STOCK EXCHANGE A WITHHOLDING TAX AGENT

LIST OF NOTIFICATIONS REPRODUCED IN THE <!--[if gte mso 9]> STOCK EXCHANGE A WITHHOLDING TAX AGENT M. Iqbal Patel, F.C.A., Karachi The Finance Minister Mr. Shaukat Aziz in his budget 2004-2005 speech Said that the daily turnover of shares on stock exchange is around Rs.70 billion but the Capital gains arising out of such shares are exempt from levy of income until tax year 2007. In view of extensive tax free income being generated in this business, it is proposed to levy capital value tax (CVT) on purchase of shares at the rate of 0.1% of the value of shares transacted. There was hue and cry from the tycoons of stock exchange members/brokers against this nominal levy and crushed the stock rate which confirmed the fact that the capital market is dominated by few tycoons in the name of the investors who manipulate it according to their requirement. It is unfortunate with this country that the big fish whether in the agriculture or otherwise sector are not in a mood to contribute to the exchequer to build the nation stronger enough to get it rid of the world donors who lend the money at their dictated terms and conditions and thus the sovereignty of the nation is at their mercy. It appears that the Government had not done its homework before framing this propose of levy of CVT, hence it surrendered under the pressure of these wealthy and powerful lobby obviously for the reasons that the rulers, whether in uniform or otherwise, are from the said flock. However final outcome of the said resistance against the levy of Capital Value Tax emerged that the Central Board of Revenue (CBR) has inserted section 233A to the Income Tax Ordinance, 2001 (Ordinance) and issued three circulars on deduction of withholding tax by a registered stock exchange and one circular on collection of capital value tax by a registered stock exchange on purchase of shares. The scenario would now be that the Circular No. 3 of 2004 dated 1-7-2004 requires the stock exchange to collect tax at the rate of 0.005% with effect from July 1, 2004, on the sale trading value of shares transacted through its automated trading system in .ready, future, provisional and any other counter. The members concerned of the stock exchange shall collect tax from its clients and shall pay it to the stock exchange. The lax so collected states the circular that it is an advance tax and is adjustable against final tax liability of the seller of shares. The Circular No. 4 of 2004 dated 1-7-2004 requires the stock exchange to collect tax @ 0.005% of the purchase value and 0.005% on the sale value of shares from its members in lieu of the commission earned on purchase/sales transacted. The members shall pay tax on purchase/sales. The tax will be final tax liability of the member. The Circular No. 5 of 2004 dated 1-7-2004 requires the stock exchange to collect advance tax @ 10% on carry over (Badla) markup transacted. The member shall collect tax from its financers. The tax so collected would be adjustable against final tax liability of the financers. The new section inserted in the Ordinance provides that Stock Exchange shall collect advance tax from it members (a) on purchase of shares. in lieu of the commission earned by such members (b) on sale of shares in lieu of commission "earned by such members (c) in respect of trading of shares of members (d) in respect of financing or carry over trade (Badla). There appears some divergent provision between under section 233A of the Ordinance and the circulars issued by the CBR. The section 233A(c) provides that the stock exchange shall collect tax from its members of the sale trading of shares in lieu of the commission earned by such members whereas the Circular No.3 dated July 1, 2004 states that the members concerned of the stock exchange shall collect tax from its clients. Thereby according to the circular the investors on whose behalf the members sale the shares will have to pay the tax of the sale value of shares transacted through the members. Though the intention of the statute is not as such. Similarly Circular No. 5 of 2004 dated 1-7-2004 states a stock exchange shall collect advance tax @ 10% from its members on carry over trades (COT Badla) markup transacted through its automated system in COT market and the member shall collect this tax from its financier. But there is no such provision in the section 233A(d) of the Ordinance to collect the tax from the financier. Moreover the section 233A(1) provides that the tax collected by the stock exchange (a) on purchase of shares and (b) on sale of shares is advance tax but subsection (2) of section 233A provides that the said tax is final. Such poor drafting confuses the issues and misleads the