BUDGET PROPOSALS 2003-2004

BUDGET PROPOSALS 2003-2004 <!--[if gte mso 10]> BUDGET PROPOSALS 2003-2004 By Muhammad Naeem Shah, Advocate and President All Pakistan Tax Bar Association, Lahore Ref: APTBA/2003/201, May 17, 2003 Mr. Shaukat Aziz, Minister of Finance and Economic Affairs, Islamabad. Dear Sir, We feel it our national duty to draw your kind attention to certain facts in connection with the present situation of taxation system and its impact on the economy of the country. These submissions are made in the best interest of nation, humanity and without any political objectives. As you are aware of the facts that the major part of our country's income is from tax collection. On average it is 400-billon annually out of which 390-billion are collected from withholding and voluntary payment of taxes and Rs.1-billion through the tax. collecting agencies. Government is suffering tax losses of Rs.100-billion which taxes the agencies are failed to collect. Due to their wrong practices and mismanagement in the system, tax collection of Rs. 390-billion is badly effecting. Resultantly it is damaging over all economy of the country and causing frustration in the public. It is the primary duty of the Government to provide a peaceful atmosphere to the taxpayers wherein they could pay their due taxes without any fear. Despite lapse of more than half a century Government could not succeed in its responsibility. A large number of economic problems of the country are 'because of mismanagement, inefficiency, corruption, maladministration and lake of cooperation with the taxpayers of the tax collecting agencies. The nation has been made mentally sick and demoralized by these practices just for nothing. We understand that economy in Pakistan cannot be lifted up unless the tax system of the country is not set straight. We believe present Government is sincere and dedicated towards the nation and is keen to restructure the tax system of the country. We are convinced that Government is committed to redress the grievances and to facilitate the public. Despite of the best' efforts made during the last fifteen years every Government failed to streamline the taxation system and to recover the tax losses. The previous regime headed by General Pervaiz Musharraf wherein you were the Finance Minister gave a special consideration to the affairs of the taxation and economy. The following measures taken by the previous regime to streamline the tax system deserves appreciations: (i) To know the drawback and anomalies of taxation system lots of discussions, meetings and seminars were organised and reports prepared, which includes the report of Task Force. (ii) A new Income Tax Law introduced in shape of Income Tax Ordinance-01. (iii) Five new members from the private sector were appointed to restructure the CBR. (iv) Constitution of CBR Advisory Board. (v) A British based Company hired to revamp the CBR. (vi) LTUs and MTUs were established to facilitate the taxpayers. We also appreciate the efforts of the previous regime to uplift the economy as under: - (i) Foreign Exchange Reserves have been crossed US Dollar 10-billion, which is a record in the history of Pakistan. (ii) Revolutionary steps taken to boost up the Capital Market. (iii) Governance has improved and the corruption at the top levels has been minimised. (iv) Pakistan's credibility has been restored with the International Financial Institutions and Markets. (v) Exchange Rate is stable and predictable. (vi) Interest Rate is declining. (vii) Both domestic and external debts have declined and moving toward sustainability and many other steps. It is unfortunate that so far no visible improvement has been observed in tax system in terms of material and meaningful results. Despite the above said steps taken by the Government to lift up the economy, there is no change in the life of a common man rather it has become more miserable than earlier. There is no improvement in trade, industry, agriculture, local and foreign investment and there is depression every where. I believe the efforts and steps taken by the Government could show much better results if there was a fair taxation system. The unfair tax system is a major factor, which demolished most of the efforts of the Government to uplift the economy. It has become a permanent feature that country is suffering following heavy losses because of mismanagement and inhuman practices of tax collecting agencies:‑ (a) Annual Tax losses of Rs. 100 billion. (b) 1.5-million potential taxpayers who are still out of tax net and not filing their tax returns.. (c) A strong protest from the public is adversely effecting the image of the Government and concept of a Welfare State. (d) Almost every assessment completed is contested in appeal. 