MANAGEMENT OF PAY ROLL TAXES IN PAKISTAN

MANAGEMENT OF PAY ROLL TAXES IN PAKISTAN <!--[if gte mso 10]> MANAGEMENT OF PAY ROLL TAXES IN PAKISTAN By Muhammad Ajmal Khan, Advocate, Lahore Introduction. Pay Roll taxes means tax on salary. It is levied by the Federal Government through C.B.R. vide Entry No.47 of Part I of 4th Schedule to the Constitution of Pakistan, 1973. It has a nature of direct tax and monitored by the C.B.R. The scope of tax on salary is regulated by the provision of section 16 of Income Tax Ordinance, 1979. (Section 12 of Income Tax Ordinance, 2001). This income is charged to tax under section 9 of the Income Tax Ordinance (Section 4 of the Income Tax Ordinance, 2001) at the rate specified in Firs Schedule of the Income Tax Ordinance and with certain exemptions and basic credits. Preliminary. What is pay roll tax? As per Blacks dictionary, A tax on an employee's salary or on the income of a self-employed individual. Federal and state income taxes are paid by the employee or the self-employed individual; social security taxes are paid both by the employer and employee and paid solely by the self-employed individual. Unemployment taxes are paid by the employer. In Pakistan, pay roll taxes refer to tax on salary income of an individual in employment of a person other than himself. Existing Pay Roll Taxes System. The existing Pay Roll Tax System can be divided into the following three categories: A. Pay Roll Tax System of Government Employees. Employees of Federal and Provincial Government, for the purpose of payment of salary, are under the control of the Auditor General of Pakistan (AGPR) or the Accountant General (AG) of respective Province, respectively. These disbursing Authorities are responsible for deduction of tax at the, time of payment of salary or before releasing pay rolls of employees to various departments. Tax deduction made out of salary of employees by the said authorities are transferred to income tax department through book adjustment. B. Pay Roll Tax System in Semi-Government Organizations/ Departments. In Semi-Government organization/department like, WAPDA, PTCL, SUI GAS, person employed for the purpose of disbursement of salary to their employees deduct tax from their salary at the time of payment of salary on average tax rates and intimation of the same is given to income-tax department through monthly statements. On perusal of the said statement, the Assessing Officer concerned examines these and points out deficiencies/mis calculation therein and also take appropriate action where-ever applicable as warranted under the law. This exercise has to be done by the assessing/monitoring officer of the Income Tax Department to check accuracy of tax deductions because the salary paying officer/official of these departments are not trained to know the intricacies of law in force. There are no training programs for the officer/officials of the said organizations/departments by the Income Tax Department/C.B.R. to enable them to be proficient with their assignment of tax deduction. C. Pay Roll Tax System in (Pvt.) Ltd. Companies. In Private Limited companies, heavy salaries are paid to certain category of employees but proper tax deductions are not made in the absence of time scale. Actual salaries paid and shown in accounts by the private concerns reveal variance with the figures prepared for income-tax department. The legislature should fix minimum salary rates according to various categories of employees for Private Limited companies keeping in view the market rates. In doing so, the amount of tax deductions will increase and practice of showing under stated salary shall be discouraged. Prevailing Practice The prevailing practice of pay role taxes is analyzed as under: Government Departments. In Government departments including Federal and Provincial, the salary is being paid under the computerized system and tax is being deducted at source. Possibility of any omission of a case is almost negligible. However, short or partial deduction is not being checked due to lack of comprehensive computerized software. Frequent changes in Pay Role Taxing Laws and Rules make this job more difficult and complicated. After the amendment in law to include perquisites in the ambit of taxation control mechanism/management/feed back is missing to rule out leakage in terms of short deduction. Private Sector. In private sector the total omission of case from deduction of a tax is possible as there is no method available in prevailing system to check deduction of tax on comprehensive level during the currency of income year. Further more the business community in private sector has no confidence on the officials of the C.B.R. They are not deterred from making short deduction of tax in the absence of proper controls. Problems The main problem in the existing system can be summarized as under: (1) Absence of computerized management, (2) Huge influx of cases