investors or taxpayers. This provision needs to be reviewed by the CBR and stock exchange as well too. Further the Securities Exchange Commission of Pakistan (SEC) cannot remain align to this confused provision in the Ordinance which has very significant impact on taxability or otherwise of the investors. The Circular No. 6 of 2004 dated 1-7-2004 issued by the CBR relates to the collection of Capital Value Tax (CVT) by a registered stock exchange on purchase of shares @ 0.01% of the purchase value of any Modaraba certificates or any instrument of redeemable capital as defined in the Companies Ordinance, 1984 or shares of a public company listed on Stock Exchange in Pakistan. The circular states that the members shall collect CVT from its clients. The said circular provides that non-resident person/institutions seeking refund shall file their claims with the taxation officer concerned. Though the refund application under section 170 of the Ordinance is required to be filed with the Commissioner but the circular requires the non-resident to apply for refund to the taxation officer which is not in confirmative with the statute which overrides. The Finance Act, 2004 has introduced a new proviso to section 7(4) to the Finance Act, 1989 whereby the Stock Exchange will collect CVT from the resident person. It does not provide that the members will collect tax from their client. It will be observed that the CVT was levied in the Finance Bill, 2004-05 on purchase of shares by the members @ 0.1% of the value of shares transacted. The Government intention was to bring into tax-net the free income generated by the members, broker of the stock exchange; but on their resistance the CBR imposes the withholding tax on the small investors who will bear this additional burden of tax because the tax deducted on sale of shares is the final tax. They cannot adjust this tax against income earned through other source. Thus both the said decisions of CBR are on unsound footing. On the one hand the period of exemption to income of capital gain from sale of shares etc. has been extended for another two years in the budget, on the other it levied CVT on such sale of shares. If the Government has intention to generate revenue, it could have not extended the exemption on capital gain in the budget 2004-05 because it was to expire on 30th June, 2005. Moreover the exemption on the capital gain is allowed without any limit of income of capital gain earned. In order to encourage the small investors, the exemption on this account should be allowed at lower limit, exceeding the specified ceiling of such income be brought to tax. The levy of withholding tax on purchase and sale of shares will have adverse impact on the investment. Because the trading in shares is mostly done by the National Investment (unit) Trust or mutual funds established by the Investment Corporation of Pakistan or collective investment scheme authorized or registered under the Non-Banking Finance Companies Rules, 2003 or a Modaraba. These institutions are exempted under clause (47B) of Part IV of the Second Schedule to the Ordinance from deduction of tax on payment to them on account of dividend under section 150, profit on debt under section 151, and brokerage and commission under section 233. But the new section 233A inserted in the Ordinance in respect of collection of tax on sale/purchase of share has not been inserted in the said clause for exemption of such tax. Consequently these institutions will suffer tax burden despite income of mutual fund of an investment company registered under the Investment Companies and Investment Advisors Rules, 1971 or unit trust scheme of an assets management company is exempt under clause (99) of Part I of .the Second Schedule to the Ordinance from tax if these institutions distribute not less than 90% of their accounting income among their certificate or unit holder. Similarly clause (57) of Part I of the said schedule exempt the income of NIT, Mutual Funds subject to distribution of 90% of their income. Further income of EOBI and other funds who are the main investors, their income is also exempt from tax under the said clause. These exempted provisions, thus will seriously hit by the provision of section 233A. The Government thus in order to protect the interest of the few tycoons, has created serious problems for the investors especially for foreign investors who has to approach the taxation authorities for refund of such tax withhold on their transaction. It is interesting that the Ordinance exempts on income under one provision while the other provision (233A) tax the same income. Moreover the members have started to shift the tax so deducted/collected from trading of shares to the investors. The