CORPORIFICATION OF ECONOMY

CORPORIFICATION OF ECONOMY CORPORIFICATION OF ECONOMY [Comments on Finance Bill 2005] By Professor Masood Ahmed Abbasi, Karachi On cursory glancing over the budgetary finance bill, it is apparent that a number of proposals stand to rectify the existing clerical, grammatical and printing errors of omission and commission crept into existing fiscal laws caused by inefficiency and sense of irresponsibility prevailing with the bureaucracy accountable to none. It is, therefore, advisable to comment on meaningful and substantial amendments proposed in Finance Bill 2005 consisting of: Para 1 Short title, extent and commencement - consisting of three clauses. Para 2 Substitution of Act of 1944, consisting of one clause. Para 3 Amendments of Act IV of 1969 consisting of six clauses. Para 4 Amendments of Customs Schedule, West Pakistan Ordinance XX of 1969, consisting of one clause. Para 5 Amendments of Employees Old Age Benefits Act, 1976 Para 6 Amendments of Finance Act 1989, consisting of one clause. Para 7 Amendments of Sales Tax Act, 1990, consisting of thirty-three clauses. Para 8 Amendments of the Protection of Economic Reforms Act, 1992, consisting of one clause. Para 9 Amendments of the Income Tax Ordinance 2001, consisting of fifty-one clauses. Para 10 Amendments of Finance Act 2003, consisting of one clause. Confining this study to Para 9 of the Finance Bill, relating to amendments proposed in Income Tax Ordinance 2001, it may be stated at the very outset that this Ordinance was transplanted in 2001 rendered effective in 2002 and actually enforced in 2003, converting the old original basic concept of assessee returning his income and tax-liability and assessor assessing the same year after year, into the concept of assessee assessing his own income and tax-liability and assessor detecting concealment & evasion like Scotland-yard. Old concept dating back to the year 1922, had been functioning satisfactorily both in Hindustan & Pakistan for the last over three quarters of a century, and inspite of all the adhocism and lack of will and ability of CBR, Withholding & Presumptive Tax Regime; though impairing the progressive direct-tax- character of Income Tax, had been pulling the apple-cart that the sitting regime upturned without any sound reason or improvement. On deeper study of this dramatic change in the Law of Income Tax it may be discerned that it is all done to protect and promote the interest and cause of Corporate Sector, which like the Feudal Lords in Rural Sector, owns and possesses about seventy-five percent of Urban Capital and generates like amount of Income. The power and influence of this Sector over the Government can be gauged from the fact that only a few years before the enforcement of the existing Income Tax Ordinance 2001, they had succeeded to snatch the concession of 'Self - Assessment Schemes, basically intended for Fixed Income & Lower & Middle Class Tax Payers, extended to them. This measure was outspoken by itself that mighty and strong corporate sector did not allow the CBR even to peep into and audit their accounts from Income point of view, which have already been audited under Companies Ordinance 1984, from the point of view of share-holders. As a matter of fact, the Law of Income Tax already plagued by the Withholding & Presumptive Taxes on the one hand, and virtually whole sole extension of Self Assessment Scheme to all and sundry with minor safeguard's to prevent brazenfaced and crude evasion of tax-liability, lost its efficacy utility and impact on the society. This situation raised its head high in 1990's, when CBR suffering profusely from Corruption and Inefficiency coupled together, was unable to enhance the returned tax-liability through the exercise of assessment by even ten percent. This malady existed as long ago as 1960's when during the Finance Minister-ship of Mr. Shoib, the Raja Todarmal of the most benevolent ruler of Pakistan Field' Marshall Ayub Khan, was obliged to introduce Self Assessment Scheme, realizing that CBR had lost all its original utility by failing to ensure the Tax Compliance inspite of enjoying vast rigorous powers to do so, which its officers utilized for their personal gains instead of collecting tax due to the exchequer. But the Government by itself has also equally failed to cultivate a congenial atmosphere for collecting this most civilized and democratic direct tax which by its very nature involves consciousness of sacrifice and generates an urge to evade and avoid unless it is countered by conferment of economic and social rewards, inculcation of national and patriotic sentiments, and over and