There is a big confusion in the minds of common people about the disclosure of asset(s) and with passage of time, general perception has developed that Pakistan's tax system necessarily, mandatorily and compulsorily links taxation of income with assets. This article deals with this subject. It is appreciated by the author that deliberation in the following paragraphs has become too technical for the common reader, therefore, such details had to be included in the article to provide comprehensive coverage to this important matter.
At the outset, it is to be appreciated that this is not particularly a domestic (Pakistan) tax issue. In all societies, where there is an organized tax system, this subject is dealt with sobriety and caution. It would be better for the general reader to relate the matter with a question whether or not there is any concept of asset records under our income tax laws. It would be highly desirable and advantageous, with this reference to deliberate on the unique disclosure contained 'only' in the Pakistan tax legislation called a 'Wealth Statement'.
Wealth statement has no relation with wealth tax return that was prescribed when wealth tax was in force. A wealth statement in short is a 'balance sheet' of a taxpayer. It is a very useful and relevant document, however, the purpose of this article is to identify and clarify the legal status of the wealth statement and consequences of any inaccuracy in the wealth statement including revision of the same in relation to assets that have escaped assessment due to limitation of time discussed in the earlier article published on November 30, 2017or non-disclosure of assets created out of income that was not chargeable to tax under the Income Tax Ordinance, 2001 [Ordinance].
In this context, it is important to note that no such statement is mandatorily required to be filed in many other developed tax jurisdictions including India, United Kingdom or even USA, where compliance is very regressive. India has considered to prescribe a form of asset statement from 2017 in certain cases and that matter is under serious discussion with reference to its nature and consequences of incomplete or inaccurate compliance.
Evolution of the concept of wealth statement that is an aberration we created in Pakistan law appeared in 2001 as explained in the following paragraphs and is essential for complete comprehension of the subject. Presumptive tax regime has multiplied the consequences of that aberration.
Evolution of law.
In Pakistan, we introduced a concept similar to wealth statement in1970 by way of introduction of Section 21A of the Income Tax Act, 1922.
The unique feature of Section 21A was that this section was not applicable on 'persons who are required to file return of income'. This exclusion explains the whole purpose of Section 21A of the Act. If we do not understand the purpose of this exclusion we will remain confused on the nature of wealth statement:
Section 21A of Income Tax Act, 1922 [Act] stated:
"S. 21A. Statement of assets and income to be furnished by certain persons.-(1) Every person who carries on any business, profession or vocation in any area which the Central Board of Revenue may, by notification in the official Gazette, specify and who pays rent for or owns the premises where he carries on such business, profession or vocation, shall, on or before the thirty-first day of August in each year, furnish, to the Income-tax Officer, a statement in the prescribed form and verified in the prescribed manner showing-
(a) the value of assets held by him on the last day of the financial year immediately preceding such year,
(b) his total income of such financial year, and
(c) such other particulars as may be prescribed.
(2) Where any person fails to furnish the statement required to be furnished under sub-section (1), the Income-tax Officer may, after giving such person a reasonable opportunity of being heard, direct that such person shall pay by way of penalty a sum not exceeding one thousand rupees.
(3) This section shall not apply to any person who is liable under sub-section (1) of section 22 to furnish a return of income."
When section 21A was inserted in 1970 the explanation to the amendment as per the Board in Circular 8 of 1970 was as under:
"Section 21 A-Statement of assets and income.- This new section applies-to persons other than those who are required to furnish returns under Section 22(1). The main purpose is to enable the Income-tax Department to obtain information about the assets and income of persons carrying on business, profession or vocation in certain areas for the purposes of survey of revenue potential of those areas. This will facilitate the survey operations which are at present carried on by the field staff. This section casts a responsibility on persons carrying on business, profession or vocation to furnish information voluntarily by the 31st day of August, every year. The penalty for non-submission of such a return or statement is a maximum of Rs 1,000.
The forms and statements will be shortly prescribed and furnished to the field officers. Rules will be framed regarding the specifications of areas from time to time."
The purpose of introduction of this provision was very different from what we prescribed and conceive today. It was a provision to seek information about assets of non-filers to ascertain whether there is any requirement of filing a return of income based on assets. The present law operates in totally opposite direction. We are seeking wealth statement from people filing return of income and non-filers roam around freely as if there is no requirement to substantiate assets record as long as they remain non-filers. This analogy is a major hurdle in expanding the tax base.
Notwithstanding the aforesaid comment, there is a profound rationale for including sub-section (3) in Section 21A of the Act. This is a legal and practical issue.