90% Appeals against the tax departments succeeds and 90% tax demand created in assessments wiped off in appeals, due to which, a great burden of fruitless labour shifts on Tribunals, High Courts, Supreme Court and also on Tax Administration and a lot of time and energy is being wasted while dealing with these matters. (e) Due to the harassment of tax machinery about 2000 trading units and 500 industrial units annually closed down their businesses and about 3000 Pakistanis leave the country. (f) A large percentage of taxpayers comprising of middle class people, most of them always remained in trouble because of their financial, health and other social problems. Mala fide and inhuman practices of tax collecting agencies always add miseries in their lives, due to these reasons the life of a common man has been made a hell, because of these reasons they criticise the policies of the Government, although the Government always desires to make the life of a common man easy. (g) On account of mala fide practices of the tax collecting agencies public is always frustrated and demoralize. There is always a great pressure on the over all economy. Trade, Industry, Agriculture, Local and Foreign Investment always remained depressed and Government could not meet with unemployment and inflation etc., Being taxmen in the present scenario we see no reason of any improvement in Tax system despite the aforementioned steps taken by the Government And we are pained to say that this nation has to live with this disabled system in many years to come. It is unfortunate that in Pakistan the Government has never availed the experties of Tax Bars and professionals. We the tax experts of Pakistan offer our experties to the Government of Pakistan with the assurance that we may advise the Government a very simple mechanism while living within the ambit of prevailing tax laws, procedures and bringing minor changes in the existing system. We could assist the Government to set its tax system straight within a very short span of time. We may advise the Government a mechanism wherein taxpayers could pay their taxes in a peaceful manner and without any protest from any corner. There will be no person having taxable income out of tax net and there will be tremendous increase in the revenues. Resultantly this would eliminate harassment and depression from trade, industry, agriculture, local and foreign investment and ultimately lift up over all economy. We expect your honour would pay due attention to the submissions made above. We feel pleasure if an opportunity is provided to All Pakistan Tax Bar Association to serve the nation. BUDGET PROPOSALS 2003-04 PROPOSALS OF SPECIFIC NATURE: 1. ACTIVE COORDINATION AND PROPER CONSULTATION WITH TAX BARS In Pakistan 70% Income (about Rs.400-billion) of the National Exchequer is from tax collection. Government is continuously loosing taxes of Rs.100-billion per annum due to incorrect procedures/policies, mismanagement and inefficiency of the tax collecting agencies. In total revenue collection of Rs.400-billion, the contribution of the CBR is 10-billion only, whereas the wrong practices/policies of the CBR is badly affecting the withholding tax collection of Rs.390-billion on the one hand and damaging the overall economy, causing the frustration in the public on the other hand. In spite of their best efforts made during the last 15 years, every government failed to streamline the taxation system and to uplift the economy and recover the tax losses because of intricacies of CBR bureaucracy. The previous regime headed by General Musharraf, having its primary object of reformation, gave its special consideration to the affairs of taxation and the economy during their tenure of last three years but in spite of their maximum efforts they could not have been able to improve the system due to reasons mentioned above. The taxation system of Pakistan at present is in its worst form. There is a great mismanagement in the affairs of taxation as well as in the economy. Government is alive on statistical figures manipulated by its economists, whereas it has failed to bring any change in the life of a common man and it will go worst if the Government does not succeed to manage its affairs of taxation. It is the permanent feature that the country is suffering following heavy losses because of mismanagement in the taxation system:‑ (i) Annual loss of Rs.100-billion due to the reasons mentioned above. (ii) 1.5-million potential taxpayers who are still out of tax net and not filling their tax returns. (iii) A strong protest from the public is adversely affecting the image of the Government and concept of a Welfare State. (iv) Almost every assessment completed is contested in appeal. 90% appeals against the tax departments succeeds and 90% tax demand created in assessments wiped off in appeals, due to which a great burden of fruitless labour shifts on Tribunals, High Courts, Supreme Court and also on Tax Administration and a lot of time and energy is being wasted while dealing with these matters. It is therefore proposed that Government should re-consider the causes of its failure, in streamlining the taxation system and to uplift the economy of the country. It is further proposed that Government should take All Pakistan Tax Bar Association into confidence because its experts have spent their lives in the field of taxation and they have all the potentials to deal with the drawbacks and anomalies of the taxation system. They can provide the Government the required assistance for the improvement of taxation system and economy while living within the ambit of prevailing tax laws, procedures and bringing minor changes in the existing tax system. 