in one circle. (3) Appointment of junior officers mostly Special Officer. (4) Lack of training and knowledge. (5) The salary circles are ignored neglected and ill-equipped to check the short deduction of tax by the employer.. (6) Complex method of valuation of perquisites. (7) Tax rates are not realistic. (8) Late deposit of tax after its deduction. (9) Ambiguity in filing of statement under section 139, due to jurisdictional problem. Jurisdictional problem i.e. the directors of company are being assessed in the circle in Company Zone whereas employees are assessed in other salary circles. The enforcement in filing of statement under section 139 is hampered because an officer incharge of salary circle is not competent to pass order under section 108 against the employer company who commits any default and one who can do so remains unaware of the discrepancy. (10) Untimely or late deposit of tax deducted in the Federal exchequer in purview of rule 49 and 50 also need to be checked. Suggestions For Improvement. Following suggestions can be advanced: (i) Need to bring uniformity by devising software as a critical problem. It is imperative to develop a software capable of computing tax payable that basic salary as well as perquisites and to generate monthly statements under section 139 for their usefulness to discourage late remission of tax under section 50(1) in the Federal exchequer. The devise Computerized software for all departments which should be interlinked with net working system. It is further suggested that the S.E.C. department should circulate this programme among the prevail sector. Design of computer software may be in view of following intended results:--‑ (a) Maintenance of record on a uniform pattern by all the employers is very important. (b) Adopting standard software would help consolidate data relating to employees under numerous employers. (c) The software should be capable of generating a monthly summary under section 139 and annual statement under the same section. (d) The software should be capable of generating notice of reminder in case a particular statement is not furnished at all or not submitted in time. (e) The software should be capable of identifying delayed deposit of tax in the Federal exchequer in violation of Rules 49 & 50. (f) The software should be capable of computing taxable income and the amount of tax thereon from the parameter such as basic salary and various perquisites. (g) The software should be friendly to any under working for possible coordination between the C.B.R. and the employers. Such attempts will be highly useful for speedy compliance in terms of electronic submission of statement and other information and processing by the C.B.R. eventually through the use of computer tools. (ii) Omission of a particular case on deduction of tax as arises in the private sector only. As discussed earlier, the possibility of failure to deduct tax under section 50(1) in case of Government or semi-Government departments would be mere accidentally. It would be ideal step to enforce a practice of periodic meetings with the private employers by the concerned C.B.R. officials to have an appraisal of this fact. To take help from the record of employees maintained by Social Security Department. The C.B.R. officials may be encouraged to utilize the information available in Government record to prevent leakage. (iii) Audit of salary circle and proper maintenance of record in salary circle. (iv) Certificates of deductions issued by the deducting authority should be supported by the original challans. It has depicted that multiple challans are not accounted for properly in the hands of the deductees nor it is possible for the with holding agent to provide original or even photocopy of the paid challans to the deductees. Secondly, the D.P.Cs. are inadequately equipped in terms of computer hardware and software support to make it convenient that award of tax deducted under section 50(1) should be made in respect of each deductee. For this purpose, we may introduce the practice of maintenance of personal ledger account of the taxpayer. At the same time, non enlisted deductees may be brought on NTN role. (v) Despite efforts made by various Income Tax Regions, issuance of NTNs to the deductees of the tax under section 50(1) is not smooth. The tax facilitation center set up has restricted their activities regarding issuance of tax numbers only to the applicant for the same. The practice of suo motu allotment of NTN on the basis of information contained in statement under section 139 or challans of payment under section 50(1) is still missing. In this regard the employers may be advised to mention tax number of each deductee. In case NTN is not allotted to' a particular employee, his/her NIC may be disclosed both in challans as well as statement under section 139 to enable the tax department/PRAL to proceed for allotment of NTN by themselves. In