FOREIGN INVESTORS AND ADVANCE RULING

FOREIGN INVESTORS AND ADVANCE RULING <!--[if gte mso 10]> FOREIGN INVESTORS AND ADVANCE RULING By Mr .M. Iqbal Patel, F.C.A., Karachi Pakistan Government is striving for foreign investment. Recently a delegation of foreign investors visited' Pakistan, speaking to them the President General Pervez Musharraf said that the country holds immense promise for return to foreign investors. He said that all sectors of the economy are open to foreign direct investment. Pakistan Government has introduced a number of structural and stabilization reforms and took measures to improve governance in the country. It introduced several modern concepts in taxation through the Income Tax Ordinance, 2001. Because a taxation system of a country plays a pivotal role in attracting foreign investment. Taxation policy of the Government is one of the deciding factors for foreign investors for making investment in a country. The country's open investment policies offer attractive opportunities to the foreign investors in all the sectors. As the investments package evolved there is no restriction on the quantum of equity, joint ventures with local partners, no restriction, on remittance of royalty, technical and franchise fee, capital, profits and dividends. But tax collecting machinery has created such a dangerous show that a foreign correspondent inquired that is it criminal act to be in a tax net in Pakistan? This impression is visible from the fact that despite Pakistan offers an attractive and secure investment environment for foreign investors, yet they are shy of making large scale investment, especially at a time that the multinational companies are striving for relocate their manufacturing and service industries in developing States. Interestingly that foreign investment has fallen sharply despite all multilateral agencies like IMF, WB and ADB have lauded our investment policies, and international credit rating has also improved. There are several reasons for this unfortunate situation one of them is discussed in this paper. Before proceeding to the real subject-matter, let the readers to know a little bit about the taxation system of. Pakistan. The Income Tax Ordinance 2001 (Ordinance) has divided the taxpayers into two categories (1) resident (ii) non-resident, based on residential status. An individual is a resident under section 82 for a tax year if he was present in Pakistan for 182 days or more in aggregate or is an employee or official of Federal or Provincial Government posted abroad in a tax year. A company under section 83 is a resident company for a tax year if it is incorporated in Pakistan and the control and management of the affairs of it is situated wholly in Pakistan at any time in the tax year. A non-resident is defined under section 80 is a person who is not a resident person for the tax year. The other major change in the Ordinance is the basis of income liable to tax. A concept of geographical source of income has been introduced under section 101 of the Ordinance. Any income shall be foreign source income to the extent to which it is not Pakistan source income as enumerated under section 101. Non-residents are taxed on their Pakistan source income whereas a resident is taxed on both, his Pakistan as well as foreign source income. The foreign investors usually face difficulty in ascertaining the tax components of their project, who are interested to know in advice the chargeability to tax of their income at the time of preparing a feasibility of new projects or industries to be set up in Pakistan or he intends to merge or amalgamate with any of the project or business or acquisition of a business in Pakistan. To meet this demand of the non-residents and in line with international practice the Ordinance has introduced a concept of advance ruling under section 206 A with an object to provide to foreign investors to know in advance the impact of income tax on their proposed plan for investment in Pakistan. According to the provision of S.206A a non resident investor is required to apply in writing to the Central Board of Revenue with full and true-disclosure of the nature of all aspects of the' transaction proposed or entered into by the applicant. Based on such full and true disclosure of the nature of all aspects of the transactions relevant to the ruling, made by the taxpayer in his application and the transaction has proceeded in all material respects accordingly, the CBR will award an advance ruling setting out the Commissioner's position regarding the application of income tax law on the transaction referred to it. The ruling awarded by the CBR will be binding on the Commissioner with respect to the transaction of the law in existence at a particular point of time of application. It is also provided that the ruling will have overriding effect if there is any inconsistency between a circular issued by the CBR and such advance ruling. The draft S.R.O. provides for withdrawal of advance ruling in case the fact disclosed in the application, if subsequent be found incorrect. This provision has been inserted by the Finance Act, 2003 on June 17, 2003, but the CBR has now after over one half tax year has passed, has circulated a draft SRO whereunder it has devised procedure and modalities for implementation of the advance ruling for foreign investors who require it in preparing feasibility reports of their new projects or industries to be setup or merged into the business in Pakistan in advance. It is learnt that meanwhile applications for advance ruling have been moved to the CBR by non-resident companies for avoiding tax disputes in future on chargeability of tax on the transaction entered into