FINANCE ACT 2004 CHANGES IN INCOME TAX LAW RELUCTANCE TO TAX UNDOCUME ED SECTOR

FINANCE ACT 2004 <!--[if gte mso 10]> FINANCE ACT 2004 CHANGES IN INCOME TAX LAW RELUCTANCE TO TAX UNDOCUME ED SECTOR By Huzaima Bukhari and Dr. Ikramul Haq, Advocates, Lahore Levy and collection of taxes is the sole prerogative of sovereign State. Parliament can introduce any change in tax laws by using its wide powers in this regard by either amending a particular tax statute or providing the same in a Finance Act. The adoption of Finance Bill, 2004 by the Parliament on June 24, 2000, three days before the 'scheduled date and in utter haste, shows that the so‑called elected representatives of the people (sic) were not interested in fulfilling their obligation towards State and masses that is to betterment of society, but to please foreign masters. Despite vehement denial by the Finance Minister (prime minister in waiting), it is common knowledge that the fiscal proposals were prepared on dictates of foreign donors under tight bureaucratic controls without any public debate or dialogue. The Parliament was not even engaged in the process of budget -making as there was no input from any Select Committee of either House of the Majlis‑e‑Shoora regarding preparation of financial proposals for the 2004‑05 budget. The Parliament has once again proved to be a rubber stamp as far as the formulation of tax policy of the Government is concerned. As usual it is the handiwork of the Finance Ministry wizards and bureaucrats sitting in the Central Board of Revenue (CBR). No doubt the fiscal changes this time are generally business friendly (though not necessarily people‑friendly) and growth‑oriented but the fact remains that the incidence of taxes remains more on the poor and less on the rich. Instead of making declarations of assets mandatory for privileged classes, immunity has been granted to persons having income less than Rs. 500,000 from filing wealth statements acid scope of presumptive tax regime PTR) has been further expanded allowing importers, contractors, suppliers, petroleum product dealers and commission agents to pass their tax burden to consumers. The tax‑to‑GDP ratio has further deteriorated [9.6% for financial year 2002‑2003 and 9.3 for financial year 2003‑2004] confirming that policy‑makers and tax administrators have failed to tap the real revenue potential of the country despite the fact that Rs. 510.6 billion record collection was made first time in the history of Pakistan. Collection of over Rs. 510 billion, against all negative factors prevailing (the main concern being law and order situation) shows that the CBR, in the past, was not utilized properly and certain classes are yet not willing let it work as an independent institution. If CBR becomes a sovereign tax authority, insulated from political and business interests, there is every possibility to collect revenue to the tune of Rs.800‑900 billion in the next three years' time making Pakistan a truly self‑reliant country. The Government .has once again failed to demonstrate strong political will to eliminate large‑scale tax evasion and existence of a mammoth black economy that have resulted in colossal loss of revenue to the State. The Government has not done anything to rectify the situation which is reducing the built‑in elasticity of a fiscal system to the extent that the tax evaded income is being spent on goods and services that help to generate inflationary pressures and raise prices of real property [our unprecedented remittances from abroad are largely being absorbed in this unproductive sector]. In the presence of a grave challenge to combat terrorism, coupled with money laundering crises, and the problem of ever‑growing black money, (which according to official and independent experts is around Rs. 1.8 trillion: about 70 %a of the total economy), there is an urgent need to launch a well‑thought for anti‑money laundering‑asset seizure law to prevent this huge amount from becoming a lethal weapon in the hands of mafias who are now in control of economy as well as the Government. Pakistan has been facing a variety of crises specifically in areas of: resources for its developmental policies, meeting trade deficits, fiscal deficits arid balance of payment, and what not. One of the factors responsible for the present situation is the great speed with which black money is generated. The CBR is directly responsible for this phenomenon as its mafia‑like operations has helped the people to avoid tax on incomes by paying it "due share". Through the infamous system of SROs [Statutory Regulator Orders], the CBR's top officials provide "legal" ways and means to the mighty sections of society to amass huge wealth that is now threatening the State's very survival. In the hands of corrupt politicians, bureaucrats and