REFERENCE IN HONOUR OF KHAWAJA FAROOQ SAEED ON HIS ELEVATION AS THE CHAIRMAN, INCOME TAX APPELLATE TRIBUNAL

REFERENCE IN HONOUR OF KHAWAJA FAROOQ SAEED ON HIS ELEVATION AS THE CHAIRMAN, INCOME TAX APPELLATE TRIBUNAL <!--[if gte mso 10]> REFERENCE IN HONOUR OF KHAWAJA FAROOQ SAEED ON HIS ELEVATION AS THE CHAIRMAN, INCOME TAX APPELLATE TRIBUNAL Address by Mr. Younus Rizwani Sheikh, President, Income Tax Bar Association, Karachi. [27th July, 2004] I rise today to facilitate Khawaja Farooq Saeed Saheb, on his elevation as the Chairman of the Income Tax Appellate Tribunal, Pakistan. We have assembled here today to celebrate not the mere ascendancy of an individual to a position of honour but the continuity of an institution and we rejoice today' that the Chairman Income Tax Appellate Tribunal, Pakistan, in whose honour this reference is being held possesses all the qualifications and qualities, which are essential for the leadership of this exclusive institution and I feel that the concept of unbiased Justice has been further enriched by the elevation of His honour. Khawaja Saheb was born in the historic city of Lahore in the month of March, 1951. He was a living example of a student who excels not only in his studies but was also outstanding in the field of sports and physical activities and managed to win a number of medals including 3 gold medals in the field of gymnastics in the Pakistan National Games in the year 1970-72 and 1974. But his gymnastic activity could not hamper his studies and he graduated from famous Government College, Lahore, in 1970 and did his LL.B from Punjab University in the year 1974. During this period he also obtained a Master Degree in Political Science from Punjab University in the year 1972. He was enrolled as an Advocate of the High Court in the year 1976 and continued to practice in the field of Taxation till 1995, when his qualities were recognized and he was appointed as Judicial Member of the ITAT, Lahore on 19th February, 1995. Khawaja Saheb was very active in the Bar affairs also and served as the Honorary Secretary of Lahore Tax Bar in the year 1984-85 and Vice President of Lahore Tax Bar in the year 1991. He was also the founder member of the APTBA. Khawaja Saheb has attended a number of International Conferences on tax and sports and has visited almost all the continents to attend seminars and conferences on tax and sports. After his induction in the Tribunal he is serving as President of Pakistan Gymnastic Federation from the year 2000 and shall continue to serve on the above post till the year 2008. He is also the Vice-President of Pakistan Olympic Association and was also Chairman of disciplinary committee for the 9th SAF Games 2004. We in Karachi have had the fortune of having Khawaja Saheb initiation his tenure as Judicial (Member) of the Honourable Tribunal at Karachi. They say HON-HAR SPOOT KAY POOT PALNAY MAY HI NAZAR AJATAY HAIN. During his short tenure at Karachi Khawaja Saheb left an indelible impression' on the Bar Community and his transfer to Lahore was a source of great regret to our fraternity. During this period, all of us who have had the pleasure of appearing before him returned back with an impression of a man whose integrity was beyond doubt, whose grip on tax laws was something to write home about and whose even handed and unbiased attitude was laudable. I would like to state that the position of Chairman of this illustrious institution which has always been held great esteem and honour by our members, has always been occupied by men know for their integrity, their grip over tax laws and we rejoice today that the Chairman in whose honour this reference is being held possesses all the qualifications and the qualities which are essential for the membership of this exclusive institution. It was Dr. Johnson who once observed, "To those who have been much together or have so much in common, everything seen, everything heard, or everything read, recalls some pleasure communicated or some benefits conferred". Your judgments studded in the pages of taxation, & PTD are brilliant examples of interpretation of tax laws and contribution in development of Income-tax case laws are a benefit conferred on the whole tax fraternity and will be beneficial not only to us but to our successors and to their successors. Mr. Chairman Sir, although "Yeh Mehfil Jo Aaj Saji Hai Sirf Aap Kay Istaqbal Kay Liye Saji Hai" But I would like to take advantage of your presence here today and apprise you of a few problems being faced by our members. Just few months ago there were at least 5 DBs functioning in Karachi and the pendency had drastically reduced but now due to shortage of both Judicial and Accountant Members and transfer of head quarter bench from Karachi to Islamabad usually not more than 2 benches are functioning