TAX CULTURE

TAX CULTURE <!--[if gte mso 10]> TAX CULTURE By Mr. Shaukat Baluch, FCMA,* Islamabad Firstly I pay my thanks to organizers of this joint seminar specially Mr. Muhammad Rafi, Vice President ICMAP and Hafiz Muhammad Idrees Advocate, President Rawalpindi/Islamabad Tax Bar Association for providing me opportunity of presenting this paper. I shall try to point out the areas which effect the whole system of tax collection and shall submit any suggestions to overcome the situation. * Paper presented at joint seminar Pre-Budget held by ICMAP & RITBA on April 26th, 2003, Islamabad. No doubt no one is happy in paying taxes, even in advanced countries people consider tax as a burden, but through development of a tax culture people could take it their moral obligation to pay taxes. Wherever word '"Tax Culture" is used in this paper, I mean a society, which is obliged to pay its due share of taxes. It is true that tax culture cannot be built in short period of two or three years, but we see that we have failed to develop a Tax Culture in our country in more than 50 years period. This is a matter of concern for our policy makers to seriously think as to why even, after 55 years of independence we could not build a tax culture in our society. We must now he serious and start taking some concrete and long term measures in this direction. As I stated above, now I shall highlight some of the areas causing negative behaviour of the taxpayer towards the exchequer, which requires immediate attention of the policy makers to develop a tax culture. Tax as burden The payment of tax is considered to be an unpleasant burden, instead of accepting it as obligation. In a welfare oriented society, a considerable amount of revenue is expended on public welfare projects such as health, education, roads, safety etc. Unfortunately our Governments failed to deliver social welfare services. Therefore, taxpayer is right to ask for why he should pay taxes? Government must address this situation and at least taxpayer must get preferential treatment in getting social services such as health, education and safety etc. False-declarations This has been the normal tendency in the society to .conceal the real assets owned and declare false figures of incomes. The main reasons for misdeclaration/non-declaration of income and assets are due to higher rates of taxes, the non-cooperative and non-friendly behaviour of the Tax Administration and the complications of the Tax Code. The taxpayer has developed a firm belief, that when the honest and true declarations are also to be rejected by the Income Tax Officer, then why to be true. The Self-Assessment Schemes over a period of almost two decades have built a new tax evasion culture. This developed no account concept. The assessee was happy in availing the self-assessment scheme. Now under the new law each taxpayer is required to maintain books of accounts of his income and expenses, but the taxpayer in this regard has to be educated through mass media advertisements. Widening of Tax net A country of more than 15 crore of population has not more than one million taxpayers. Due to narrow tax net the tax administration, to meet the revenue targets catch hold the existing Taxpayers instead of finding new taxpayers. This attitude not only creates harassment amongst the taxpayers but also compels them to adopt different way and means to avoid Tax and to hide themselves from Tax officials. Truly speaking no real effort has so far been made in this regard except a few tax amnesty schemes and a tax survey. These TAS and survey also did not yield the desired results, except some short term achievements. Tax Survey and TAS failed to unearth all undeclared assets and also failed to broaden, the tax net by any substantial percentage. Survey was to be done in 13 cities, but it could be done in only 7 cities and that too was not complete. The survey instead of causing benefits to exchequer has effected the business activities badly. In this regard it is suggested that C.B.R. should pursue the tax administration that every year at least 30% revenue should be collected from new taxpayers. Each taxation officer should report, how many new taxpayers were booked during the year and how much revenue collected from them. Incentives to Tax Collectors The environment under which Tax people work, justifies their inefficiencies and corruptions to some extent. Honesty must be rewarded and efficiency based incentives be introduced. Their working conditions should be improved. Tax Code Tax Laws should be simple and understandable. The literacy rate in our country is about 35%, even lesser than this percentage. Therefore Law should be as simple as it could be so that a common taxpayer could understand the tax code to discharge his tax liability. Before framing Tax Code, the law makers should keep in mind the socio-economic, religious and cultural aspects so that the law has broader acceptability in the society. Therefore, all concerned at all levels should be consulted before the draft is finalized and once it is enacted it must be implemented in true letter and spirit. The Income Tax Ordinance, 2001 has been enacted from 1st July, 2002. Before its enactment about 300 amendments were made in this Ordinance and about 250 