BUDGET PROPOSALS 2004-05

BUDGET PROPOSALS 2004 05 <!--[if gte mso 10]> BUDGET PROPOSALS 2004‑05 By All Pakistan Tax Bar Association, Lahore PROPOSALS OF SPECIFIC NATURE: 1. ACTIVE COORDINATION AND PROPER CONSULTATION WITH TAX BARS It is one of the object and motto of All Pakistan Tax Bar Association (APTBA) to provide an assistance to the Government to reform the affairs of taxation of the country. We have always supported the healthy and positive laws and policies of the Government, APTBA also believes in healthy criticism to promote the healthy activities. It has always been a dream of APTBA that there should a modern tax system with an honest, efficient and effective tax administration. 2. APTBA appreciates the economic policies of the Government, which have brought many positive changes in the economy of the country. Economic achievements during the current fiscal year have shown excellent results. The various steps taken by the Government have led to (i) higher growth in industrial production, (ii) fiscal deficit reduction, (iii) decline in foreign and domestic debts, (iv) decline in interest rate, (v) unprecedented increase in credit to private sector, (vi) extraordinary increase in foreign exchange reserves, (vii) increase in remittances, (viii) upsurge in stock market, (ix) higher income in exports. It is also a matter of great appreciation that revenue targets of Rs.5 billion will be achieved easily. 3. APTBA believes hat credit of these achievements goes to the ‑Ministry of Finance because these achievements are due to the higher economic activities. Since there were more imports, exports, supplies etc., on which more withholding taxes were collected as the CBR has been able to meet its budgetary targets: APTBA congratulates the Minister of Finance Learned Mr. Shaukat Aziz for his extraordinary efforts, dedications, special interests and immediate attention to the matters of even root level. 4. As per a careful estimate 96% of the tax collection of the country is from withholding taxes which taxes are not paid 'as tax but as cost of goods, about 8% as voluntary payment and 2% through tax collecting agencies. Out of said 8% and 2 % taxes; 80 % are being collected from multinationals and 20 from the general taxpayers. APTBA therefore, propose that accurate dates of tax collection through withholding, voluntary payments and tax through agencies be prepared separately for Income Tax, Sales Tax, Customs and Central Excise duty and to be brought before the nation. 5. APTBA has always supported the healthy and positive changes, laws and procedures, introduced by the Government/CBR. It always appreciated the introduction of Income Tax Ordinance, 2001, Universal Self‑Assessment Scheme, CBR's efforts towards facilitation of taxpayers, to minimize the contact between the taxpayers and tax collectors, taxpayers education and different computer programmes devised by the CBR. We support these policies only because that these have minimized the powers of‑tax, machinery and the contact between the taxpayers and tax collectors. 6. APTBA understand, that the efforts made so for arc not sufficient to meet the requirements of Reform Agenda and there is a need to do a lot to achieve a real improvement in the tax system. The psyche of the tax collector has not been changed so for, the confidence of the public has not been restored, even today the environment 'is not such which could attract even a local investor. A lot has been said to facilitate ,the taxpayers but practically there is nothing on the, ground. So for the CBR has only been able to change the wrapper whereas there is no change in the quality of the product. 7. In spite of all its powers and commitments the Government seems helpless before the taxpayers and tax collectors. Taxpayers are not ready to come forward or to comply voluntarily. They are reluctant to come into the tax net because of their own logics and reasons. On the other hand tax collectors are also not ready to withdraw their powers of discretion, which is the main attraction of their service and their acknowledgement in the society. They are also not ready to leave all these privileges only because of an additional salary. 8. In Pakistan mostly the tax laws and procedures are simple but mala fide implementation made these laws a problematic one. It is a principal that tax system always provide a pushup to the economy of the country but in Pakistan tax system has always pull the economy and created hurdles in its smooth running. 