ADVANCE RULING-RULE 231A --NEEDS IMPROVEMENTS

LIST OF NOTIFICATIONS REPRODUCED IN THE <!--[if gte mso 9]> ADVANCE RULING-RULE 231A -‑NEEDS IMPROVEMENTS By M. Iqbal Patel, F. C. A. , Karachi The new Chairman, Mr. Abdullah Yusuf, the Central Board of Revenue (C.B.R.) has said that he would go for investment-oriented tax policies. His statement is in confirmative with the policies of the Government who is striving for foreign investment. The President, General Pervez Musharraf is propagating that the Country holds immense promise, for return for foreign investors, and 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. The taxation system of a country plays a pivotal role in attracting foreign investment and it 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 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 u/s 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 206A 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 C.B.R. 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 C.B.R. 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 C.B.R. and such advance ruling. This provision has. been inserted by the Finance Act, 2003 on June 17, 2003, but the C.B.R. has now after over one about eight months of tax year has passed, has circulated a S.R.O. 130(1) 2004 dated February 27, 2004 where under it has amended the Income Tax Rules, 2002. A new rule' 231A has been inserted. It has devised procedure and modalities for issuance of advance ruling under section 206A to foreign investors who requires it in preparing feasibility reports of their new projects or industries to be set-up or merged into the business in Pakistan in advance. It is learnt that meanwhile applications for advance ruling have been moved to the C.B.R. by non-resident companies for avoiding tax disputes in future on chargeability of tax on the transaction entered into by them one of them is pending since last over eight months. 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 C.B.R. has failed to issue him ruling even after over six months have passed. 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? Following are the few suggestions to improve the provisions of rule 231A on the ruling:-- (1) The rule 231A(I) requires a non-resident person desiring an advance ruling shall make an application to the C.B.R. on prescribed form as set out in the Schedule of the notification with the particular the C.B.R. 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. (2) The rule 231A(2) provides that an application be made to the C.B.R. by a non-resident person desiring an advance ruling shall be considered by a Committee, comprised of three members, the C.B.R., 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 C.B.R. itself that is Chairman and member direct taxes. Thereby C.B.R. has undertaken upon itself both executive and judicial powers. In the circumstances how the foreign investors will expect that the system of awarding advance ruling will ensure level playing field for them. In order to build their confidence in the system it is necessary that discretion and favors 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 is formed comprising tax experts from judiciary, professional bodies, the high rank members from Board of Investment, Ministry of Finance and Law and Justice including Chairman, C.B.R. or Member Direct Taxes. This Commission should ensure transparency and professional advance ruling which will inspire confidence of the foreign investors. (3) Further the rule 231A(3) provides that the Committee may obtain comments of the Commissioner concerned. The practical aspects of this procedure has been experienced by one of the applicants that his application of advance ruling was referred to the Director General, LTU, Karachi for comments by the C.B.R. in the month of September, 2003. The DG took about four months to submit his comments to the C.B.R. This situation suggests that a time frame is necessary to be provided under rule 231A(3) during which period the Commissioner should submit his comments to the CBR on the question of laws. Moreover the rule 231A does not provide an opportunity of being heard to be afforded to the applicant or his authorized person. Such provision in the rule will facilitate the Committee to resolve their queries on the question of law specified by the applicant in his application besides understanding the nature of the transaction quickly and will help them to give ruling within shortest possible time. Accordingly the Committee' upon receipt of an application from the foreign investor for advance ruling should afford an opportunity of being heard to the applicant. 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 is made in the rule 231A. 4. Further the rule 231A(4) provides that the Committee will determine in relations to the transaction proposed or entered into by the non-resident person the question of law specified in the application. It does not specify any time limit for its determination on issuance of advance ruling on the application. Though the draft S.R.O. published by the C.B.R. included sub-rule (8) to rule 231A(I) that the application filed under this rule shall be disposed off not later than ninety days of its receipts. This sub-rule has been dropped in the final S.R.O. 130(I)/2004 dated February 27, 2004. Thereby the C.B.R. has assumed unlimited time and intends the non-resident person to wait for indefinite period to get ruling as has been in one of the case referred above where the applicant has been waiting since August, 2003 when he applied for ruling which is still pending when three months have left to end of the tax year. The question to ponder is whether the foreign investors will have to wait for indefinite period for obtaining an advance ruling from C.B.R.? This undue delay will distort their feasibility, and is one of the reasons that discourage 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. In order to avoid such undue delay at the cost of displeasure of foreign investor it is necessary that the rule 231A(4) be amended providing that an application filed under this rule shall be disposed of not later than 15 days of its receipts. 5. The rule 231A(7) also provides that ruling shall cease to be binding on the Commissioner if he subsequently found that the ruling has been obtained by misrepresentation of fact about the nature of transaction entered into on which ruling was obtained. The Federal Finance and Economic Affairs Minister Shaukat 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 C.B.R. is his baby so he should also concentrate to it to ensure that these objectives are achieved in this institution. 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 investors be brought at par for the facility of advance ruling. The advance ruling policy should be transparent, fair and favorable to the foreign investors. The C.B.R. 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