amendments are ready to find their place through the coming budget. This shows that C.B.R. has not properly completed its home work before the enactment of new Tax Code. Now please imagine what will happen when this law shall be practically applicable on returns for the tax years 2003 filed under this Ordinance. Such attitude and working shatters the confidence of the taxpayer. Except the C.B.R. officials, none has yet spoken in favour of this new Law. In developing a tax culture, the lax codes play very vital role. The tax laws must be simple and understandable. The taxpayers, Tax collectors and Tax consultants, after 23 years of practice and clarifications/rulings of the superior Courts, developed understanding of the Income Tax Ordinance, 1979. Now when society has developed understanding and acceptability for Income Tax Ordinance, 1979, it has been repealed. With the promulgation of Income Tax Ordinance, 2001 every concerned has a feeling that he is again on the ground and has again to start climbing the ladder step by step. The C.B.R. calls it a revolutionary step and claims that the new law has been made simple, understandable and taxpayer friendly and that through this new law the discretionary powers of the Assessing Officer have been done with. To make it more friendly the C.B.R has inserted above 300 amendments in the new law before it is made effective from 1st July, 2002. And now it is heard that almost same number of amendments are ready to find their place in the Income Tax Ordinance, 2001, through the coming budget. Here it may not be out of place to mention a fiction written by Saadat Hassan Minto. Titled "Niya Qanoon". This is a story of a Tangewala who was very much supporter of the new law and was happy on the promulgation of new law "Niya Qanoon". He was confident that the new law was friendly and in favour of the common man. A policeman stopped him and as usual insulted him. The Tangewala said that new law was in force, therefore, he should behave properly. The policeman said alright, I teach you new law, and he then not only beat him but also put him behind the bars under the new law. I pray that the Income Tax Ordinance, 2001 may not be the Niaya Qanoon of Minto and the coming amendments be real friendly and not "Friendly Fitting". Now I take an opportunity to discuss a few sections of the Income Tax Ordinance, 2001, which requires immediate attention of the policy makers. Section 111 (I.T.O. 2001).---Unexplained income or assets. The provisions of this section are parallel of those of section 13 of the Income Tax Ordinance, 1979. No time limitation for discovery of any unexplained income or asset has been fixed. Under the present provisions of this section an asset, expenditure or income of fifty years back, could be probed and addition could be made in the year of discovery. This is against the concept of finality. It is therefore, proposed that no case beyond five years be probed for the purpose of this section. Section 122 (I.T.O. 2001) Amendment of Assessments. This section is regarding amendment of assessment. As all returns filed under the new Ordinance shall be taken to have been accepted under the Universal Self-Assessment Scheme and the return shall be taken for all purposes of the new Ordinance to be an assessment order. The Commissioner has been empowered under section 122 to amend any assessment as many times to ensure that correct amount of tax for the tax year has been charged to taxpayer. Without going into the details of this section that under what circumstances this section could be invoked. I shall only share with you that this is a growing fear amongst the taxpayers that this section is a hanging sword on their heads. Mr. Muhammad Ather Saeed, Advocate at a seminar held by Income Tax Bar Association Karachi on 31st March, 2003 has presented a paper on section 122 of Income Tax Ordinance 2001. He in his paper has discussed the provisions of this section in detail, and those who are interest to study section 122 in detail may please read paper by Mr. Ather. Although true applicability/practice of ITO 2001 shall start after 1st July, 2003 when returns of incomes shall be filed under this new Tax Law, but the taxation officers under the delegated powers by Commissioners, through the issue of bulk show-cause notices under this section are pronouncing the promulgation'` of the new Tax law. This exercise has created hue and cry amongst the taxpayers. Before I further talk on section 122 of the Income Tax Ordinance; 2001, it would be worthwhile to say something about sections 65 and 66A of the repealed Ordinance 1979, which are considered parallel sections to section 122 of new Ordinance. Section 65 of Income Tax Ordinance, 1979 is regarding additional assessments in the cases where income of any previous year was not properly assessed, under assessed or escaped assessment, the Deputy Commissioner with the prior approval of the IAC could proceed under this section and the time limit was five years. Section 66A of the repealed Act empowered the IAC to reopen the case where he found that orders passed by the Deputy Commissioner are erroneous in so far it were prejudicial in the interest of Revenue, The time, limit in such cases was four, years. The comparison of section 