PROPOSED AMENDMENTS IN INCOME TAX ORDINANCE, 2001 AND SALES TAX ACT, 1990

LIST OF NOTIFICATIONS REPRODUCED IN THE <!--[if gte mso 9]> PROPOSED AMENDMENTS IN INCOME TAX ORDINANCE, 2001 AND SALES TAX ACT, 1990 By Mr. Rashid Ibrahim, F.C.A., Rawalpindi Honourable Chief Guest Mr. S.A. Khan, MNA, Former President APTBA, Mr. Muhammad Rafi, Vice President of ICMAP and also the Chairman of the Joint Committee of ICAP and ICMAP, Hafiz Mohammad Idrees, President Rawalpindi Islamabad Tax Bar Association, Officials of ICMAP, learned speakers, ladies and gentlemen AOA. I am grateful to ICMAP to have provided me yet' another opportunity to share' with this august gathering my thoughts on the' Income Tax Ordinance, 2001 and Sales Tax Act, 1990 and to propose certain amendments in these statutes for the benefit of both the exchequer and the taxpayers in general. In the first part of my presentation I would propose amendments in the Income Tax Ordinance, 2001. Before I start my presentation, I would like to mention that these proposals are already forwarded to C.B.R. for their consideration. Although this presentation was developed with the objective of providing a background of proposed amendments but due to paucity of time, I would skip certain portions of this presentation and will briefly explain the proposed amendment. Section 2(22) Employment The definition of employment is confusing and can be interpreted to include any person holding a position entitling the said person to a fixed or ascertainable remuneration, as an employee irrespective of existence of such relationship. Such a confusion is required to he removed. Section 2(24) Financial Institution The definition of financial institution needs to be amended to make it applicable for sections 28, 29, 30, 39, 77, 106, 151 and 153. Section 2(41) Permanent Establishment By virtue of existing definition of Permanent Establishment of a non-resident suppliers of plant and machinery if depute their employees for assembly, installation or supervisory activities in Pakistan would deemed to have a PE in Pakistan. The definition of PE needs to be amended to that extent to conform to the internationally accepted taxation norms. Section 2(54) Royalties The definition of Royalties includes "disposal of property or right" and accordingly would attract tax @ 15% on royalties payable to non-resident, which is not justified. The gain or loss on disposal of such properties and rights should be taxed under "Capital Gains." Section 3 & 54.--Section 3 of the Ordinance provides that the provisions of Ordinance are to apply notwithstanding anything to the contrary contained in any other law, thus nullifying all tax exemptions and concessions .available under (Aber statutes. However, C.B.R. has clarified that existing exemptions and concessions available in various statutes before July 1, 2002 would remain intact. This understanding should be appropriately inserted in the law to avoid complications. Section 13 Subsection (5) Value of perquisites Valuation of perquisites for salaried class include services of a housekeeper, driver, gardener or domestic servant whereas fully maintained car is valued separately, which also includes provision of drivers.' salary thus taxing the same facility of provisions of driver twice. It needs to be corrected. Section 20.---The repealed Ordinance provides that an expenditure incurred "for the purpose of the business" was an allowable expenditure for computing Income from business. However, Ordinance, 2001 allows an expenditure "to the extent to which the expenditure is incurred in deriving income from business". The wordings of Ordinance, 2001 are confusing and it is recommended that the provisions of Ordinance, 1979 be restored. Section 21 Excess cost of perquisites Perquisites in excess of 50% of the employee's salary is not allowed as a tax deductible expense. Perquisites in this respect are valued under section 13. There can be cases, where company has not incurred cash expense to the extent of valuation of perquisites. Accordingly, the inadmissibility of expenditure would not be justified. Further, as the perquisite or employees earning taxable salary of more than Rs.600,000 are taxable in their hands except utility and medical, the disallowance of perquisite in excess of 50% would amount to double, taxation. This situation needs to be corrected. Section 22.---Tax Depreciation is now to be computed based on the number of months the asset is used. Clause (e) of Rule 12(1) requires WDV of each depreciable asset at the beginning of tax year to be furnished with the Return of Income Normal depreciation is now to be calculated after deduction of initial depreciation. These new introduced provisions will entail detailed calculations and clerical work and will not benefit the exchequer and needs amendments in line with the provisions of Repealed Ordinance. Section 26.