above all making tax-payers realize that they themselves are the beneficiaries, when these taxes are ploughed back in the economy, in the same proportion in which they have contributed. It is thus in the very nature of things that Income Tax can be levied and collected beneficially, only by a benevolent Government, which can infuse philanthropic spirit in the `haves' of the society to render some sacrifice for the. welfare of the `have-nots'. "Equality" & "brotherhood" the cardinal & outstanding features of Islam have to be practised more than preached from pulpit. Our Governments from its very inception are bent upon keeping all their eggs in Macro Basket of the Economy laying all their emphasis on production, and losing sight of Micro Obligations of the Economy demanding equitable distribution. They have failed to realize that both Macro & Micro Economies are twin-sisters and two sides of the same coin, for one can neither survive nor prosper without the other. The sooner due attention is diverted to this aspect. of the economy the sitting managers may not accomplish their uphill task of national welfare and prosperity. In keeping with their Plan, our. Governments have been nourishing and patronizing Corporate Sector, apparently under foreign dictates, by conferring unorthodox concessions and privileges upon them at the cost of the poor and middle class, to keep the wheel of economy moving swiftly and comfortably. Many historians believe that the first chapter of the Fall of glorious Moghul Empire was authored by Emperor Shah Alam Sani while he granted Diwani Rights of collecting the taxes to East India Company from the Province of Bengal, Bihar & Orissa for the paltry sum of Rs. 26 Lac per year, in the year 1765, because the decaying Emperor found it cumbersome and painstaking to collect taxes from these far-flung territories. The question arises whether economic Monopolies & Cartels can be countenanced by any Political Government established merely to protect the teeming millions from the clutches of the rich & powerful. Every Government has to answer it either readily to its own people or eventually to themselves when consigned to the dustbin of History. While nobody would deny the Multi-Nationals and our own giant size Companies to ensure large-scale production, nobody would allow them to own and hoard lion-share in their coffers. Following one of the most cardinal cannons of taxation propounded by Adam Smith, that is Equity, which other Sector in the economy deserves to contribute larger amount of income-tax than Corporate Sector, which enjoys all the economic benefits in its,' very formation. Limited liability on the one hand, and being the Legal Person, elimination of direct brunt of payment of tax, on the other. Who in the right frame of his mind, can tolerate BANKING AND INSURANCE COMPANIES, involving no, or in any case, least entrepreneurial risks in their business, not contributing the largest share of their income with the State. Yet our MACRO ECONOMY Government has placed the following table of Tax rates from its very inception on its statute-book. TAX YEAR. BANKING COM. PUBLIC COM. ' PRIVATE COM. (1) (2) (3) (4) 2002 50% 35% 45% 2003 47% 35% 43% 2004 44% 35% 41% 2005 41% 35% 39% 2006 38% 35% 37% 2007 35% 35% 35% It is interesting to note that almost all the Civil and Military Governments act under the dictates of CORPORATE SECTOR, as from the assessment year 1993-94 to 1998-99, the rates of tax on BANKING COMPANIES have been gradually reduced year-wise from 64% to 58% and on PUBLIC COMPANIES reduced year wise from 42% to 33% & on PRIVATE COMPANIES reduced from 52% to 43%. Now to give further incentive to encourage individuals, associations and firms, to convert their business into the status of COMPANIES, the Government has granted a concessional rate of tax 20% to middle-class entrepreneur with maximum paid up capital of rupees Twenty Five Lac and turnover of Rupees Two Crores, which is quite justified to facilitate documentation of economy on the one hand and provide incentive of limited liability to investors, on the other. In order to facilitate the application of sales tax @ 3% on retailers of textile products and leather articles, carpets and surgical and sports goods having turnover exceeding Fifty Lac Rupees. They shall pay income tax @ 1% inclusive therein. The Commissioner is to select a person for an Audit having regard to certain aspects of the case enumerated in section 177(4). Now section 120 providing for finality of self assessment by the assessee, is proposed to be amended to vest the power in Commissioner to select any person at his own discretion, without