge" is proposed. This expression is defined in section 2(6B) as under:
"(6B) "Default Surcharge" means the surcharge payable by a defaulter at the rate specified in section 34 of this Act.
1.1.1 The idea behind this proposal is to overcome the recent judgement of the honourable court that no additional tax can be levied where there was no wilful default or issue involved entailed honest disagreements on the interpretation of law. Now by proposing change in nomenclature the intention is to make payment mandatory as "default surcharge". The test of wilful default has been removed by proposing a substituted section 34.
1.1.2 Expression "additional tax" wherever appearing in the Sales Tax Act has been proposed to be substituted with "default surcharge".
2. SECTION 3AA-RETAIL TAX:
2.1. In section 3AA, a proposal is made that "the Federal Government may, subject to such conditions and restrictions as it may impose, by notification in the official Gazette, declare that in respect of any goods or class of goods imported into or produced; or any taxable supplies made by a registered retailer or class of registered retailers; the tax shall be charged, collected and paid in such manner and at such higher or lower rate or rates as may be specified in the said notification.
2.2 Sub-section (4) is proposed to be omitted meaning by that a retailer can no more opt for voluntary registration and payment of sales tax.
3. SECTION 7-DETERMINATION OF TAX LIABILITY:
It is proposed that period for adjustment of input tax paid is enhanced from three immediately following tax periods to seven subject to other conditions mentioned in proviso to section 7(1).
4. SECTION 10-EXCESS AMOUNT TO BE REFUNDED:
4.1 The concept of carried forward has been proposed to be abolished.
4.2 Any excess amount of tax shall be refunded to the registered person subject to such conditions, restrictions and limitations as the Board may, by notification in the official Gazette, specify.
4.3 The word "additional tax" is to be substituted with "default surcharge" in sub-section (3).
5. Section 21-deregistration, blacklisting etc
5.1 In sub-section (2), "evaded tax" is to be omitted; and
5.2 After the word "has" the word "otherwise" is to be inserted
6. SECTION 22-RECORDS:
6.1 This section is intended to be rationalised by making a number of changes. In sub-section (1) after the word "purchased" the comma and word ", imported" is proposed;
6.2 The existing clause (c) is to be re-lettered as clause (d) and for clause (c) re-lettered, the following new clause is proposed,
"(c) records of goods imported shall show the description, quantity and value of goods and the amount of tax paid on imports.
6.3 The existing clauses (d) and (e) are to be re-lettered as clauses (e) and (f), respectively.
6.4 In the proviso, the words "turnover tax or" is to be omitted.
7. SECTION 23-TAX INVOICE: Through proposed amendment, a registered person making a taxable supply may, subject to such conditions, restrictions and limitations as the Board may, by notification in the official Gazette, specify, issue invoices to another registered person electronically and to the Board as well as to the Collector, as may be specified. This will be a great facility.
. SECTION 24-RETENTION OF RECORD ETC: The limitation for keeping old record/documents is proposed to be reduced from five years to three years.
9. SECTION 30A TO 30E-NEW AUTHORITIES: A number of authorities are proposed to be included in the Act as they also perform some functions for the purpose of execution of this law and their non-inclusion was a legal lacuna.
10. SECTION 33-OFFENCES AND PENALTIES: Substitution of the entire section is proposed to provide in tabulated and systematic form the offences and penalties entailed. Please see clause 7(18) of the Finance Bill for details.
11. SECTION 34-SURCHARGE DEFAULT:
11.1 The entire section is proposed to be substituted having inter alia the following salient features:
-- Notwithstanding the provisions of section 11, if a registered person does not pay the tax due or any part thereof, whether wilfully or otherwise, in time or in the manner specified under this Act, rules or notifications issued thereunder or claims a tax credit, refund or makes an adjustment which is not admissible to him, or incorrectly applies the rate of zero per cent to supplies made by him, he shall, in addition to the tax due, pay default surcharge at the rate mentioned below:-
(a) for the first six months of default, the person liable to pay any amount of tax or charge or the amount of refund erroneously made, shall pay default surcharge at the rate of one per cent per month, of the amount of tax due or the amount of refund erroneously made;
(b) from the seventh month onwards, the person liable to pay any amount of tax or charge or the amount of refund erroneously made, shall pay default surcharge at the rate of one and a half per cent per month, of the amount of tax due or the amount of refund erroneously made, till such time the entire liability including the amount of default discharge is paid; and
(c) in case, the default is on account of tax fraud, the person who has committed tax fraud shall pay default surcharge at the rate of two per cent per month, of the amount of tax evaded or the amount of refund fraudulently claimed, till such time the entire liability including the amount of default discharge is paid.
-- For the purpose of calculation of default surcharge,-
(a) in the case of inadmissible input tax credit or refund, the period of default shall be reckoned from the date of adjustment of such credit or, as the case may be, refund is received; and
(b) in the case of non-payment of tax or part thereof, the period of default shall be reckoned from the 16th day of a month (following the due date of the tax period to which the default relates) to the day preceding the date on which the tax due is actually paid.";
11.2 It is quite disturbing to note that an attempt is being made to overturn the recent judgement of the honourable Supreme Court that additional tax should not be levied where there is no wilful default.