9. History shows that a provision of law or a policy always given fruitful results, whenever it withdrawn the powers of tax machinery, this practice always encouraged the economic activities and public always take a sigh of relief, whether it was 1990 when the powers of issuance of show‑cause notices or assessments were withdrawn by introducing presumptive tax regime or it was 2003 when the powers of machinery withdrawn by introducing the Universal Self‑Assessment Scheme. 10. If the Government is desirous of building the image of Revenue Departments, it has to go for Zero Powers to tax machinery. We therefore propose that (i) Powers of tax machinery be curtailed to Zero on the one hand. (ii) A system be set up whereby a bona fide, strong fair and free audit be provided. 11. APTBA is against the abolishing of Circle based system. We understand that with some modifications (which could change the entire working of the Circles and with ZERO powers) this is the only system whereby the number of income taxpayers be enhanced up to 5 million, without any survey or panic in the taxpayers. We understand that in the past this system was utilized only for the benefit of tax officers and their immediate bosses. To abolish the circle based system it will further squeeze the number of return filers. 12. APTBA believes that tax system of the country is heading towards an unidentified destination and it will require decade to understand and to know the results, which may also be a negative one. We understand that there is no default in the conventional system and procedures, yet these laws and procedures were never implemented in a bona fide and fair manner, we believe that Circle based system with the help of computer technology can pay much more than a new one. 13. One cannot deny that there should not be beautiful buildings (offices), beautiful furniture, peaceful atmosphere, a disciplined receipts and dispatch system but in Pakistan these were never the problems of taxpayers. Problem at present is that each and ever person liable to pay tax should be on the tax roll and filling his Income Tax/Sales Tax Return or in case he is not fulfilling his duties, there should be a mechanism whereby he should be bound to fulfill his legal obligations. Unfortunately Government; CBR is neither in a position to ensure these things nor we could expect in next many years 14. APTBA is not against the establishment of MTU's, LTU's or Model Tax Units but we understand that Government could not accommodate all the taxpayers by establishing these units in such a large number. We are also not sure that tax agencies can get any more revenues from these units or it is also not viable to spent large amounts just to get nothing. 15. As per a careful estimate at present there are about 5 million income taxpayers on the ground. Following dates would show the efficiency of tax collecting agencies:‑ INCOME TAX No. of taxpayers available on the ground 5,000,000 (3.5% of the population) Total No. of taxpayers on the roll (1% of 1,400,000 the population) Total Nos. of Return Filers 1,000,000 Which may he categorized as under:‑. %Age No. of Returns Filers i) Salaried Class 40% 400,000 ii) Business Class 59% 590,000 iii) Companies 1 % 10,000 iv) Others 1,000 Total:‑ . 1,000,000 SALES TAX No. of tax GST payers available on the 500,000 ground No. of Turnover taxpayers on the ground 1,500,000 Total:‑ 2,000,000 No. of Taxpayers on the Roll 100,000 As already, discussed at present there are 1,000,000 return filers who are declaring their income, which ranges as under:‑‑‑ Range of Income %Age No. of Returns Persons declaring income upto Rs.200,000 50% 500,000 ‑‑ do ‑‑ Rs.300,000 20% 200,000 ‑‑ do ‑‑ Rs.500,000 10% 100,000 ‑‑ do ‑‑ Rs.700,000 10% 100,000 ‑‑ do ‑‑ Rs.1,000,000 7% 70,000 More than Rs.1,000,000 3% 30,000 Total:‑ 1,000,000 According to APTBA presently there are 5 million income taxpayers on the ground who are earning their incomes which ranges asunder:‑ '' Range of Income %Age No. of Prospective Returns Taxpayers earning income 25% 1,250,000 Up to Rs.200,000 ‑‑ do ‑‑ Rs.300,000 20% 1,000,000 ‑‑ do ‑‑ R5.500,000 20% 1,000,000 ‑‑ do ‑‑ Rs. 700,000 15 % 750,000 ‑‑ do ‑‑ Rs.1,000,000 14% 700,000 Taxpayers earning more 6% 300,000 than Rs.1,000,000 TOTAL: 100% 5000,000 Note:‑‑The figures given above based on careful estimation and observations but it is assured that these are accurate to the extent of more than 90 % . Besides above there was every second Return submitted of understatement and every fourth a concealment case. In spite of having all legal powers tax administration has failed to address these violations of law. We therefore propose that Government should fix the yearly targets of prospective Return Filers and NTN holders. 