---Scientific Research Expenditure A deduction is allowed for scientific research, if it is for the purpose of deriving income from business, while to encourage scientific research such a restriction is not useful and may be removed. Section 27.---Employee training and facilities Expenditure incurred for establishment; of any educational institution on hospital for the benefit of employees and establishment of training institutions is an allowable expense. However, in section 27 of the use of words "other than capital expenditure" seems to be superfluous and may be deleted. Section 29.--Allowability of bad debts Section 29 refers' to bad debts as allowable expenditure for financial institutions. Omission of scheduled banks seems to be an inadvertent mistake and needs correction. Section 34.---Accrual-basis Accounting In accordance with the provisions of section 34 an expense is allowable when "economic performance accrues". Accordingly even if the taxpayer has adopted accrual base accounting, the expense for tax purpose would be allowed on cash basis. This situation needs correction. Section 39.---Income from other sources The requirement for obtaining loan, advance, deposit or gift include receipt of amount through banking channel and from a person having "NTN Card". The requirement of NTN is not justified and may be removed. Section 50.--Foreign source income of short term individuals The Ordinance requires that expatriates who, remain in Pakistan for more than three years, their total world income would become taxable in Pakistan. There is no reason to tax foreign source income of expatriates in Pakistan and accordingly section 50 subsection (1) clause (b) may be deleted. Section 55(2).---Exempt Period Losses. The Ordinance provides that losses sustained during exempt period cannot be set off against income after the expiry of exemption period which is not justified and against the settled issue by Courts. Accordingly it needs correction. Section 68 Non-recognition rules Gains of losses on transmission of an assets on death, by reason of a gift, by compulsory acquisition or on liquidation of a company are made taxable if the person acquiring asset is a non-resident. This is not justified and can' create hardship and accordingly may be amended. Section 83.---Resident Company A company can be treated as a resident if the control and management is situated wholly or almost wholly in Pakistan. The condition of "almost wholly" is not relative and give huge discretionary powers to the tax authorities and should be removed. Section 98.---Change in control of an entity Change in control of an entity of 50% or more will debar that entity from set off of loss suffered prior to change unless that entity is engaged in the same business and does not engage in any new business. This is not justified and needs to be amended. Section 101.---Geographical source of income Gain on sale of shares of a company incorporated outside Pakistan it is not taxable in Pakistan, if the assets of the company are located in Pakistan. It is a bad law and needs to be corrected. Any amount payable to non-resident is subjected to withholding tax, whereas number of payments made to non-resident are not taxable in Pakistan. Accordingly subsection (14) of section 101 may either be deleted or appropriately amended. Section 109.--- Re-characterization of income and deduction Huge discretionary powers are given to tax authorities for re-characterization of a transaction such provisions lead to disrespect for the law and needs to be deleted. Section 116.---Wealth statement There is no provision in the law to file wealth tax as was in the Repealed Ordinance, such a provision needs to be inserted in "Ordinance, 2001. Section 127.---Appeal to the Appellate Commissioner No appeal can be filed to the Commissioner (Appeals) unless 15% of tax assessed 'in excess of the tax due on the basis of the return on 20% of the tax assessed for the immediate preceding year or in the absence of assessment 30% of the tax due on the basis of return whichever is less is paid. This provision is harsh and against natural justice and virtually deny the right of appeal and therefore, the condition is highly recommended to be deleted. Section 131.---Appeal to the Appellate Tribunal Provisions regarding stay of demand by Income Tax Appellate Tribunal as contained in -section 134(6) of the Repealed Ordinance are not appearing and needs to be inserted. Section 147.---Advance tax The provisions of filing own estimates for payment of advance tax needs to be restored, while individuals should also be allowed to pay advance tax in 4 equal instalments on the basis of last tax assessed. Section 153.