In an exclusive talk with Business Recorder here at ICAP office on Wednesday, Chairman Taxation Committee ICAP, Rashid Ibrahim has strongly opposed the Federal Board of Revenue's (FBR) move of forensic audit of cellular companies and banks and proposed to replace higher rates of withholding tax regime for non-filers with recovery from short-filers of returns in budget (2017-18).
Rashid Ibrahim, Tax Leader at AF Ferguson & Co Chartered Accountants and Council Member ICAP, apprehended that there is a strongly possibility of extension in 'super tax' for 2017-18 in coming budget. It is a revenue generation measure which may continue for another tax year. To overcome revenue shortfalls, the FBR has taken harsh taxation measures like super tax.
He also shared the key tax policy proposals floated by the ICAP to the FBR for consideration in the next budget (2017-18). The council member ICAP categorically said that the complexity of tax laws, harsh attitude of tax authorities and inconsistent tax policy are hampering new investors from coming to Pakistan. The ICAP budget proposals for 2017-18 have focused on all key issues including policy reforms.
He said that forensic or investigative audit is conducted in sectors indulged in tax evasion or concealment. Both the telecom and banking sectors are well-documented and very strong IT systems are in place. The FBR should be extra careful to deal with the documented sectors like telecom and banks. The FBR can verify the withholding tax payments and other tax payments of banks and cellular companies through system audit. There is no justification of forensic audit of telecom and banking sector. Under parametric audit selection mechanism, the parameters for selection of cases for audit should be made public. But the random balloting has picked some cases which are now required to be audited and ignored those should be audited.
He said that the ratio of withholding taxes in revenue collection is increasing day by day. The government has given responsibility of collecting withholding taxes on withholding agents without giving them any benefits or service charges etc. The cost of compliance of withholding agents has been considerably increased. The present withholding taxes collected from non-filers are indirect taxes being collected by withholding agents on the behalf of FBR.
Chairman Taxation Committee ICAP further said that the 90 percent of the filers are short-filers and paying less than their actual tax liability. If the FBR focus on recovery from short-filers, there is no need to implement regime of higher rates of withholding tax. It is a flawed tax policy where non-filer is not required to comply with tax laws after payment of higher rates of withholding taxes. Non-filers think that they have discharged their tax liabilities by paying higher rates of taxes. The effective implementation of excising enforcement laws would generate additional revenue for the FBR. At the same time, the FBR must enforce filing of returns by holders of National Tax Numbers (NTNs), Rashid Ibrahim said.
About the excise collection from tobacco sector, he said that both the multinational companies are documented and paying their due share of taxes. Can you imagine that a big corporate firm like PTC can avoid taxes? The main issue is counterfeit and local non-duty paid cigarettes creating problems for the multinational cigarette manufacturing companies. The FBR should track and trace the counterfeit and local non-duty paid cigarettes.
Rashid Ibrahim has said that the revival of Alternative Dispute Resolution Committee (ADRC) is very important, but amendment in the law is required. The ADRC panel must include more professionals and experienced persons like in past during the tenure of former FBR Chairman Abdullah Yusuf.
According to the budget proposal of ICAP for 2017-18, the decision of Alternative Dispute Resolution Committee (ADRC) should be made binding on FBR, and only in case of serious reservations, FBR may be allowed to appoint another Committee for review of the decision of ADRC.
He said that the ICAP has also given budget proposals regarding forum of Commissioner Appeals. The forum of Commissioner Appeals should be brought under the Ministry of Law and Tribunals should be under High Court to ensure independence of the appellate fora.
In this regard, ICAP has proposed that the tribunal should be made independent of FBR and tax recovery demands should be made subject to final decision by the Tribunal. The Tribunal in fact is biased to favour tax department's order. In majority of the case it is observed that it either maintains the order or refers back to the Commissioner. Consequently the Tax Payers have practically no option for justice.
Transfer of tax officers from Appellate Tribunal back to field formation should be restricted/abolished. Prior to amendment by Finance Act 2013 the Accountant Member of the Appellate Tribunal in the grade of Regional Commissioner normally were not called back by FBR in the field formation, ICAP proposal added.
Tax Leader at A F Ferguson & Co Chartered Accountants stated that the Directorate General of Intelligence and Investigation Inland Revenue (IR) should expand the scope of investigations in wide range of sectors. I&IR IR should play its role in broadening the tax base.
About the federal and provincial tax laws, he said that the harmonisation of taxes between the federal and provincial governments would resolve issues of cross border tax adjustments and multiple payments of taxes by the taxpayers. There should be a unified sales tax return for taxpayers instead of separate federal and provincial sales tax returns. A roundtable conference of all provincial and federal tax authorities should be held to identify gaps and suggest solutions.
ICAP has suggested that the for harmonisation of Federal and Provincial tax laws, major steps are needed immediately viz. (i) establish jurisdiction of taxation of services to decide the basis of levy of indirect tax ie ORIGINATION or TERMINATION (ii) abolish withholding tax on indirect taxes (iii) single return with identification of provincial head of account and direct deposit of share of tax of each province, and (iv) establish Central Directorate of audit.
In its budget proposals for 2017-18, ICAP had proposed that an effective and well represented Policy Board as fundamental step toward improved policy making process. The current Policy Board, which was formed under Section 6 of the Federal Board of Revenue Act, 2007 (as amended by Finance Act 2011), mainly comprise of high level members by virtue of their government positions but it practically remained nonfunctional. We therefore propose that this board should include members from the society comprising of the eminent economists, intellectuals, technocrats and representatives of major stakeholders viz. FPCCI, Tax Bar Associations, Trade bodies, Institute of Chartered Accountants of Pakistan and other accounting and professional bodies. On part of the Government it may comprise of Minister for Planning and the Chairman of the respective committees of both houses of the Parliament. The Board should act as an oversight for the performance of the FBR. Its function should include formulation of fiscal policy and support to legislative function.