by them. In the absence of any laid down procedure, one of the application since last over five months is in transit between tax authorities in Islamabad-Karachi. It's anybody's guess to think over, the bad impression, will be carried by the non-resident who moved the application since long and the CBR has failed to issue him ruling even over five months have passed. The new draft rules provide to finalize application on advance ruling with 90 days of its filing. The question to ponder is whether the foreign investors will have to wait for a period of three months for obtaining an advance ruling from CBR? This undue delay will distort their feasibility, and is one of the reason that discourages the foreign investors to invest in Pakistan. Moreover as the advance ruling will be given on the transaction already entered into, therefore, in case the ruling is delayed, the applicant may be made liable for payment of penalty or additional tax on the amount involved for non-compliance of the provisions of the Ordinance in respect of such transaction. Although the current investment policy offers host of incentives to the foreign investors; but unless special care has been taken to avoid delays and bureaucratic red tapes in the way of business, the Government's efforts to enhance foreign investment will be a futile exercise. The Government has to provide the facility of advance ruling to non-residents within a specified time of not more than fifteen days of its application made so as to a meaningful decision be taken by the foreign investors. It is suggested that the time limit for 90 days. proposed in the Rules be reduced to fifteen days with which the CBR shall give its ruling on the application made to it by a non-resident for advance ruling. No doubt any ruling will have considerable impact on exchequer because ruling sought by a non-resident will either result in exempting from tax of his income or payment of tax on the transaction will result at reduced tax rate. The Tax Authorities, therefore, will be cautious in taking their decision on the matter and will try to involve as many tax collectors as may be possible. Which has been the case in processing the above cited case which has caused so much delay in giving the ruling. In order to issue advance ruling a Committee has been constituted for the purpose is comprised of three members, the CBR Chairman, Member Direct Taxes and Additional Secretary of Law and Justice and Human Rights Division. It will be observed that out of three members, two of them are from CBR itself that is Chairman and Member Direct Taxes. Thereby CBR has undertaken upon itself both executive and judicial powers. In the circumstances how the foreign investors will expect that the system will ensure level playing field for them. In order to build, their confidence in the system it is necessary that discretion and favours are replaced with fair rules. Advance ruling is a judicial function which can only serve the purpose if this function is assigned to an independent authority to be constituted for the purpose. It is imperative that high powered statutory Advance Ruling Commission be formed comprising tax experts from judiciary and professional bodies, the high rank members from Board of Investment, Ministry of Finance and Law and Justice including Chairman CBR or a Member Direct Taxes. This Commission will ensure transparency and professional advance ruling which will inspire confidence of the foreign investors. The Commission should reduce the waiting period to get advance ruling to the maximum of fifteen days. The Federal Finance and Economic Affairs Minister Shokat Aziz speaking at the launch of auto assembly plant said that the Government is now focusing on primary elements of good governance besides eliminating the unnecessary delays. Since the CBR is his baby so he should also concentrate to it to ensure that these objectives are achieved in this institution. Accordingly the Commission upon receipt of an application from the foreign investor for advance ruling should afford an opportunity of being heard to the applicant which will facilitate the Commission to understand the nature of transaction and their point of view. It will reduce the waiting period of getting the ruling significantly. A provision in this respect for giving an opportunity of being heard to the applicant be made in the section 206-A. Moreover in order to expedite the disposal of an application of advance ruling, a format of application has been proposed in the Schedule of the draft notification with the particular the CBR considers necessary to understand the nature of all aspects of the transaction relevant to the ruling. The rules should prescribe the documents to be attached with the application so as to the applicant is not bothered to furnish the explanation or documents from time to time which may delay the matter: The advance ruling is restricted to the foreign investors only. The resident investors are not entitled to apply for such ruling. This discriminatory treatment with the local investors is not justified in view of their huge contribution to the exchequer by way of Government levies without relief and incentives that are available and enjoyed by the foreign investors. Therefore, the resident and non residents, be considered to bring at par for the facility of advance ruling. The advance ruling policy should be transparent, fair and favourable to the foreign investors. The CBR should take measures to implement the reforms introduced through the Ordinance in true spirit and to improve its governance, eliminating the unnecessary delays and creating an impression that the tax collectors are friends and not masters of the taxpayers. INCOME TAX RULES, 2002 (Draf amendments) S.R.O. 14(I)/2004.