16. We believe that today's CBR is more efficient and technical but it is still not able to meet the present and future challenges of the tax system. It is heading towards an unidentified destination, it does not know from where it has to start or to end. CBR cannot show its performance only by way of high claims, it has to show some achievements practically. We believe that in the present scenario Government should not expect any voluntary compliance from the public because the time has proved that whosoever comply voluntarily, he invited problems for himself. 17. To avoid scattered tax offices and to waste public money by way of paying huge rents we propose that tax parks be established by allocating 25 acres of land for big cities and 10 acres for small and medium cities, where tax complexes with complete infrastructure and efficient work force be made available. We believe that there is no alternate of infrastructure and competent work force. Computer technology can only speed up a work but cannot create a work itself. We believe that nothing could be done without an efficient workforce, which is not available with the tax agencies. Hundreds of squares of land has been allocated so for to various public importance departments but the Tax Department, which is an institution of national importance is working in small complexes and rented buildings: 18. At present when the economy of the country is moving upward, if the following drawbacks of tax system are removed, the tax system of the country can be made an excellent one. (i) Number of return filers be enhanced from 1 million to 5 million (already exist on the ground) and in Sales Tax from one Lac to five Lacs and 1.5 million Turnover taxpayers (already exist, on the ground) (ii) To eliminate the abuse of authority of the field officers and their immediate bosses and to provide the taxpayers a bona fide and fair audit system. Note:‑ For these purposes APTBA offers its services to provide a mechanism to address these anomalies within a period of two/three years. 19. Instead of taking the benefits of the Bars and to create a healthy competition between the tax managers and tax experts of the country to reach a rightful conclusion and to shift a workload of the tax departments on the tax practitioners, the CBR has always tried to curb the tax practitioners. We would like to clear that like civil and criminal laws, tax laws are highly technical and that a taxpayer has to consult a tax expert, even these laws and forms are made a simplest one. 20. APTBA experts believe that it is hardly a matter of 2/3 years to increase the number of Income Tax Return filers from 1 million to 5 million and Sales Tax from one Lac to 5 Lacs and Turnover Tax to 1,5 million. We are of the opinion that the speed and style in which the CBR is working requires two decades to know the results only. 21. APTBA believes that this is the time when the Government should adopt short‑term tax policies but consistency in the economic policies is essential to attain the desired growth. MYSTERY OF HIGH INCOME TAX RATES IN PAKISTAN 22. Time and again voices are being raised on the high tax rates. It is being argued that because of high income tax rates people are discouraged to come to tax net. APTBA is of the opinion that in Pakistan tax rates are reasonable, 97% of the taxpayers are liable to pay tax at the rate which ranges from 5.75 % to 22.40%, persons earning income of Rs.1,000,000 are liable to pay tax of Rs.224,000, the average tax rate comes to 22.40%, person earning income up to Rs.700,000 liable to pay tax of Rs.119,000, average tax rate 17%, on income of Rs.500,000 tax is Rs.69,000, average tax rate 13.80%, on income of Rs.300,000 tax Rs.24,000 average tax is 8% and on income of Rs.200,000 tax comes to Rs.11,500 average tax rate is 5.75%. 23. For private limited companies straight rate of tax is 43%, which would be gradually reduced to 35 % up to the year 2007 @ 2% per annum reduction. For public limited companies straight rate of tax is 35 % and for banking companies it is 45 % which will be gradually reduced to 35 % up to the year 2007 @ 2% 'per annum reduction. 24. Total number of returns filers in Pakistan is 1‑Million, 98% taxpayers consists of Ind's and AOP's. The ratio of private, public Ltd., companies and multinationals is about 1 % of the total number` of taxpayers. Number of companies quoted on Stock Exchanges is about 700. 