2. POWERS OF TAX OFFICERS IN RESPECT OF ISSUANCE OF SHOW CAUSE NOTICES BE WITHDRAWN The Government should immediately withdraw all the powers of the tax officers, especially the powers of issuance of show-cause notices. Most of the show-cause notices are issued for their own motives, illegally and illogically. This practice of the tax officers has made the life of taxpayers a hell. Most of the tax officers and the tax employees involved in illegal tax practice, which is a serious matter to be considered. They should be warned to wind up their tax practices and choose either to be a tax employee or a tax practitioner. All the tax employees be prohibited to visit the premises of the taxpayers. These restrictions will close the doors of corruption. It is therefore, proposed that necessary legislation be made on these issues. 3. LTU'S AND MTU'S, A WASTAGE OF HARD EARNED PUBLIC MONEY The establishment of Large Taxpayer Units (LTU) and Medium and Small Taxpayer Units (MTU) are only the wastage of hard-earned public money, wherein millions of rupees per month are being spent for no public use. These units were established to bring a complete change in the system and to facilitate the taxpayers but presently these units have been made a source of comfort for a few tax officers and tax employees. Under present circumstances no change can be brought in the system because of the fact that it is not possible to change the psyche of tax officers who want the acknowledgement of their authority in all the circumstances even if it is at the cost of the nation. Secondly, these units are running under the control of CBR and bound to follow the orders/instructions of the CBR and the higher authorities, which is the main cause of failure of the system. INCOME-TAX: 1. EXPENDITURE UNDER A SINGLE HEAD WHERE IT EXCEEDS FIFTY THOUSAND RUPEES [SECTION 21 CLAUSE (1)] Section 21(1) of the Income Tax Ordinance 2001 should be deleted because practically payment of expenses like entertainment, conveyance etc. is impossible to be made through cross cheques and it is also not possible to ascertain during the year that at the end of the year an expense in aggregate will exceed fifty thousand rupees. This section has become a trap for the taxpayers and a big incentive for Tax Officers. 2. TAX DEDUCTION ON CASH PURCHASES [SECTION 153] This section needs to be amended to the extent of definition of Sale of Goods "CASH SALES" should be out of preview of definition of sale of goods practically it is impossible to deduct tax on Cash Sales of Goods. The tax officer be restrained forthwith from issuing Notices for default of section 50 in respect of cash purchases. 3. TAXATION OF LOAN, ADVANCE OR GIFT RECEIVED IN CASH [SECTION 39(3)] Any amount received as loan, advance or gift in cash by an assessee is deemed to be the income of the assessee. This provision is creating hardship/harassment to the taxpayers. Gifts or loans between husband and wife or blood relations are never paid through cross cheque. In such cases the application of this section create hardship. Proviso should be added to remove the above difficulties regarding non-applicability in case of husband/wife and blood relations if availability of funds is adequately explained. 4. UNEXPLAINED INCOME OR ASSETS [SECTION 111] Under section 111(2) where any investment/expenditure/asset is discovered after the assessment, the income chargeable to tax under section 111 shall be included in the total income of the income year relevant to the assessment year in which the said discovery is made. This provision is giving a licence to the tax authorities to cover its inefficiencies on the one hand and always hamper in the finality of the assessment in the year of earning/investment. There should be a reasonable limit of section 111(2). 5. AMENDMENT OF ASSESSMENT (SECTION 122) Subsection 5(b) of section 122 needs to be amended to the extent of words "from an audit or otherwise". There must be a definite information of concealment of income or a fact from whatever source it was acquired. Under subsection (8) of section 122, "every sales or purchases of goods, receipts of the taxpayer from services rendered and acquisition, possession or disposed off any money, asset, valuable article or investment made or expenditure incurred" have been brought under the definition of "definite information". The plain reading of this subsection reveals that action under section 122 has been proposed only on information of a transaction ignoring the fact whether the same was concealed or not, which is quite illogical and illegal. The purpose of the law is that an action under section 122 should only be initiated if a particular transaction was concealed or it was escaped or under-assessed or assessed at too low a rate and there was a definite information of that concealment with the Commissioner. The language of section 122 is unconstitutional, the basic concept of this section has been changed altogether and a big tool has been provided in the hands of a Commissioner to modify any assessment without having any definite information of concealment, escapement of assessment or under assessment, without any law and logic. This will definitely create a fuss in the system. It is therefore, proposed that the basic concept of section 65/66 of the Income Tax Ordinance 1979 be restored. 