65 & 66A of the repealed Ordinance would depict that checks were provided in sections 65 and 66A of the repealed Ordinance, whereas, there is no 'check of the superior on the taxation officer while issue of show-cause notices under section 122 and this would certainly lead to misuse of powers to harass the assessee. It is therefore, proposed that the powers to issue notices under section 122 may not be delegated to taxation officers and wherever as a result of show-cause notice under section 122, the assessee accepts his omission/mistake and revises his return, further proceedings under this section should be stopped and the revised return be accepted. Moreover, the reassessment should not be for as many times but should be restricted to maximum for two times and that too during the five years after the filing of original income-tax return. Section 21 (m)---ITO 2001. This section provides that any expenditure exceeding Rs.5000 paid or payable under a single account head which, in aggregate, exceeds Rs.50,000 should be by a crossed bank cheque, crossed bank draft, with the exception of expenditure on account of freight charges, travel fair, postage, utilities or payment of taxes, etc, otherwise, these expenditures will be disallowed. Although this is the same provision of section 24(ff) of Income Tax Ordinance, 1979, but it is a harsh provision in genuine cases particularly where payer and the payee both are taxpayers and have duly declared such payments/receipts in their accounts. Such genuine transactions may be kept outside the ambit of this section. Revision by Commissioners Section 138 of repealed Ordinance provided the assessee an additional forum to file Revision petition before the CIT. This was a shortcut forum available to an assessee instead of going for appeals against the assessment orders, The new law is silent in this regard. These provisions be restored. Certification of Accounts Section 32A of Income Tax Ordinance, 1979, required every private company whose paid-up capital was Rs.500,000 or more to file balance-sheet and profit and loss accounts duly prepared and signed by, Chartered Accountant or Cost and Management Accountant alongwith the return. This provision could not find any place in the new Ordinance. The provision may be restored with a modification that every company formed under The Companies Ordinance 1984, with whatever paid-up capital, be made liable for submission of Balance Sheet and' Profit and Loss Accounts, duly audited by the Chartered Accountants or Cost and. Management Accountants.. Books of Accounts Under the new Tax Ordinance, all returns filed under this law shall be accepted and filed returns shall be the assessment orders, but the declared version is required to be back with proper books of accounts. For this purpose books of accounts have been specified for different categories of assessees. The majority of the taxpayers are illiterate and requiring different sets of accounts for their different level of business activities would not only be unfair but also make the situation more complex. Therefore, it is suggested that simple books of Accounts should be prescribed for all levels of incomes. It may also be added that same set of books should suffice for Sales Tax. Selection for Audit For selection of returns for total audit, it' is proposed that 20% of total returns filed be selected only through computer ballet, and it should be ensured that a return once selected for total audit 'shall not be selected for next four years, and that every assessee be subject to audit once in five years time. There should not be any parametric selection as this would lead to a discretionary treatment. It is also suggested that the audit of potential taxpayers may be outsourced to Chartered Accountants and Cost and Management Accountants. Rates of Taxes No doubt in the present scenario where the percentage of taxpayers to total population of the country is, around 1%, the demand for lower rates of income taxes is unjustified. But if we study in deep amongst other reasons for tax evasion, the higher tax rates are one of the major reasons. The common taxpayer even does not disclose as much income which is .necessary to meet his kitchen requirements. An average family of four to six members requires at least two hundred thousand plus annually for household, education and other normal family expenses. But we find that more than 65% business individual declare their annual income far less than Rs. Two hundred thousand. This less declaration of income' results into accumulation of undisclosed wealth and other, unhealthy activities. It is, therefore, proposed that the maximum rate of income-tax for individuals and AOPs may not be more than 25% and each slab stage of income-tax rates, be increased up to Rs.300,000. This would surely attract people to declare their, true incomes and shall also oe a cause of accumulation of white wealth and healthy business activities. The rates of income-tax for corporate sector should also be reduced so that the trend of declaring losses particularly by the private limited companies be eliminated and it is also proposed that the slab rates of taxes also be introduced for corporate sector. These are all my submissions. Thank you for patience hearing.