25. Below is the schedule showing the number of persons, range of their declared income and average rate of tax paid by them. Range of Income %age No. of Returns Tax Payable Average Tax rates Applicable Persons declaring income Up to Rs.200,000 50% 500,000 Rs.1,150 5.57% ‑‑ do ‑‑ Rs.300,000 20% 200,000 Rs.24,000 8.110% ‑‑ do -- Rs.500,000 10% 100,000 Rs.69,000 13.80% ‑‑ do ‑‑Rs.700,000 10% 100,000 Rs.119,000 17.00% --do ‑‑ Rs.1,000,000 7% 70,000 Rs.224,000 22.40% More than Rs.1,000,000 3% 30,000 -- -- Total:‑ 1,000,000 26. In India average tax rate is many times high than Pakistan. If we compare the tax rates of Pakistan with India and England where the tax laws are the same as in Pakistan, we see in India, the minimum tax slab is 20% whereas the maximum 40%. Exemption limit is Rs. 40,000. Income up to Rs.'60,000 tax slab applicable is of 20%. From Rs.60,000 to Rs.120,000 tax slab is of 30% and income more than Rs.120,000 tax slab is of 40%. Below is the schedule showing comparison of tax in Pakistan and India:‑, Income Tax In Pakistan Avg. Tax Rate Tax In Pakistan Avg. tax Rate Rs. 100,000 Rs. 1,500 1.5% Rs. 16,000 16% Rs. 200,000 Rs. 11,500 5.75% Rs. 64,000 32% Rs. 300.000 Rs. 24,000 8% Rs. 91,000 31.33% Rs. 500,000 Rs. 69,000 13.80% Rs. 174,000 34.80% Rs.1.000,000 Rs.224,()00 22.40% Rs. 374,000 37.40% Rs.2,000,000 Rs.574,000 28.70% Rs. 774,000 38.70% Rs.3,000,000 Rs.924,000 30.80%, Rs.1,174,000 39.13% In India, in case of a Domestic Company straight rate of tax is 40%. 27. In England, the minimum tax slab is of 10 % and maximum it is of 40%. There is no exemption limit and tax starts from very first Pound. From 0 to 1920 Pounds tax rate is 10%. From 1921 Pounds to 29,900 Pounds rate of tax is 22%, over 29,900 Pounds rate of tax is 40 % . From these comparative figures it can be said that in Pakistan tax rates .are quite reasonable and there is hardly any discouragement due to the tax rates. 28. APTBA strongly protests on the loss of 20 million rupees spent in the name of income data processing and on feeding of Income Tax Returns filed in September, 2003. One can understand ;hat it was an incorrect act, a fruitless labour arid wastage of time for no use. We therefore propose that a high level committee be formed to investigate the loss of 20.million hard‑earned public money. SALES TAX: 1. SALES TAX DEPARTMENT BE MERGED WITH INCOME TAX To enlarge the Sales Tax base Sales Tax Department be merged with Income Tax because Income Tax Department has much more inforrnations about the taxpayers, their identification, data of their sales/purchases anti many other informations etc. It would be quite easy to identify, approach or assess a. person in case of non‑compliance on the basis of informations already available. It would also be helpful to educate the taxpayers that they are bound to show same Batas for Sales Tax as well as Income Tax. Although the Sales Tax as well as Income Tax laws are the same but due to different practices adopted by the two different departments they create more problems for the taxpayers. The merger of both the departments therefore can reduce the problems of the taxpayers and enhance the efficiency of the department. 2. SALES TAX REGISTRATION APTBA does not agree with the Sales Tax Authorities on the point that at present there are large number of registered persons issuing fake and flying invoices and therefore Sales Tax Department has to keep a strict check on the new registrations. It has been the practice that field officers and their immediate bosses keep the things in their control so that people remain in contact with them. To justify and keep the things intact they create fairytale type stories. APTBA assures that there would be no adverse effect if Sales Tax Registration is assigned to Tax Facilitation Centers and Registration is issued on the basis of only I.D. Card. We also propose that there should only be NTN Certificate, which should be used for Income Tax as well as for Sales Tax purposes. 3. CERTAIN TRANSACTIONS NOT ADMISSIBLE (SECTION 73) Section 73 of the Sales Tax is illegal, illogical and unreasonable provision of law whereby the credit of the Sales Tax already paid by a unit is refused because of the reason that transaction exceeding Rs.50,000 was not completed within a period of 120 days or payment was not made through a cross cheque. Here a question arises, either the Sales Tax already paid is refundable or forfeited. If it is refundable then it is illogical first to refund and then to demand, if tax is forfeited it is unreasonable and impossible for a unit to pay a tax equal to 15 % of its sales once again. APTBA therefore propose that existing section 73 be deleted with retrospective effect and this section be reintroduced, whereby in case violation of provision of section 73 is made, heavy penalties be imposed. 