Income Tax Ordinance, 2001 is a law for taxation of 'income' not taxation of 'assets'. In this context there is neither an intention to obtain 'voluntarily' the statement of assets and liabilities of that person nor the strict application of Constitution of Islamic Republic of Pakistan provides same right to the legislature for seeking such information. Legislature has not levied tax on assets. It has taxed 'income', even when an asset is located as untaxed there is no tax on that asset. It is considered that income which created such asset was concealed and the same is so taxed if not barred by limitation. This fine distinction is being honoured in all taxing statutes in all the jurisdictions including Pakistan even now, and the purpose of this article is to dispel any misinterpretation or misapplication on the matter.
This leads to the questions of implication of non-filing, inaccurate filing, or incomplete filing of such statements. This statement is just an aid or assistance, not a substantive law. This aspect has been explained in the following paragraphs.
In the Income Tax Ordinance, 1979 [1979 Ordinance] which replaced Income Tax Act, 1922, Section 58 was inserted that specially dealt with the concept wealth statement. Present law (Section 116 of the Ordinance) is the replica of the same. It is important to note that on that date Wealth Tax Act, 1961 was operational. Section 58 of the 1979 Ordinance is stated as under:
"58. Wealth statement.-(l) The Deputy Commissioner may, by notice in writing, require any assessee to furnish, on a date to be specified in the notice, a statement (hereinafter referred to as the 'wealth statement') in the prescribed form and verified in the prescribed manner giving particulars-
(a) his total assets and liabilities as on the date or dates specified in such notice;
(b) the total assets and liabilities of his spouse, minor children and dependents as on the date or dates specified in such notice;
(2) Notwithstanding anything contained in sub-section (1), every assessee, whose total income is not less than one hundred thousand rupees, shall furnish a wealth statement along with his return of total income and all the provisions of this Ordinance shall, so far as may be, apply to the wealth statement as they apply to a return of total income."
Through Finance Act, 1996 an important change has been made in Section 58 of the 1979 Ordinance sub-section (2) relating to mandatory filing of wealth statement with every return was rightly removed. This removal was rational and in line with the concept laid down in Section 21A of the Act referred above. The Board explained the position in their circular 10 of 1996 as under:
"5. Wealth statement - provision for personal expenses and doing away with mandatory filing:
[Section 58]
The prescribed form of wealth statement contains a column for personal expenses. The amendment purports to provide specific legal cover to it. The amendment, also removes the mandatory requirement of filing wealth statement, along with return of income, where income is Rs 100,000 or more. Wealth tax returns, wherever required will continue to be filed."
When Income Tax Ordinance, 2001 was introduced, provisions similar to Section 58 were reproduced in Section 116 and sub-section (2) of Section 58 of the Income Tax Ordinance, 1979 that had been rightly removed from the repealed Ordinance were reintroduced. Now there is a requirement of filing a wealth statement. Author is unable to understand the change in the rationale and basis of the same. However as described above, substantive legal position has remained the same.
Before entering into any other discussion, it has to be remembered that except for the Ordinance, since the inception of law in 1922, there has been no mandatory requirement for filing the wealth statement along with the return. Other period of aberration was 1979 to 1996.
Taxation of income & wealth statement
The subject in the following paragraphs is the legal essence of the provision relating to wealth statement and its relationship with the Income Tax Ordinance, 2001 and taxation of income. In summary it is extraneous and inconsequential document that cannot change the right or liability of tax in any manner.
In the present tax statute the only link between the Ordinance and the wealth statement is the provisions contained in Section 114(2)(e) of the Ordinance that states that every return of income shall be 'accompanied' by a wealth statement as prescribed under Section 116 of the Ordinance. If this provision was not in place, there was no relationship between a return of income and the wealth statement and it could have been a valid argument that there cannot be a basis for mandatory filing of wealth statement.
Nature of relationship
The primary question on this subject is the nature of such relationship. In author's opinion this relationship is 'procedural' in context that has no substantive consequence. This means that any disclosure, accurate or inaccurate, complete or incomplete, full omission or in part or otherwise, does not include attract 'taxability' or chargeability of tax on such amount, disclosed or undisclosed in the Wealth Statement. This may appear to be a big statement. However, when we study the correct position of law then it transpires that aforesaid statement is based on principles of taxation and legal provisions as contained in the Ordinance.
What is the extent of tax liability?
The liability of tax is limited to what has been stated in Section 9 of the Ordinance. In addition to Section 9, there is a concept of deemed income which has been identified in Section 111 of the Ordinance, being an asset, investment or expenditure the source of which is not explainable. In other words, the maximum tax liability of any person is the aggregate of the sum under Section 9 and Section 111 of the Ordinance [Final Tax Regime (FTR) has been excluded for the sake of clarity). Can any other provision add to that incidence? The answer is in negative. This explains the whole story of nature and status.