CBR has, therefore, advised the members of KSE not to charge tax from their clients as it is against the norms of income tax law. Because the members/brokers pass on the presumptive tax payable by them on the commission to their clients either by enhancing the rate of commission or through collecting service charges. In fact the payment of presumptive tax is the personal and exclusive liability of the members/brokers on their commission income. The mechanism devised for collection/deduction of tax on purchase/sale or Badla transaction is that the members will tax so collected including proprietary trade submit a specified statement to the Stock Exchange who will deposit tax on 25th of each month into Government treasury. The copy of the paid challans alongwith a specified statement shall be forwarded to the CIT concerned holding jurisdiction over the concerned stock exchange. The Stock Exchange claims that it has developed a software to collect and process the required data and to create the required specified statements etc. It has delivered a cheque of over Rs.73 million to the CBR of tax collected during .the period of July 2004. The system of said withholding tax is very complicate and the chances of evasion are tremendous. The MD of the Karachi Stock Exchange also has admitted that out of 150 working members 140 have complied with, rest are the defaulters. The CBR has not any means to detect the evasion and thus default in tax culture will grow. The question is why the investors are made subject to withholding tax on their investments activities just to please a powerful lobby. The section 233A clearly provides that; these withholding taxes are levied on the income of the members/brokers in lieu of commission income earned by them. There nowhere is provided that it will be collected from the investors whereas the members/brokers have started to collect these taxes from their clients. The CBR has also warned them against their illegal practice. But there is no provision in the Ordinance to check this trend. It is recommended that: (i) The withholding tax levied under clause (a) and (b) of 233A(1) be withdrawn. (ii) The capital gain tax be 'exempted to a certain low ceiling, exceeding this ceiling be brought to tax. (iii) The words Advance Tax in subsection (1) of section 233A be, deleted. (iv) As a result of withdrawal of tax on the sale / purchase from the investors, the rate of CVT be raised to 0.02% and the members be made liable to pay pit. (v) The non‑resident investors be exempted from payment of CVT. LETTER FROM MUHAMMAD SHAHID BAIG, ADVOCATE, LAHORE TO THE CHAIRMAN, CENTRAL BOARD OF REVENUE, REVENUE DIVISION, GOVERNMENT OF PAKISTAN (Re: Request for clarification regarding definition of "retailers") [24th August, 2004] The Chairman, Central Board of Revenue Revenue Division, Government of Pakistan, Islamabad. Respected Sir, This refers to the above subject. As per newly added section i.e. 113A to the Income Tax Ordinance, 2001 by Finance Act, 2004, "Retailers" having turnover up to Rs.5(M) have been given option to pay Turnover Tax @ 0.75% being their Final Tax liability. "Retailers" have been defined as under:‑‑‑ Section 113A(2)(a) "Retailer means a person selling goods to general public for the purpose of consumption." Whereas the word "turnover" has been defined in the following words‑‑‑‑ Section 113(3) "In this section "turnover means" (a) the gross receipts, exclusive of 4[sales tax and central excise duty or] any trade discounts shown on invoices or bills, derived from the sale of goods; (b) the gross fees for the rendering of service 5[or, giving benefits], including commissions; (c) the gross receipts from the execution of contracts; and (d) the company's share of the amounts stated above of any association of persons of which the company is a member. It appears from the above definitions that those rendering services to the general public against fees/receipts also fall within the definition of "retailer". Your good‑self may appreciate that following categories of persons are also rendering services to the genera public Hotels, Guest Houses, Marriage Halls, Workshops, Printers, Architects & Engineers, Educational Institutions, Property Dealers, Fashion Designers, Photographers, Beauty parlours, Car dealers, Dry cleaners. You are requested to clarify, whether or not above service providers along with others fall in the definition of "retailer". You are also requested to clarify whether or not those engaged in retail sale vis‑a -vis manufacturing and sale can also avail this scheme to the extent of their retail sale. An early consideration is deeply requested so that concerned Tax Payers could be benefited from the newly promulgated law. Thanking you.