6. FAILURE TO PAY TAX COLLECTED OR DEDUCTED (SECTION 161) There should be a reasonable limit of section 161, fixation of a limitation shall keep the tax officers alert in taking action under this section, secondly there should be a finality of an assessment/action after a certain period. 7. MANDATORY DEPOSIT FOR APPEAL (SECTION 127(2)) Under section 127(2) it has been made mandatory to deposit 15% of the tax assessed etc. in order to file an appeal before the Commissioner of Income Tax. This amendment is being used by the tax authorities to harass the taxpayers and forcing them to accept arbitrary increase in assessable income. In case of disagreement by the taxpayers, excessive/fictitious income is assessed to avail collection of 15% before an appeal is tiled. Moreover, in cases where the taxpayers would not have funds to pay 15% of the fictitious demand created by the tax officials, they will be deprived of their legal right to file an appeal. Therefore, this amendment needs to be withdrawn. 8. BURDEN OF PROOF (SECTION 136) A new concept has been brought in through section 136 in the provisions relating to appeals namely Burden of Proof, according to which burden shall be on the taxpayer to prove on the balance of probabilities in the following situations:‑ (a) In the case of an assessment order made by Commissioner, the extent to which the order does not correctly reflect the taxpayer's tax liability for the tax year. or (b) In the case of any other decision, that the decision is erroneous. We have strong reservation about this new concept. Firstly due to the reason that not only under the general jurisprudence, but also under the Islamic jurisprudence it is well-settled law that onus lies on the person who alleges. 9. POWER TO ENTER AND SEARCH PREMISES (SECTION 175) The Section is very harsh and some parts to it are even violation of fundamental rights. There is urgent need to rationalize the wording of this section to eliminate unbridled discretionary powers of the Tax machinery which are always used for their own motives. 10. RETIREMENT BENEFITS/PROVIDENT FUNDS (SECTION 12(2)(e)(iv)(f)) Retirement benefits and Provident Fund may be exempted and section/clauses 12(2)(e)(iv) and (f) be deleted from the definition of Salary. 11. TAX LIABILITY BORNE BY EMPLOYER, (SECTION 13(3)) Tax Liability of employee borne by employer was earlier exempt under clause 167(c) of the second schedule of Income Tax Ordinance 1979, which exemption has been withdrawn vide section 12(3) of Income Tax Ordinance, 2001 in order to avoid imposition of tax on tax, the said exemption be continued. 12. REFERENCE TO HIGH COURT UNDER SECTION 133 BE ALTERED WITH APPEAL As earlier Section 133 of Income 'lax Ordinance 2001 provides reference to High Court where Appellate Tribunal has made an order on an appeal under section 132 which is a very lengthy procedure. It is suggested that reference be substituted with appeal to High Court, which is an easy and short procedure. SALES TAX: 1. SALES TAX DEPARTMENT BE AMALGAMATED WITH INCOME TAX DEPARTMENT Sales Tax Department be eliminated forthwith and all the sales tax work be assigned to Income Tax Department where there are all the facilities to assess and to deal with the Sales Tax affairs. This will save lot of hard-earned public money. 2. SALES TAX REGISTRATION There should be only NTN Certificates, which should be used for Income Tax as well as Sales Tax purposes. For the time being if it is not possible Sales Tax Registration procedure be made easy on the lines of NTN Certificate, Sales Tax Registration Certificate must be issued within 72 hours. 3. SALES TAX AUDIT Multiplicity of Audits is causing undue harassment for the taxpayers and workload on the Sales Tax Officers. It is proposed that only one Audit in a year may be made. The Auditors be allowed to issue a Certificate certifying the carrying out of an Audit. 4. FURNISHING OF A REVISED RETURN/RECTIFICATION OF BONA FIDE MISTAKE Like other statutes there must be provisions under Sales Tax Act for "Rectification of Mistake" Bona fide mistakes in maintaining the record may be allowed to rectify. Likewise if a person discovers a bona fide omission or a wrong statement therein he may be allowed to furnish a revised return. 5. CERTAIN TRANSACTIONS NOT ADMISSIBLE (SECTION 73) Section 73 of the Sales Tax be deleted forthwith because it is creating lot of problems for the taxpayers and giving lot of discretions to the officers. In most of the cases it is not practicable to comply with this section. This section is otherwise un-Constitutional and is creating lot of problems for taxpayers. CENTRAL EXCISE: 1. CENTRAL EXCISE DEPARTMENT BE AMALGAMATED WITH INCOME TAX DEPARTMENT Central Excise Department be eliminated forthwith and all its work be assigned to Income Tax Department where there are all the facilities to assess and to deal with the Central Excise affairs. This will save lot of hard-earned public money. 2. POWERS OF CENTRAL EXCISE OFFICERS TO ISSUE SHOW CAUSE NOTICES BE WITHDRAWN That Government should immediately withdraw all the powers of Central Excise Officers especially the powers of issuance of a show-cause notice. Most of the show-cause notices are issued for their own motives, illegally and illogically. This practice of the Central Excise Officers is creating lot of problems for the taxpayers.