in Karachi and thependency which had been controlled to a reasonable extent is again getting out of hands. I would most respectfully request you to post enough members so that 4 benches function regularly to enable the appeals to be disposed of expeditiously. I shall also request you to make the disposal of stay applications and out of turn hearing applications a top priority. It shall also give the Karachi Lawyers who are still recovering from the shock of transfer of Headquarter Bench from Karachi to Islamabad a great pleasure if you Mr. Chairman Sir visit Karachi frequently for judicial sittings. Khawaja Saheb has proved to be the Muarildharan of this Honourable Tribunal. He has broken all the records and has the distinction of holding the record for the highest disposal of appeals in the year 2001-2002-2003 & 2004. He has the distinction of deciding a large number of appeals on almost all aspects of tax laws and most of his judgments have been upheld by the Superior Courts. Among the judgments authored by him there are many trend-setting judgments and if I start citing these judgments we will be sitting here all afternoon. But I will be failing in my duty if I do not quote few of his trend setting judgments. Khawaja Saheb is the author of full bench decisions reported in 1996 PTD (Trib.) 1144 where he decided a case regarding interpretation of section 12(13) and 12(17) of the Income Tax Ordinance, 1979 and superceded the earlier judgments given by the Income Tax Appellate Tribunal reported in 1986 PTD (Trib.) 373. He decided this point in favour of the Department by adopting the cardinal principle of interpretation of statute, which is--‑ "Interpretation of law should always be avoided, which would make any provision of law ineffective". He has authored many judgments on the application of section 13 of the Repealed Ordinance, regarding the valuation of asset made under section 13 without substantiating tare valuation with any evidence. Some of these reported cases are : (1) 73 Tax 222 (Trib.), (2) 97 PTD 1994, (3) 1998 PTD 394 and (4) 2004 PTD 1492. He also decided the issue of allowability of deduction of interest paid to the non-resident under section 24(b) of the Repealed Ordinance. This case is reported in 1996 PTD 411. He also decided a number of cases on reopening of assessment under sections 65 and 66A, taxation of lease and by-back transaction and the taxability of loans under section 12(18). I would proudly like to state at this juncture that in most of his trend-setting judgments the counsel appearing on behalf of the appellants were the famous tax lawyers from Karachi like Mr. Iqbal Naeem Pasha, Mr. Rehan Hassan Naqvi and Mr. Siraj-ul-Haq Memon. I could go on and on and recite his Lordships achievements in the legal field which are far and many, I could quote some of his memorable decisions, which are studded in the pages of legal journals. I can recount his other exploits, but then Ladies Sc Gentlemen. I would be making the same mistake a counsel made when he begin harping on some elementary principles from black Stone Commentary. The Chief Justice of the U.S. Supreme Court politely admonished him as under "Counsel there are some things which the Supreme Court of United States may be presumed to know". It is my strong presumption that this elite audience comprising the creators and practitioners of law know more about this famous jurist than me. I will just say that Khawaja Saheb is a great lawyer, an excellent Judge and above all a thorough gentleman, whose greatest quality is humility and whose efforts have always been to enhance the prestige of judiciary. Although I am not in a habit of making predictions but I will stick my neck out today and make a prediction. I predict that the name of Khawaja Saheb will go down in the annals of Taxation History as a Chairman of exceptional qualities. Khawaja Saheb Sir, I on my behalf and on behalf of the members of my bar wish you an outstanding and record breaking inning as the Chairman of this Honourable I.T.A.T. and pray to Allah to shower you and your family members with His choices blessings. M.. Chairman, I would like to end my speech in your language with a couplet on law:--‑ We cannot kindle when we will. The fire-that in the heart resides. The spirit bloweth and is still. In mystery our soul abides. But task's in hours of insight willed. Can be through hours of gloom fulfilled. With aching hands and bleeding feet. We dig and heap lay stone on stone. Not till the hours of light return. All that we have built, do we discern. Thank you very much all of you. CRITICAL ANALYSIS OF RECENT TAX DEVELOPMENTS IN PAKISTAN By Dr. Ikramul Haq, Advocate, Lahore There has been much emphasis on "tax reforms" in Pakistan for the last many years on the behest of IMF and World Bank, but nothing