---Deduction of tax The provisions for deduction of tax from payments to non-resident with PE in Pakistan are confusing and needs to be appropriately amended. Section 182---Penal for failure to furnish a statement There is no maximum ceiling for penalty for non-filing of statements, which should be introduced. Leasing business Under the Repealed Ordinance, the lease rentals received by approved lessors was treated as their income. No such provision exists in the Ordinance, 2001. Accordingly the lease rentals can be construed to be, not the gross rental income but the financial income earned. If this view is taken, the tax authorities could endeavour to limit the deduction for depreciation, in which case leasing business would not be viable. This position needs to he corrected. Marginal relief for salaried individuals The moment the taxable salary income of an individual exceeds Rs.600,000 there is disproportionate increase in tax liability, as all the perquisites exemptions are withdrawn and there is no provision to provide marginal relief. It is mostly effecting the professionals of this country. It is accordingly recommended that provisions for marginal relief be introduced in the Ordinance. Fifth Schedule Limitation for carry forward of loss After commencement of commercial production the depreciation of offshore petroleum companies can he carried forward without any limit for oil exploration and production companies while in onshore petroleum concessions it can be carried forward for six years only, which should also be allowed to be carried forward without any limit. I would again like to submit that advance ruling concepts should be introduced to help reduce litigations. I would now propose certain amendments in Sales Tax Act, 1990. Section 2(9).--Due date for filing of return The time period of 15 days to file monthly return is too short as since most businesses have wide networks spread over the country and collection of data takes time. Accordingly it is suggested that the filing time be enhanced to 30 days. Sections 2(14) and 7.---Input tax on services Adjustment of input tax on services on which sales tax is levied through Provincial and Islamabad Capital Territory Ordinance, be allowed. Section 2(33) Sales Tax Department has consistently taken the posit .a Mat sales tax is leviable on sale of fixed assets, scrap, used vehicles and other materials whereas the Courts and Ministry of Law has different views. The controversy should be settled by making clear amendments ii the law in accordance with the views of Ministry of Law. Section 2(44) Sales tax is charged at the time of delivery or receipt of advance, payment, whichever is earlier. It is recommended that sales tax should only be levied at the time of delivery and necessary amendments he made to set at rest the controversies and to conform with certain Court orders. Section 3(1) The rate of tax should be reduced to 10% from the present 15%. Section 3(A) Further tax is chargeable to supplies made to unregistered persons. The ultimate consumers such as banks, financial institutions, professional service providers etc. are not required to be registered, and charging additional tax to such consumers is not justified and appropriate amendments be made in the law to remove this anomaly. Section 7 Time period of claim of input tax within the tax period is against the basic spirit of sales tax, system while Courts have also decided again a these provisions. Accordingly necessary amendments are required to correct the situation. There should be no restriction on claim of input tax as any restriction is also against the scheme of sales tax. Accordingly S.R.O. 578(I)/98, dated June 12, 1998 be withdrawn. Section 26 There is no provision in the law to revise sales tax returns. Necessary amendments are required to provide for revision of return. Section 34 The rate of 2% per month of additional tax is very high in view of the present economic trend and is required to be reduced substantially, while additional tax is being levied by adjudicators in a casual manner, instructions should be issued to levy additional tax and penalty where it is due and not on every case. Section 73 Certain provisions of the law whereby input is disallowed if payment of amount exceeding Rs.50,000 is made through cash or if payment is made after 120 days are not justified and should be deleted. Adjudicating Authorities The competent of adjudicating authorities other than Tribunals is questionable which needs considerable improvement. Audit Audit Audits conducted by the Department, DGRRA and outsourced auditor needs to be streamlined.