4. (i) BLACK LISTING [SECTION 21(4)] (ii) SEARCH WITHOUT WARRANT ,(SECTION 40‑A (iii) POSTING OF SALES TAX OFFICER (SECTION 40‑B) These sections provide high discretionary powers to the Sales Tax Authorities. CBR should not give permission to Sales Tax Officers to use these provisions except under special circumstances. It must be assured that the powers should be exercised judiciously and carefully and before taking an action under these provisions, there should also be a clearance and scrutiny by the high officials including CBR. APTBA therefore demands a strict check on exercise of these discretionary .powers. 5. CORRECTION OF CLERICAL ERRORS (SECTION 57) Like other statutes there must be a provision 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. We therefore propose that section 57 of Sales Tax Act 1990 be substituted with section 221 of the Income Tax Act, whereby taxpayers have also been authorized to rectify a bona fide mistake. 6. APPEARANCE BY AUTHORIZED REPRESENTATIVE (SECTION 52) . This section is a vague provision of law, which encouraged the unqualified and unauthorized persons to enter into the Sales Tax system and in this way the corrupt practices are being encouraged. We therefore propose that section 52 of Sales Act be substituted with section 223 of the Income Tax Ordinance, 2001 to avoid the entry of unqualified person in the Sales Tax System. 7. APTBA SUPPORT THE PROVISION OF FURTHER TAX [SECTION 3 (1A)] AND SALES TAX RATES. This provision is highly revenue generating and in accordance with law. If a registered person is ultimately liable to pay a tax it makes no difference if he is being asked to pay that tax alongwith monthly returns. APTBA also supports the Sales Tax rates and is of the opinion that these rates should not be amended for the time being. INCOME TAX: 1. 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 sales of goods practically it is impossible to deduct tax on Cash Sales of Goods. This is the only solution to restrain the tax officers from issuing notices for default of section 52 of the repealed Ordinance in respect of cash purchases. 2. AMENDMENT OF ASSESSMENT [SECTION 122 (1)] Section 122 of the Income Tax Ordinance, 2001 is very important from the point of view of discretionary powers, therefore, there was need to keep a strict check on the exercise of this provision of law. 'Under section 122(1) a Commissioner is empowered to amend an assessment order but practically the Commissioners were delegating these powers to their subordinate officers, which amounts to defeat the intention of legislature that power under section 122(1) should Only be exercised by a more responsible officer of Commissioner rank. It is therefore propose that a proviso be added in section 122(1) whereby a Commissioner should be restrained to delegate the power of section 122(1) to any of his subordinate officer. 3. FAILURE TO PAY TAX COLLECTED OR DEDUCTED (SECTION 161) There should be a reasonable limit of section 161 as 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. 4. 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 ‑ filed. 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. Although this provision of law has been declared ultra vires of the constitution by the Lahore High Court but still there is a need to delete this provision of law. 5. POWER TO ENTER AND SEARCH PREMISES [SECTION 175] This provision of law provides high discretionary powers to the Income Tax Authorities. CBR should not give permission to the tax officers to use this provision except under special circumstances. It must be assured that this power should be exercised judiciously and carefully. APTBA therefore demands that there should be a strict check on exercise of this discretionary power. 6. REFERENCE TO HIGH COURT UNDER SECTION 133 BE ALTERED WITH APPEAL Section 133 of Income Tax 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. 7. APTBA SUPPORT VARIOUS PROVISIONS OF INCOME TAX ORDINANCE APTBA believes that the provisions mentioned below are reasonable and these should remain intact for the time being:‑ (i) Statutory exemption limit of Rs.80,000. (ii) Rates of Income Tax. (iii) Record keeping for all.