significant has been achieved so far except promulgation of Income Tax Ordinance, 2001 'hereinafter "the new Ordinance"]. The new Ordinance, published through Gazette Notification No. F.No.2(I)/2001 dated 13 September, 2001, was made operative from 1st July 2002 vide S.R.O. 381(I)/2002 dated 15 June 2002, notified by the Central Board of Revenue (C.B.R.) using powers conferred on it under section 1(3) of the said Ordinance. Even this new law is adjudged by tax experts and administrators alike as an exercise in futility as it has created more distortions, complications, contradictions, anomalies and conflicts. The new Ordinance is different in scheme from its predecessor Income Tax Ordinance, 1979 (hereinafter: "the repealed Ordinance") in many ways, the most notable being abandonment of the concepts of income year and assessment year, which were at the core of levying tax for a particular year under the repealed Ordinance. The new Ordinance embodies a paradigm shift as it purports to tax income of a person on current year basis that is called tax year [defined in section 74]. The new Ordinance is completely different from its predecessor as far as chargeability in respect of taxable income for a tax year is concerned, as it is not subjected to any change(s) brought through a Finance Act', which is always enforced in Pakistan with effect from 1st July in each calendar year with the clear expression that in respect of Income Tax Law the amendments would take place with effect from 1st July of the relevant financial year. The chargeability under the new Ordinance is confined to law prevailing in the tax year irrespective of any subsequent amendment made through the Finance Act: The new Ordinance is divided into 13 chapters and seven schedules. It contains 253 sections. Section 3 of the Ordinance overrides all other laws in force in the event of any conflict. Seven schedules that are an integral part of the new Ordinance, 2001 are divided as under: First Schedule provides rates of tax for all kinds of taxpayers, collection and deduction at source. Second Schedule specifies tax exemptions and concessions. Third Schedule prescribes rates of depreciation of asset:; and pre-commencement expenditure. Fourth and Fifth Schedules contain rules for computation of profits and gains of insurance business, and petroleum and minerals. Sixth Schedule describes provisions concerning recognized/approved provident, superannuation and gratuity funds. Seventh Schedule concerns taxation of income from export of goods manufactured in Pakistan. The principles of chargeability under the new Ordinance are: Income tax is chargeable at the specified rates given in Division I or II of Part I of the First Schedule on taxable income of a person as defined in section 80. The following incomes are taxed as a separate block on gross receipt basis that is commonly known as Presumptive Tax Regime (PTR): (i) Dividend declared by a company to all persons, including companies. (ii) Pakistan source royalty or fee for technical services received by non-resident persons, other than those connected with a permanent establishment in Pakistan. (iii) Shipping and air transport income of a non-resident person will be subject to taxation distinct from other incomes of taxpayer. (iv) Transactions where tax collected or deducted is a final tax liability as explained in section 169. (v) Retailers having turnover up to Rs. 5 million can opt for presumptive tax by paying tax @ 0.75% on gross turnover. Thus the Ordinance incorporates both global and scheduler basis of taxation of income (sections 4 to 8). For purposes of imposition of tax and computation of total income, incomes are classified under the head: Salary, Income from Property, Business, Capital Gains, and Income from other Sources. Residents are taxable in respect of Pakistan as well as foreign-source income. Non-residents are taxable only in respect of Pakistan-source income (sections 9 to 11 read with section 101). Several types of income have been specifically exempted from tax (sections 41 to 55 and the Second Schedule). These include agricultural income, remuneration of diplomats/UN employees/foreign Government employees (other than diplomats), remuneration paid out of grant/aid agreements; and income of persons entitled to tax treaty benefits. Allowances attached to: Presidential honours, awards and medals, interest on foreign loans (other than among affiliates), scholarships, support payments to spouse under an agreement to live apart and income of short-term residents is also not taxable. Foreign source income of returning expatriates, non-resident shipping and airlines enterprises (other than where the person's country of residence does not allow similar exemption) have been exempted. The new Ordinance attaches very great importance