this way we can minimize, the problem of non-registration. Broadening of tax basis would ensure as a supplementary benefit. (vi) Role of Zonal CIT as for as the collection tax are concerned should be minimized when the challans are received at DPC, these are forwarded to the respective zones wherefrom they reach to circle-wise destination. The latter part of the journey of challans is highly controversial and malicious in the sense that zonal staff manipulates the results of budget achievement of a particular circle by way of favour or disgust. It is interesting to mention that while preparing the zonal MPRs, the Zonal Commissioner do not rely on the figures reported by their subordinate circle. This care, is exercised even up to close of the year. It is highly undesirable to transmit the challans down ward to invoke malpractice. The undesirability of this exercise is also recommended in view of hectic efforts put in a futile manner in order to the daily collection registers both at zonal as well as circle level. Entry of challans in such registers is a nuisance from audit, point of view and massiveness of data entry, which is done through manual labour. It is proposed that the DPC should directly assign circle-wise credit for the purpose of simplicity. (vii) Training programme of the officials, of withholding agents should be undertaken by the C.B.R. Authorities. (viii) Jurisdictional problem can be redressed by directing the companies to file statement under section 139 in duplicate in the circle having jurisdiction over the companies case because the non-filing of these 'statements can be penalized under section 108 of the Income Tax Ordinance as per prevailing law by the officer having jurisdiction over the case of the company. RECOMMENDATIONS FROM ALL PAKISTAN TAX BAR ASSOCIATION TO CHAIRMAN, CENTRAL BOARD OYREVENUE Re: Sales Tax [8th January, 2003] The Chairman, Central Board of Revenue, Islamabad. Dear Sir, A meeting of all Pakistan Tax Bar Association was held on 4-1-2003 at Holiday Inn, Lahore wherein the representatives of Tax Bars of the country attended the meeting. The house discussed various issues relating to C.B.R. and it was resolved to communicate the same to C.B.R. for their consideration and necessary action:-‑ (1) It was resolved that powers of the Regional Commissioners under para. 9(a)(ii) of Self-Assessment Scheme (2002-2003) to set apart the cases for total audit be withdrawn. The house was of the view that after the selection of cases through computer ballot, there should be no selection by the R.C.I.Ts. However, if it is not possible, every effort is to be made to select only those cases where there is sufficient material available to set apart a case and after providing an opportunity of hearing to the taxpayers. (2) Tax practice by the tax employees came under discussion before the house. It was pointed out that in Sales Tax Department 80% of the legal practice has been captured by the Sales Tax Staff and Sales Tax Auditors who are maintaining their law chambers. They are availing the maximum benefits of their being tax employees and using their threatening positions, which forced taxpayer to approach them and get their job done. Obviously legal practice is only the right of a person having authority under the law. If the tax employees are allowed to involve in the tax practice, it causes increase in corruption and mismanagement in the system. It was also pointed that same problem is being faced in Income Tax Department. It was resolved that C.B.R. should take appropriate measures to stop this illegal practice of the tax employees. (3) It was pointed out that procedure of Sales Tax Registration has been made very cumbersome by the Sales Tax Collectorates. On the one hand Government is interested in bringing more and more taxpayers under the Sales Tax net,, but, on the other hand taxpayers are being discouraged with troublesome procedures. It was resolved that procedure of Sales Tax Registration be made easy: (4) It was pointed that Exemption Certificates under sections 50(4) and 40(5) of the Ordinance, 1979 are being issued with abnormal delays, unnecessary reports are being called again and again in the presence of old reports, irrelevant and unnecessary documents are being called for, which causes wastage of time and abnormal delay in issuance of Exemption Certificates. (5) It was objected by the Multan Tax Bar tat the areas of Melsi, Vehari and Burewala have been separated from Multan Zone and jurisdiction of these areas are assigned to Sahiwal Zone, whereas appellate jurisdiction of these areas have been assigned to CIT(A), Faisalabad which is causing hardship for the taxpayers as well as the tax lawyers. Members were of the opinion that APTBA should approach the C.B.R. to resolve this issue. We, therefore, request that C.B.R. should consider the issues raised hereinabove. An early action in this regard shall be highly appreciated.