---The following draft of certain amendments in the Income Tax Rules, 2002, which the Central Board of Revenue proposes to make in the Income Tax Rules, 2002 in exercise of the powers conferred by section 237 of the Income Tax Ordinance, 2001 (XLIV of 2001), are hereby published, for the information of all persons likely to be affected thereby, and notice is hereby given that the draft will be taken into consideration after fifteen days of its publication in the official Gazette. Any objection or suggestion which may be received from any person, in respect of the said draft amendments before the expiry of the aforesaid period, shall be considered by the Central Board of Revenue. In the aforesaid Rules, after rule 231, the following shall be inserted, namely:‑ "231A. Procedure for issuance of advance ruling under section 206A.---(1) A non-resident person desiring an advance ruling under section 206A of the Ordinance, 2001 (XLIV of 2001) shall make an application to the Central Board of Revenue in the following form set out in the Schedule below. (2) The application under sub-rule (1) shall be considered by a Committee consisting of the following members, namely: (a) Chairman, Central Board of Revenue Chairman (b) Member (Direct Taxes) Member (c) Additional Secretary, Law, Justice Member and Human Rights Division. (3) The Committee may obtain comments of the Commissioner of Income Tax concerned and, if it considers necessary, advice of a legal expert on the application and decide the issue, as it may deem appropriate, in a joint sitting or through circulation amongst its members. (4) Advance ruling for the purposes of this rule means determination by the Committee in relation to the transaction which has been undertaken or is proposed to be undertaken by a non-resident person the question of law specified in the application. (5) The advance ruling shall be binding on the Commissioner only in respect of the specific transaction on which such advance ruling is issued. The advance ruling shall continue to remain in force unless there is a change in facts or in the law on the basis of which the advance ruling was pronounced. (6) The copy of the advance ruling pronounced by the Central Board of Revenue shall be provided to the applicant and to the Commissioner of Income Tax having jurisdiction over the case. (7) Notwithstanding anything contained in this rule, the advance ruling shall cease to be binding on the Commissioner, if it is subsequently found to have been obtained by fraud or misrepresentation of facts about the nature of the transaction on which advance ruling was issued. (8) An application filed under this rule shall be disposed of not later than ninety days of its receipt. 231B. Withdrawal of application.---The applicant may withdraw the application made under rule 231A at any time before the advance ruling is issued. SCHEDULE [See sub-rule (1)] Application for advance ruling under section 206A of the Income Tax Ordinance, 2001 To The Chairman, Central Board of Revenue, Islamabad. Dear Sir, The undersigned being duly authorized hereby applies, on behalf of____________ (name of the non-resident person) for advance ruling under section 206A of the Income Tax Ordinance, 2001 (XLIV of 2001). Necessary details of the transaction are set out below and in the Annexure to this application. The following documents as required under rule 231A of Income Tax Rules, 2002 are enclosed:‑ (a) __________________________ (b) __________________________ (c) __________________________ (d) __________________________ (e) __________________________ Yours faithfully, Signature Name (In block letters) Designation ANNEXURE [See paragraph 2 of the Schedule] (i) Name of the non-resident person (in block letters) ______________ (ii) Permanent address and telephone and fax numbers of the non-resident person (in block letters)_____________________________________________ (iii) Address in Pakistan ____________________________________ (iv) Telephone No. ___________________ Fax No. _____________ (v) Country of Origin_______________________________________ (vi) National Tax Number___________________________________ (vii) The following is the statement of the relevant facts of the transaction having bearing on the question(s) on which the advance ruling is required (please annex extra sheet, if required): (viii) Statement containing the applicant's interpretation of law or facts, as the cu z may be, in respect of the question(s) on which advance ruling is required (please annex extra sheet, if required) 1s as follows: (ix) The undersigned, solemnly declares that:‑ (a) full and true particulars of the transaction relevant for the purposes of advance ruling applied for have been disclosed and no material aspect affecting the determination of the application of the Income Tax Ordinance, 2001, in this behalf has been withheld; and (b) that the above issue(s) is/ are not pending before any Income Tax Authority, Appellate Tribunal or Court for adjudication. Yours faithfully, Signature_______________ Name (In block letters)____ Designation____________ Address in Pakistan __ Telephone No. ________ Fax No. _____________ [C. No. 4(119)ITP/03] (Sd.) Vakil Ahmad Khan Member (Direct Taxes)/ Additional Secretary LETTER FROM MALIK MUMTAZ HUSSAIN KHOKHAR, PRESIDENT, LODHRAN TAX BAR ASSOCIATION TO CHAIRMAN, CENTRAL BOARD OF REVENUE [10th October 2003] To The Chairman, Central Board of Revenue, Islamabad. SUBJECT: INSTRUCTION REGARDING AGAINST ILLEGAL RECOVERY MEASURES FOR OUTSTANDING WEALTH TAX DEMANDS. Honourable Sir, I want to draw your kind attention towards illegal recovery measures being adopted for the