to "universal self-assessment scheme" [hereinafter: "USAS"] which is aimed at ensuring that the genuine small taxpayers, who form nearly 90 per cent of the number of taxpayers, are not put to avoidable inconvenience of appearing before the Taxation Officers to prove correctness of the income returned by them. The selection process adopted by the CBR recently has proved that USAS cannot work if the (mal)practice of assigning and achieving budget targets to Field Officers is not abolished. The moment budget estimate for a Circle is communicated to a Taxation Officer, he is instructed by his high-up, including the CBR stalwarts, that he is bound to collect that amount, somehow or other within the year and it is even suggested that he may collect it illegally if he cannot collect it legally. The budget figure exercises too great an influence on the Tax Officer's disposals and (mal)treatment towards taxpayers. This reacts on the progress of work in two opposite ways: (a) it makes the Tax Officer rush his work towards the end of the year, or (b) it makes him slacken off if he had already reached his budget figure. Except that he should give precedence to cases which are likely to yield more revenue, the Tax Officer should not be obsessed by' the budget figure. He has certain number of assessments to complete in a year and his merits will be judged by the way in which he completes those cases and not by the extent to which he has collected his budget estimate. He should, therefore, concentrate on completing his cases carefully and in good time; if he does so, the budget can take care of itself. The success of the new Ordinance, effective from tax year 2003, largely depends on the successful implementation of USAS. The CBR, in its material posted on website, claimed and assured that no taxpayer will be selected for audit unless there is some "concrete" evidence of concealment against him, With a view to bring home the advantages of USAS to the taxpayer, a massive campaign of taxpayer education is required which unfortunately has not been undertaken by the 'CBR. The apex revenue collection authority has failed to explain the various provisions of the new Income Tax law with particular emphasis on the details and advantages of the USAS. The new scheme basically reposes faith in taxpayers and expects them to disclose full particulars of their income and claim only proper deductions. This procedure aims at reducing the volume of the department's work as otherwise the time of the authorities would be spent in scrutinizing each and every "return of income" irrespective of the income; similarly, a large number of taxpayers are saved the trouble of attending to their cases at the time of scrutiny. The CBR after selection of cases for audit for tax year 2003 has offered the non-corporate taxpayers to revise their returns by paying 20% extra tax and audit exercise will be dropped. It is sad reflection on our system where State itself wants people to tell lies and do not discharge tax obligations diligently and honestly. In the area of direct taxes, the most, significant development is a gradual shifting of General Sales Tax (GST) to Value Added Tax (VAT) type. This shift is highly controversial as hostility between the CBR and the taxpayers over different issues vis-a-vis modes of collection of this VAT-type tax continues unabated. VAT in Pakistan has provided unprecedented opportunities for fraud by means of 'flying' (fake) input invoices and other false claims for refunds that are not available under other forms of commodity taxation. Also, registered persons frequently deduct VAT paid on goods used for private consumption. They over-report sales of zero-rated goods and conspire with their customers with respect to the issue of receipts. Finally, fake companies are set up for the purpose of selling purchase invoices to registered persons. A number of independent studies show that presently, CBR officials are issuing sales tax refunds to corrupt people and blocking genuine claims. Each year the loss to the exchequer is estimated at Rs. 40 to 50 billion. Successful implementation of VAT requires an elaborate system of book-keeping at each level of production and distribution, which poses a heavy burden on taxpayers. Admittedly, accounting practices in Pakistan are underdeveloped, which can partly be attributed to the very low literacy rate. It is much simpler for businesses, in particular small businesses that are abundant in Pakistan, to file returns under a standard turnover tax than those that are required under the present system. Checking and cross-checking business records and invoices require efficient administrative procedures. However, the Pakistani tax administration being admittedly inefficient, incompetent and corrupt one has neither capacity nor