12. SECTIONS 35 TO 47-APPEALS ETC:
12.1 certain amendments have been suggested to streamline the appellate functions and judicial powers under the Act. The salient features are:
ADDITIONAL COLLECTOR: Cases falling under sub-section (2) of section 11 and section 36 without any restriction as to the amount of tax involved or amount erroneously refunded.
DEPUTY COLLECTOR: (a) Cases falling under sub-section (1) of section 11.
(b) Cases falling under sub-section (2) of section 11 and section 36 provided that the amount of tax involved or the amount erroneously refunded exceeds one million rupees, but does not exceed two and a half million rupees.
ASSISTANT COLLECTOR: Cases falling under sub-section (2) of section 11 and section 36 provided that the amount of tax involved or the amount erroneously refunded exceeds ten thousand rupees, but does not exceed one million rupees.
SUPERINTENDENT: Cases falling under sub-section (2) of section 11 and section 36 provided that the amount of tax involved or the amount erroneously refunded does not exceed ten thousand rupees.
12.2 The Collector may, suo moto, call for and examine the record of any proceeding under the Act or the rules made thereunder for the purpose of satisfying himself as to the legality or propriety of any decision or order passed by an officer of Sales Tax subordinate to him, and pass such order as he may deem fit.
12.3 In section 45B all the orders passed are now proposed to be included. The condition of "below in rank to Additional Collector' is to be deleted.
12.4 Collector of Sales Tax (Appeals) is now required to pass the order not later than ninety days from the date of filing of appeal or within such extended period as the Collector (Appeals) may, for reasons to be recorded in writing fix. But such extended period shall, in no case, exceed ninety days.
12.5 Recovery of the amount of tax due is suggested to be stayed for a period not exceeding six months following the day on which the fifteen per cent amount of principal tax was deposited, unless the case is finally decided.
12.6 Direct reference has been provided against the orders of the Tribunal to High Court on any law point. Within ninety days of the communication of the order of the Appellate Tribunal under sub-section (5) of section 46, the aggrieved person or any officer of Sales Tax not below the rank of a Deputy Collector may prefer an application in the prescribed form along with a statement of the case to the High Court, stating any question of law arising out of such order.
12.7 Notwithstanding that a reference has been made to the High Court, the tax will be payable in accordance with the order of the Appellate Tribunal. Provided that, if the amount of tax is reduced as a result of the judgment in the reference by the High Court, and amount of tax found refundable by the High Court, the High Court may on application by the Collector within thirty days of the receipt of the judgment of the High Court that he intends to seek leave to appeal to the Supreme Court, make an order authorising the Collector to postpone the refund until the disposal of the appeal by the Supreme Court.
12.8 Where recovery of tax has been stayed by the High Court by an order, such order shall cease to have effect on the expiration of a period of six months following the day on which it is made unless the appeal is decided, or such order is withdrawn, by the High Court, whichever is earlier.
13. SECTION 66-CLAIM OF REFUND: Amendment is sought that the application or claim filed under section 66 shall be disposed of within a period not exceeding ninety days from the date of filing of such application or claim. This is no doubt a very positive change as it will ensure that refund claims are not deferred for unlimited period.
13. SECTION 73-CERTAIN TRANSACTIONS NOT ADMISSIBLE: An amendment is sought to provide that online transfer of payment from the business account of buyer to the business account of supplier as well as payments through credit card will be treated as transactions through banking channel, subject to the condition that such transactions are verifiable from the bank statements of the respective buyer and the supplier.
14. THIRD SCHEDULE: A number of new items have been included in the scope of this Schedule and now these will be subjected to tax in terms of section 3(2)(a) ie @ 15% of the retail price at the very first stage of charge. They fall outside the VAT regime. The new items are:
-- Toilet & laundry soap
-- Detergents
-- Shampoo
-- Toothpaste
-- Shaving cream
-- Perfumery and cosmetics
-- Biscuits
-- Confectionary
-- Tea
-- Powder drinks
-- Milky drinks
-- Footwear
15. SIXTH SCHEDULE:
15.1.1 The entire Sixth Schedule has been proposed to be substituted. See text in Bill.
15.1.2 For the purposes of this Schedule, for entries against which classification of headings or sub-headings has been specified, exemption shall be admissible on the basis of description of goods as mentioned in column (2) of this Schedule. PCT classification of headings is provided for ease of reference and commodity classification purposes only.
15.1.3 For the purposes of determining classification of any goods, the general rules for interpretation of the First Schedule to the Customs Act, 1969 (IV of 1969), and Explanatory Notes to the Harmonised Commodity Description and Coding System (relevant version) as amended from time to time shall be considered authentic source of interpretation.
15.1.4 For the purposes of exemption of sales tax under serial numbers 46, 47, 49, 50, 51, 52, 53, 56, 57, 59, 60 and 62 of this Schedule, the definitions, restrictions, limitations, conditions and procedures and all the provisions of Chapter 99 of the First Schedule to the Customs Act, 1969 (IV of 1969), for the purposes of applying zero-rate of customs duty shall, mutatis mutandis, apply and shall be deemed and construed to be part of this Schedule.