recovery of outstanding wealth tax demands. Sir, the modes of recovery given in section 32 of Wealth Tax Act, 1963 had been provisions of section 91,92,93,94 and 95 of the Income Tax Ordinance, 1979, though these provisions are till mentioned in section 32 of the Wealth Tax Act, 1963 but the Income Tax Ordinance, 1979 itself has been repealed w.e.f. 1-7-2002 so any Assessing Officer cannot take recourse to these provisions for recovery of outstanding wealth tax demands as the Income Tax Ordinance, 1979 no more exists. Now no modes of recovery are available to the Assessing Officer either under Wealth Tax Act, 1963 or under Income Tax Ordinance, 2001: In this respect I want to draw your kind attention towards Capital Value Tax (CVT). The CVT was recoverable, through similar provision contained in section 7(6) of the Finance Act, 1989. As the legislature finds it maintainable and continuable they through Finance Act, 2003 have amended the section 7(6) of the Finance Act, 1989. Section 32 of the Wealth Tax Act, 1963 has not been substituted with the words of Part IV of Chapter X of Income Tax Ordinance, 2001 so no Assessing Officer can proceed under sections 91,92,93,94 and 95 of the repealed Tax Ordinance 1979. In these circumstances coercive recovery measures being adopted are not only illegal but also ab initio void. Early instructions in this respect will solve the problems of so many assessees. Tanking you in anticipation. LETTER FROM MALIK MUMTAZ HUSSAIN KHOKHAR, PRESIDENT, LODHRAN TAX BAR ASSOCIATION TO CHAIRMAN, CENTRAL BOARD OF REVENUE [15th January, 2004] To The Chairman, Central Board of Revenue, Islamabad. SUBJECT: ISSUANCE OF ILLEGAL RECOVERY NOTICES-INSTRUCTION REGARDING. Respected Sir, We want to draw your kind attention towards the issuance of illegal notices being issued by the department in these cases:-‑ (1) Where appeals are pending before the CIT(Appeals) hearing have, been concluded and we are waiting for decisions. 15% tax has already been paid. (2) Where original orders have been cancelled or set aside. (3) Where demand created has been reduced. (4) Where assessment orders alongwith DN have not been served. In spite of our several requests learned Taxation Officers are reluctant to cooperate with the Bar on this issue. In each and every .case we are moving application before the concerned CITs. Bar requests for the issuance of instructions to the Zonal Commissioners as well as subordinate officers in this respect. Bar wants to draw your kind attention towards the following decisions of Supreme Courts and High Courts. (1) (1992) PTD 347 (SC of Pak); (2) (1992) NTR 123 (SC of Pak); (3) (1989) PTD 1302 (HC Karachi); (4) (1987) PTD 249 (HC Karachi) and (5) (1976) 33 Tax 285 (HC Karachi). Assessees are being compelled for the payment of 15% demand created by the Assessing Officer before filing appeal ignoring the latest decision of DB of Honourable Lahore High Court, dated 24-10-2003 deciding Writ Petitions Nos.1722, 1882, 2386 and 2908 of 2002, 54, 2585 to 2588 of 2003 and 2445 of 2002 (Copy being enclosed). While deciding these writ petitions reliance was made by the apex Court on the following decisions of Supreme Court and High Courts:-‑ (1) Chanab Cement Products (Pvt.) Ltd. and others v. The Banking Tribunal Lahore and others (PLD 1996 Lah. 672 (Full Bench) (2) The right of appeal has always been considered by the superior judiciary as a substantive right which has to be conferred in express terms by an express enactment Hassan Baksh v. Settlement Commissioner Rawalpindi and others (PLD 1970 SC 1) Muzaffar Ali v. Muhammad Shafi (PLD 1981 SC 94) Wherein their lordships further observed that the jurisdiction or right of continuation of trial but has to be created and guaranteed by statute. Other cases CIT Peshawar v. Messrs Siemen A.G. (PLD 1991 SC 368); (PLD 1988 SC 2002); (PLD 1997 SC 582 and (1959 SC 364). Mr. Justice A.R. Cornelius while delivering leading opinion of Hon,able Supreme Court in the case of Messrs Eastern Rice Syndicate v. C.B.R. Operated in the way in which these provisions have been operated in the present cases, they are mere instruments and agencies of oppression, and it is with great regret that we observed that the Appellate Authority being cognizant of the very heavy penalties imposed should have regarded it as a sufficient discharge of its duty to dispose of the appeals on the bare ground of non-deposit of the full amount of penalties. In the light of above decisions of apex Courts Honourable Lahore High Court declared the enactment made by section 21 of the Finance Ordinance (XXI of 2000) as unconstitutional as without authority. Now our Bar wants to draw your kind attention towards the decisions of Gujarat High Court (India) The Commissioner of Income Tax is a Tribunal subject to the Supervisory jurisdiction of the High Court under Article 227 of the Constitution. Hence he is bound to obey the law declared by the High Court. It is not open to the Commissioner of Income Tax to ignore decision of the jurisdictional High Court or refuse to follow it on the, ground that verdict had not been accepted by the Department and that the matter was carried further and was pending before the Supreme Court. When a point is concluded by the decision of the Court, all subordinate Courts and inferior Tribunals within the territory of the State and subject to the supervisory jurisdiction of the High Court are bound by it and must scrupulously follow the said decision in letter and spirit. 1998 PTD 2155; 221 ITR 739 (Gujarat High Court (India); 1998 PTD 2155; 221 ITR 861. (Gujarat High Court (India). Pray: Instructions in this respect may kindly be issued as early as possible. Thanking you in anticipation.