The primary goal of a revenue authority is to collect the taxes and duties payable in accordance with the law and to do this in such a manner that will sustain confidence in the tax system and its administration. Functions of the FBR may be divided into three main functions, viz. Operation, Audit and Legal:
About audit functions ICAP, proposed that FBR audit function lacks competence and used as tool for collection, not as deterrent. Currently it is not independent as it is prejudiced to the taxpayers defending assessment by the tax department. Therefore a separate audit division needs to be created to plan and execute the work of audit. The national audit plan should be chalked out each year based on search and investigative work carried out by the Audit Division.
The audit at the field formation should be conducted under direct supervision, scrutiny by the division based on risk areas identified during enquiry work. There should be proper documentation of the audit process and the same should be carried out in a structured manner including a review by the supervisor before drawing any final conclusion. Making Audit Function independent will also help restore taxpayers' confidence.
ICAP has proposed that the FBR needs to be reorganized with functional specialisation clear flowing all the way down to the level of field formations at LTU and RTO levels. Four functional divisions may be created in IR viz. Operations/Enforcements, Tax payer's audit, Registrations (broadening of tax base) and litigation support/legal at FBR with clear demarcated staff at field formation level. All staff at the field formation level may be divided in these functional lines directly reporting to functional head at the FBR.
This re-Organization will help in development of risk based compliance program by each division and a complete ownership and accountability of the program. It would also allow an effective review and oversight of the implementation function being carried out at field formation levels.
ICAP proposed that at present various alternative modes of determining the effective tax liability of a taxpayer are in place. In addition complex calculations for apportionment of business income for the purposes of arriving at income subject to final tax, income subject to minimum tax and income subject to normal tax have to be carried. There is consequently, a need for the Policy Makers to simplify the complex system of determining tax liability.
The corporate sector which is the most documented segment of the economy has been neglected due to extreme tax collection measures taken by the Government in order to meet annual budget targets. Although tax evasion needs to be tackled with strong measures, however tax compliant taxpayers should be extended supportive interface with the tax department.
The present Corporate Tax rate of 31% for tax year 2017 and 30% for the tax year 2018 and onwards is one of the highest in the entire region. It should be reduced to bring it at par with other competitive economies and to provide incentive for formation of organised and documented sector.
The income of association of persons (AOP) of the professionals, prohibited from incorporating as a limited company, should not be taxed in the hands of AOP and instead share of each partner be taxed in his/her hands. The taxation of Dividend Income under normal tax regime, as applicable for companies prior to Finance Act 2013 should be restored. This will encourage companies to invest their surplus funds in shares of listed companies which will strengthen stock market.
Corporate sector should be excluded from final tax regime unconditionally. The rates of minimum tax for opting out of final tax regime be reduced to raise the difference between final tax and minimum tax by at least one percent. There should be no discrimination in incidence of tax between different sectors.
The amendment made in Section 130 (3)(c) allowing departmental officers to be appointed as judicial member of ATIR should be withdrawn. Further, a condition should be placed on the officer of Inland Revenue appointed as Member ATIR that such person will not be transferred back to the department of Inland Revenue.
To promote, encourage and incentivise export of services, it is proposed that income from export of all types of services should be exempted in line with IT enabled services. Alternatively, export of services be subject to reduced rate of tax as in case of export of goods.
Taxpayer should be allowed a compensation for disputed tax demand, recovered but later deleted in appeals. This will bring fairness in the process of collection and payment of tax system and will also enforce accountability for FBR field force.
Service providers, both corporate and non-corporate, should be exempted from levy of minimum tax. Alternatively, the rates of withholding tax and minimum tax should be reasonably brought down to justify a reasonable relationship between the income from such services and minimum tax thereon.
ICAP proposed that brought forward as well as capital losses of amalgamating Banking companies is allowed to be adjusted against the income of the amalgamated banking company. We suggest that similar adjustment of brought forward losses should also be allowed for other companies.
'Bar Code' has been introduced to ensure that Income Tax notices are genuine and to facilitate taxpayers to search it using "Online Notice Verification" option on FBR's portal. A new section be introduced in all the indirect tax laws to the effect that no Notices and Orders would be served in the absence of a system generated 'Bar Code', ICAP proposed.
Federal sales tax rate should be reduced to 15% from July 1, 2017 and gradually to 10% in subsequent years in order to encourage unregistered taxpayers to get them registered, ICAP proposal added.
All Presumptive/Value Addition/Fixed Tax Schemes should be abolished and all such sectors/goods may be brought under the uniform tax regime. To promote registration and dealing with registered and organised sector, incentive may be offered to general public as well as registered persons by announcing a scheme in this respect, if they deal only with registered and organised sectors.
In terms of Section 124A of the ITO any issue decided by the Appellate Tribunal Inland Revenue or the High Court, is given effect in the returns / orders for the subsequent period. It is suggested that similar provision should also be introduced in the STA in order to facilitate registered persons by bringing procedural harmony between Sales Tax and Income Tax Laws.
An Indirect Tax Settlement Commission should be established under STA on the same pattern as ITSC was in vogue prior to promulgation of Finance Ordinance 2000, with the view to reduce tax disputes and enhance Government revenues without recourse to Court of Law, the ICAP added.