When we read the provisions of Section 116of the Ordinance in conjunction with the concept of the sum taxable under Section 111 on account of income being generated from unexplainable source, we find that there is no relation between the two. There is a rationale and legal basis for the same. In other words, any asset or investment whether disclosed or not in wealth statement will remain taxable if the source of income is unexplainable and not time-barred by law. This means that taxability is not related or limited to what has been disclosed in the 'wealth statement'. In other words, the legal position is that inclusion of a sum in wealth statement will not make it kosher if it has not been taxed and in the similar way the same will not become non-kosher if not chargeable to tax and the same was not included in the wealth statement. If the aforesaid principle is properly understood then all confusion about wealth statement will be resolved. This argument equally applies on the other side.
If the income is not chargeable to tax and the asset created out of such income is not disclosed in the wealth statement then that does not change the non-taxable character of that income. This can be further explained in the sense that if a person has income that is not taxable either for the reason that it is not taxable under the law or for the reason that income for that year is barred by limitation as contained in Section 122 read with Section 111 of the Ordinance then disclosure or non-disclosure of such asset in the wealth statement does not change the character of that receipt/income.. This is the only practical consequence in relation to a wealth statement. It is only for this reason that almost all the developed tax jurisdictions do not include such statement of assets in the tax disclosure.
Consequences of non-compliance-penalties and prosecution
The consequences of non-compliance, if any, in relation to wealth statement is another feature of the subject of nature and relevance as described above. Under the Pakistan tax laws, the penalties and prosecutions have been laid down in Section 182 and 192 of the Ordinance, respectively. It is important to note that there are different clauses for the penalty of non-filing of return of income and non-filing of a wealth statement and reconciliation of wealth. Through the Finance Act, 2015 penalty for non-filing a wealth statement has been linked with the amount of 'tax payable' which in author's view is an incorrect and legislatively wrong act. Notwithstanding the same, it is important to note that consequences of prosecution, as laid down in Section 192 and 192C is not applicable on non-filing of a mandatory wealth statement. These provisions relating to penalty and prosecution very clearly exhibit the procedural nature of a wealth statement as prescribed under the law. It is highly important to note that there is no prosecution for any default under 116(2) being voluntary filing of a wealth statement. This says all what legislature wanted to say; that is, a procedure is to be followed and the intention is not to charge tax or create liability.
The aforesaid discussion in summary can lead to the following conclusions:
(i) Wealth statement as prescribed under Section 116(2) relates to wealth and reconciliation of wealth that is chargeable to tax under the Income Tax Ordinance, 2001. It is so as nexus of wealth statement with the Ordinance only arises through Section 114 which is restricted to Section 9 read with
Section 111 of the Ordinance. Accordingly if any asset created out of income that is not chargeable to tax in Pakistan, will not make a disclosure of wealth statement filed in Pakistan as inaccurate. Accordingly, any person who is a tax resident in Pakistan, now on account of his/her stay in Pakistan, is eligible to include or exclude any asset outside Pakistan, created out of sum non-chargeable in Pakistan, whilst he/she was out of Pakistan, in the wealth statement now being filed by that person. Any such action will not make the statement invalid for any reason. Even if for the sake of argument, if it is considered that the same should have been included in the wealth statement, there will be no consequence even under Section 182 except a penalty of Rs 20,000 as there is no 'tax payable'. We have to properly apply this provision in the context of assets held abroad by returning Pakistani expatriates where there may be confusion on this subject.
(ii) In similar manner, any asset created in Pakistan or outside Pakistan that has escaped assessment under the Ordinance by way of time limitation being the provisions of Section 111 of the Ordinance read with Section 122, then inclusion or otherwise of the said assets in the wealth statement will have no consequence for the reason that after the expiry of time limitation the state has lost the right of taxation of such income and no tax is payable on such income after lapse of limitation of time. The only consequence even in extended form is a penalty of Rs 20,000. It is reiterated that this is not a subject of amnesty but income barred by limitation that has escaped assessment. The obvious adverse consequence of this lack of information on this subject is continuation of unrecorded assets in the present form leading to real hurdle in the expansion of record of asset base and consequential tax base from such assets.
The purpose of these discussions is to shed light and highlight facets of the subject which are generally not discussed in public. The result is a vacuum due to which the system is not working in an appropriate manner. It is high time to decide a way forward for the country for substantial improvement in fiscal matter which is the biggest fault line in our economic priorities. We cannot succeed unless we remove such fault lines.
The bottom line on this subject is reiterated as "inclusion of a sum in wealth statement will not make it kosher if it has not been taxed and in the similar way the same will not become non-kosher if not chargeable and not included in the wealth statement.
Copyright Business Recorder, 2017