willingness to satisfactorily implement VAT in Pakistan. The task of enforcing VAT in Pakistan is otherwise very difficult as more than 70 per cent of its economy is undocumented. Dr. Aqdas Ali Kazmi, Joint Chief Economist, Planning Commission of Pakistan, has stated this in his research paper Tax Policy and Resource Mobilisation in Pakistan. Dr. Kazmi has concluded that this 70 percent part of economy consists of 36 percent 'pure' black economy, T8 percent exempted economy, 9 percent illegal economy, 4.5 percent unrecorded economy and 2.5 percent informal economy (unreported economy). His study says that the problem in the low resource mobilisation is the rigid system of taxation, and the emphasis of the Government to increase revenue, ignoring the details of the long-term policy measures. According to a Gallop Survey, there are 2 million small business houses/outlets in Pakistan, which include small-size service providers. Out of 2 million, there are only 4,00,000 manufacturing concerns, rest are 6,00,000 commercial service providers like workshops, vocations like barbers, drycleaners, tailors, doctors, small schools etc, whereas one million are retail/wholesale outlets/stores. This small business sector is not dependent on bank loans and truly represents our vernacular business sector, where Ustad (teacher) and Shagird (pupil) relationship still exists. This sector is facing three, big problems to survive. The top-most issue is growing highhandedness of tax officials, the other two are ever-increasing cost of utilities and lack of modern skills and technology. These units are worst hit by the system of VAT. It is not possible to implement VAT in Pakistan for various reasons, but especially due to the following: Lack of tax culture Rampant corruption and connivance between taxpayers and tax administrators Poor tax administration Problem of widespread illiteracy Lack of documentation Poor accounting practices The problem of Pakistan is that its tax system is not equitable. The burden of taxes is already less on the rich and more on the poor. In the face of this reality, the Government is resorting to regressive taxation like presumptive taxes in income tax and turnover taxes in the shape of multi-point sales tax. In the Pakistani perspective, the retail stage sales tax at a lower rate will be more beneficial from the point of view of generation of revenue, broadening of tax base and in the interest of the common people on whom the ultimate tax incidence lies. Taxation requires pragmatic thinking and is most effective when developed from the practical and possible agenda for building a sound tax administration. The widest possible taxpayer base has to be identified for any tax to be equitably spread across the whole taxpayer population. Even a small tax at a lower rate spread over a wide taxpayer base will invariably yield more revenue than a higher tax on a narrow base. The levy of VAT-type tax at 15% (In the case of commercial importers 27.8% after compulsory value addition of 10% and 6% presumptive income tax) in Pakistan has failed to bring the desired results, as it is a higher tax on a narrow base. Had it been a 2% to 3% levy across the board at single stage, it could have been acceptable as well as successful in terms of yielding more revenue, being a low rate tax spread on a wide taxpayer base. LETTER FROM MUHAMMAD SHAHID BAIG, ADVOCATE, LAHORE TO THE CHAIRMAN, CENTRAL BOARD OF REVENUE, GOVERNMENT OF PAKISTAN (Re: Request for clarification regarding revision of Income Tax Returns by the tax payers (non-corporate) selected for audit for the tax year 2003 paying 20% higher tax) [5th August, 2004] The Chairman, Central Board of Revenue, Revenue Division, Government of Pakistan, Islamabad. SUBJECT: REQUEST FOR CLARIFICATION REGARDING REVISION OF INCOME-TAX RETURNS BY THE TAX PAYERS (NON-CORPORATE) SELECTED FOR AUDIT FOR THE TAX YEAR 2003 PAYING 20% HIGHER TAX Respected Sir, This refers to C.B.R's. Circular C.No.1(1) S.(ITAS)/2004, dated 28th July, 2004, on the above subject. Above circular provides that Audit will be closed in all those cases where non-corporate tax payers revise their Returns by paying 20% higher tax as compared to the tax payable on their original Returns provided there is no definite information against them. We shall be highly grateful, if your good self could clarify whether and how this Circular would be applicable in the following categories to Taxpayers:--‑ (i) Where excess payment of tax has already been made and Refund has been claimed in the original Tax Returns. (ii) Where salary as well as other income has been declared. (iii) Where Tax payable on the Income declared for the Tax Year 2003 is more than 20% as compared to tax payable on the last assessed Income. An early consideration is deeply requested. Thanking you.