I hope the same spirit continues and the taxpayers also pay taxes in an amicable manner. However, like in most of the other tax jurisdictions, revenue-related laws are still complex and ambiguous and need further clarifications/amendments, etc.
Despite the issuance of Circular No 13 referred above, the levy of Workers Welfare Fund needs to be re-looked for clarification/rationalisation. Definition of total income for the purposes of charging Workers Welfare Fund was amended in the Finance Act, 2006 as under: Section 2(i) of the workers Welfare Fund Ordinance, 1971:
"TOTAL INCOME" MEANS:
(i) Where Return of Income is required to be filed under this Ordinance, the profit (before taxation or provision for taxation) as per accounts or the declared income as per the return of income, whichever is higher; and
(ii) Where return of income is not required to be filed, the profit (before taxation or provision for taxation) as per accounts or four percent of receipt as per the statement filed under section 115 of the Ordinance, whichever is higher.
[UNDERLINING PROVIDED FOR EMPHASIS]Section 4 (1) of the Workers Welfare Fund Ordinance, 1971 charges WWF as under:
"Mode of payment by, and recovery from, industrial establishment.- (1) Every industrial establishment, the total income of which, in any year of account, commencing on or after the date specified by the Federal government in the official gazette in this behalf is not less than five lakh of rupees shall pay to the Fund, in respect of that year, a sum equal to two per cent of its total income."
1. DOUBLE CHARGING OF WORKERS WELFARE FUND ON THE SAME INCOME It is a cardinal principle of revenue laws that the same income cannot be subjected to tax twice in the hands of the same taxpayer. Since the declared/taxable income in the return is arrived at by making certain adjustments, the use of phrase whichever is higher makes these adjustments subject to levy of Workers Welfare Fund twice, as is seen from the following simplified example of the deduction of depreciation:
EXAMPLE Such effect would aggravate if all adjustments like provision for bad debts, gratuity etc are taken into account. It is, therefore, requested that this double charging may be removed by making one basis of charging of the WWF consistently [either on accounting profit basis or on taxable basis and not higher of the two].
2. Tax on income from services/construction contracts outside Pakistan is 1% on the basis of gross receipts, irrespective of the accounting income accrued to the taxpayer on account of these receipts as per Clauses (3) and (3A) of Part II of the Second Schedule to the Income Tax Ordinance, 2001.
Levy of 2% WWF on income arising abroad in which there is no contribution of the local workers, is not justified and would discourage repatriation of money earned from abroad by such taxpayers. This aspect becomes more important when Section 111(4)(a) is still on the statute, which practically protects bringing of foreign exchange from abroad without disclosing its source. Even otherwise, the facility of 1% tax given under the second schedule would lose its incentive impact when WWF is to be charged on profit before tax in the accounts instead of on income worked out by taking 4% of the receipts as income.
3. Similarly, levy of WWF on export proceeds on which income tax is levied at a rate of 1% as an incentive to promote exports, levy of WWF on the basis of total income [where being higher than 4% of total receipts] would bring a negative impact in the already depressed exports.
This new method of levy of WWF would necessitate pro-rating of profit before tax to different sources/receipts and will result in unnecessary litigation with the department. Even in the case of final taxation, preparation of audited accounts would be necessary so that profit before tax could be computed accordingly. It would mean more cost to the taxpayers, apart from audit probing into whether accounting profit is according to the generally accepted accounting principles or not? When income tax is being collected at the stage of remittance of export proceeds, why to subject them to departmental proceedings of audit, etc unnecessarily. If at all it is necessary to collect WWF on export proceeds, it should be collected at the time income tax is collected from export proceeds.
TO CONCLUDE, IT IS SUGGESTED THAT:
a. In normal law cases, WWF should be charged consistently, either on the basis of accounting profit before tax or on the basis of taxable income to avoid double charging otherwise the Honourable courts of the country will be burdened with litigation on this account too with absolutely no chance for the Federation to win it being a clear case of double levy.
b. In case of receipts covered under the final taxation, WWF may charged on the basis of those receipts [along with income tax] and not on the basis of accounting profit before taxation.
c. In case of receipts on account of services rendered or construction contracts executed abroad, the levy of WWF may be waived off. It is desirable on two grounds:
i. The income is not earned in Pakistan and there is no contribution of any worker from Pakistan in this earning. The companies earning such income abide by laws relating to the welfare of workers working in their establishments abroad.
ii. Non-levy of WWF on such receipts would help keep the foreign exchange flowing into Pakistan. Otherwise, higher cost means more incentive to save [from their point of view or evade from departmental point of view] and the loser would be the exchequer of Pakistan.
Suppose that Profit before tax and depreciation in each the tax year from 2009 to 2013 is same at Rs 1,000 million. In the tax year 2009 an asset, eligible for initial allowance and depreciation, having cost of Rs 200 million was added and used for business. Suppose, accounting depreciation as per consistent policy of the company is charged on such asset @ 15% per annum [ie Rs 30 million a year] on straight-line method. After accounting depreciation, accounting Profit before tax or provision for tax to be treated as total income as per WWF Ordinance, 1971 shall be as under:
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Tax Year 2009 2010 2011 2012 2013
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(Rs in Million in each year)
Profit before Tax 970 970 970 970 970
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Taxable income of each year on the basis of initial allowance in the tax year 2009 and depreciation in all these years, shall be as under.
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Tax Year 2009 2010 2011 2012 2013
(Rs in million in each year)
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Profit before initial
allowance and
depreciation 1000 1000 1000 1000 1000
Less:
Initial allowance 100
Depreciation 15 12.75 10.84 9.21 7.83
115 12.75 10.84 9.21 7.83
Taxable income
to be declared in
return 885 987.25 989.16 990.19 992.17
Income to be taken
For WWF 970 987.25 989.16 990.19 992.17
WWF @ 2% 19.40 19.75 19.78 19.80 19.84
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Thus in the tax year 2009, accounting income will be taken for WWF as the taxable income is less due to allowable initial allowance and tax depreciation, while in the other years, taxable income will be taken for charging WWF (whereas taxable income is higher only due to initial allowance and depreciation allowed in the tax year 2009). Thus, for five years, WWF works out Rs 98.57 million on the basis of the existing provision.
WWF if taken on a consistent basis, it would have been Rs 97 million on the basis of accounting profit and at Rs 96.88 million for these 5 years. [It may be noted that if the calculation were for all the years in which the Tax WDV and book value of the asset were consumed, WWF on accounting profit and taxable income would have been the same]. However the higher of the two has distorted it and, at present, the WWF is being charged twice on the adjusted amounts.