According to Tola, the government has allowed traders to whiten their working capital up to Rs 50 million on payment of one percent tax under the VTCS introduced vide Income Tax (First Amendment Act 2016). Tax at the rate of 1 percent on working capital will be payable on profits and gains from the trading activity, provided working capital does not exceed Rs 50 million. Where working capital is more than Rs 50 million, the person will be taxed in the normal manner under the new scheme.
Ashfaq Tola said that we foresee that withholding tax on banking transactions will be restored to 0.6 percent after the due date of filling of returns under the VTCS. This will also trigger the urge in the non -filer traders to avail the scheme and file their returns under the scheme. The FBR foresees that over 1 million new taxpayers will be added to the tax net, broadening the tax base and further contributing to the exchequer.
Explaining the scheme, the renowned tax expert said a trader has been defined as a person individual or an AoP buying goods or merchandise and selling the same without further processing and providing business related after sales services by doing repair jobs. The persons providing professional services including accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, have been excluded from the definition of the Trader.
The following retailers, who are registered under Sales Tax Act, 1990, are also excluded from the definition of Traders: A retailer operating as a unit of a notional or international chain of stores or a retailer who has a credit or debit card machine (currently is in abeyance); a retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks; a retailer whose cumulative electricity bill during the immediately preceding 12 month exceeds Rs 600,000 and a wholesaler-cum-retailer, engaged in bulk import and supply of consumer goods on wholesale basis to the retailers as well as on retail basis to the general body of the consumers.
Two types of traders have been defined and a separate part of Ninth Schedule is applicable on each type: Traders who has not filed a return of income during any of the previous ten tax years before 31st December, 2015 covered under Part I of Ninth Schedule. Secondly, traders who is a Filer or NTN holder and a non-filer but has filed any return during previous ten tax years is covered under the Part II of Ninth Schedule. For traders under Part-I, tax year 2015 is the first year in preceding ten years in which they will file a return of income.
Tax based on turnover during the year, at the rates specified shall be payable provided that the turnover declared shall be at least three times the working capital declared during 2015. Tax based on turnover during the year, at the rates specified, shall be payable provided that tax paid based on turnover shall be at least 25 percent more than the tax paid during 2016.
Traders falling under this part shall be entitled to take credit of imputed income as assets explained and having verifiable resources. For Years 2016-2018, amount up to Rs 4,764,000 will be allowed as imputable Income to be declared in wealth statements.
For Traders Falling Under Part II for Tax Year 2015, tax shall be payable at higher of following: a) 25 percent more than tax paid for tax year 2014 or for latest tax year for which return has been filed on the basis of taxable income; b) Turnover based tax at rates specified or c) Rs 30,000. For Tax Year 2016 to 2018, tax shall be payable at higher of following: a) 25 percent more than tax paid for tax year 2015 on the basis of taxable income; or b) turnover based tax at rates specified.
Ashfaq Tola stated that the trader who has already filed return for tax year 2015 before due date may file a revised return provided that the tax payable is at least 10 percent higher than the tax paid as per original return. Approval of Commissioner for such revision shall not be required. Trader under this part may opt to take credit of difference between imputable income (in relation to turnover tax at rates) and taxable income declared, in case the imputable income is higher than taxable income, subject to condition that 1 percent tax has been paid on such difference. A credit of Rs 505,000 will be allowed as explained income in wealth statement after payment of (505,000x1 percent) Rs 5,050.
Explaining the general conditions, renowned tax expert said that only incomes from trading activities under head of "Income from Business", profit on debt, dividend and income from property shall be eligible under Ninth Schedule. The provisions of section 177 (Audit), 214C (Selection of Audit by the Board) and 214D (Automatic Selection for Audit) of ITO shall not apply to traders for tax years 2015 to 2018.
The return of Income for traders falling under Part I is specified in Form A to the Schedule. No adjustment shall be available for any withholding tax or refund due, with respect to trading activity. No adjustment of any tax paid or refund due under this schedule shall be available.
Other conditions said that the adjustment of withholding tax with respect to dividends, profit on debt and Income from property shall be available to trader. In case the return for any tax year from 2016 to 2018 is not filed, the trader shall not be qualified under this schedule for any tax year from 2015 to 2018 and all provision s of ITO shall apply, he stated.
The trader qualified under this schedule shall not withhold tax from payments made by him for goods and services received. The trader qualified under this schedule and whose declared income for the year is less than Rs 1 million, is not required to file wealth statement and wealth reconciliation statement. The return may be subject to amendment under section 122 of ITO (amendment of assessment), where Commissioner has definite information. Persons convicted under Control of Narcotics Substances Act, 1997, Anti Terrorism Act, 1997 and Anti-Money Laundering Act, 2010 shall not be eligible to qualify under this Schedule.
He said that the VTCS may be exploited by individuals or AoPs by distributing their working capital among several associated persons to whiten their maximum wealth. For example an individual having working capital of Rs 500 million may file 10 different returns under names of related persons (sons, daughters, spouse, etc) and avail the scheme.
It has been provided that the return filed under the scheme may be amended by the commissioner subject to possession of definite information. The income disclosed by the Trader has also been made subject to amendment instead of limiting the powers to undisclosed wealth. This provision will render the VTCS of no benefit as the powers of Commissioner under this provision will be a hanging sword over Traders availing the VTCS, Ashfaq Tola stated.
The provisions relating to Imputable Income under Part I need further clarification as to the course of action in case the imputable income falls short as compared to working capital declared. As it is shown, imputable income is less than working capital declared. The deficiency as identified above will worsen the situation as the excess of working capital over imputable income will prima facie be assumed and added to undisclosed asset.
Top tax expert said that the time limit for compliance under the two schemes introduced earlier in 2013 and in 2008 was extended multiple times. The scheme introduced in March, 2013 was time bounded for three months, whereas, scheme introduced in July, 2008 was valid initially for 4 months (till October 31, 2008) and was further extended for 2 months (until December 31, 2008). As the time limit for compliance under the VTCS has been extended up to 31st January, 2016 (which will probably extend further keeping in view the history of granting extensions), there is a chance that taxpayers under normal tax structure will also delay the filing of their returns to further defer their tax payments. The compliance date of the scheme is, therefore, required to be made exclusive for the traders eligible under this scheme only, Ashfaq Tola added.