terrorists, this black money has played havoc with the humanity at large. The gruesome face of black money emerges in the corridors of power, political as well as administrative. No country other than Pakistan knows better about the perils of allowing money launderers and drug traffickers to get an upper hand. We are at present not only facing a drug‑abusing population (mostly young) of nearly 4 million, but also many terrorist organisations, which by themselves pose a threat to the Government. The fact is that a cartel or a group of cartels have become so powerful that they can work out agreements with terrorists and saboteurs to emasculate authority of the State. No serious effort has been made by successive Governments, both military and civil, to determine the loss of revenue due to the existence of this underground economy, Part IV * A new clause (3A) has been inserted to exempt people from payment of tax on any remission on loan or mark-up under the State Bank of Pakistan, Banking Policy Department's Circular No.29 of 2002, dated the 15th October, 2002, to the extent not set off against the losses under Part VIII of Chapter III. * A new clause (36A) has been inserted whereby exemption from withholding has been extended to widows and other eligible investors in Bahbood [Urdu word for welfare] Savings Certificate or Account. * Two new clause viz. (38A) and (38B) are inserted exempt ing Venture Capital Company from withholding tax under sections 150, 151 and 233, and Islamic Development Bank from withholding tax under section 150. * A new clause (47C) is inserted to the effect that the provisions of subsection (1) of section 154 will not apply to an exporter in respect of cooking oil or vegetable ghee exported to Afghanistan from whom advance tax has been withheld under section 148 on import of edible oil. Fourth Schedule - various amendments The following amendments have been made in the Fourth Schedule: * In rule 1 an amendment has been proposed that in income from other business shall be profit or loss before tax as per profit and loss account prepared under the Insurance Ordinance, 2000 (XXXIX of 2000), excluding any surplus appropriation made during the year. * Rule 2 is proposed to be substituted providing that the profits and gains of a life insurance business shall be the current year's surplus appropriated to profit and loss account prepared under the Insurance Ordinance, 2000 (XXXIX of 2000), as per advice of the Appointed Actuary, net of adjustments under sections 22(8), 23(8) and 23(11) of the Insurance Ordinance, 2000 (XXXIX of 2000) so as to exclude from it any expenditure other than expenditure which is, under the provisions of Part IV of Chapter III, allowed as a deduction in computing profits and gains of a business to the extent of the proportion of surplus not distributed to policy holders. LETTER FROM .ABDUL MALIK KHAN, I.T.P., CHARSADDA TO THE MEMBER (INCOME-TAX), CENTRAL BOARD OF REVENUE ("Clarification regarding section 129(2) precondition of payment of not less than 15 percent. of amount of tax for filing appeal before the CIT(A) Assessment Years 2001-2002 and 2002-2003) (24th July, 2004) 1. The Member (Income-tax), Central Board of Revenue, Islamabad. 2. Regional Commissioner of Income-tax, North Region, Lugman-e-Hakim Road, Islamabad. (CLARIFICATION REGARDING SECTION 129(2) PRECONDITION OF PAYMENT OF NOT LESS THAN 15 PER CENT. OF AMOUNT OF TAX FOR FILING APPEAL BEFORE THE CIT(A) ASSESSMENT YEARS 2001-2002 AND 2002-2003) Kindly clarify the following through a Circular Letter so that the confusion no., prevail be removed. 1. The Honourable High Court of Lahore vide their judgment Writ Petition No.1722 of 2002 decided on 24-10-2003 reported as 2004 PTD 122 has held that the condition is un-Islamic and un-Constitutional. 2. A Division Bench comprising Muhammad Mujeebullah Siddiqui, Chairman (now Judge of Sindh H.C.) and Muhammad Mehboob Alam, Accountant Member, of the Income Tax Tribunal of Pakistan, reported as (1998) 78 Tax 343 (Trib.) = 1998 PTD (Trib.) 3866 has held vide their verdict in the following words. "PRONOUNCEMENT BY THE SUPERIOR COURTS IN PURSUANCE OF THE INTERPRETATION OF LAW WHETHER HAVE THE RETROSPECTIVE EFFECT----- HELD, YES." 3. The Honourable Ombudsman of Pakistan vide Finding/Decision in Complaint No.877-L of 2003, dated 29-9-2003 reported as 2004 PTD 2017 has held "THAT IGNORING A DECISION OF SUPERIOR COURT" AMOUNTS TO ARBITRARY CONDUCT ENTAILING "MALADMINISTRATION". 4. In my opinion it amounts to contempt of Court also. Keeping in view the above judgment/decision if a person has not paid or not paying 15% of the Tax Demand for, the assessment years 2001-2002 and 2002-2003 appeals already filed or to be filed, what will be the fate of his appeal and what the CIT(A) should do? An early clarification will be highly obliged.