assigning any reasons. Thus henceforth the Commissioner, before selecting a case for Audit is not under any legal obligation to express or intimate any reasons for doing so. The unlimited powers of the Commissioner (Appeal), particularly those relating to setting aside the assessment order for de novo assessment, have been curtailed. Matters requiring further enquiries or adducing fresh evidence were usually set aside for de novo assessment, Now the Commissioner (Appeal) in such cases would make such. enquiries and take such evidence himself before confirming, modifying or annulling the assessment order. This will enhance the responsibility of CIT (A) and save both assessor and assessee from duplicating the same exercise. Since the Taxation Laws can not afford the scrutiny and lethargy of judicial proceedings, in income tax law right from its very inception in the year 1922, overhauled in 1939, two appeals were provided against the quasi-judicial order of the Income Tax Officer, being the original authority of jurisdiction, responsible for assessing income and tax liability and collect such tax from assessee. First appeal was provided before the appellate Assistant Commissioner and second appeal was provided both to the Income Tax Officer and assessee, aggrieved by the first appellate order, before the Income Tax Appellate Tribunal, which was constituted to function as the Second & Final Appellate Authority. Though the Jurisdiction of the Courts was expressly ousted, as a complete full- fledged machinery and procedure was provided within the Income Tax Act to resolve all disputes and differences between the assessor and the assessee, yet it was deemed desirable to keep Income Tax assessment proceedings open to JUDICIAL LIGHT and GUIDANCE at the highest judicial forum for the use and benefit of the highest appellate Authority through the window of `REFERENCE' strictly on points of Law arising out of the final appellate order of the Tribunal. To get intricate and controversial `point of law' adjudicated even at the highest level of the Supreme Court, an appeal was further provided against the judgement of the High Court, to provide complete satisfaction to both the assessor and assessee of correct application of law in determination of tax liability. This system, being full of centuries old wisdom has worked in British India as well as Hindustan and Pakistan satisfactorily as it provides absolute judicial scrutiny with out hampering the expediency and swift disposal of final tax liability. Sometimes procedural amendments have been brought about in this system, but soon they failed. At one point of time in our country the REFERENCE was substituted by direct appeal on point of Law before High Court, which were flooded with such appeals and had to waste precious time on 'katchi pashi' to determine whether `the point of Law fit for decision of the Court did actually arise, and the function hitherto discharged by the Tribunal before referring it to the High Court was to consume time of the Court, which they could ill-afford, having heavy burden of their own, normal appellate, revisional and supervisory work-load. Moreover converting 'REFERENCE' jurisdiction to `APPEAL' jurisdiction, even though on 'point of law' expands the jurisdiction of the Court to travel from one end to another, on to all the points of law involved in the case, and itself pass an effective and exhaustive appellate order merging all subordinate authorities orders within it, instead of confining its judgment only on the 'point of law' referred to it for the guidance and compliance of the Tribunal only. A via media is now being proposed by retaining 'REFERENCE' to High Court but allowing the parties to make it direct and bye pass the Tribunal from determining the 'fitness' of the point of law for the judgement of the Court. Even the correctness of the statement of the case setting out the facts submitted by one party would be controverted by the other party requiring the High Court to unnecessarily spend time to resolve the controversy. It is strongly suggested that the proposed change to the existing procedure, full of wisdom, would be a change for the worse. Jurisdiction of Appeal before the Supreme Court enshrined in section 134, is proposed to be omitted. The jurisdiction of Supreme Court as presently contained in this section is essential for after judgment of the High court no Point of law remains begging of further judgment by the Supreme court unless so found fit by the High Court itself. Secondly Income Tax, being a federal tax enforced in all the provinces alike, needs to be finally adjudged and decided by the Supreme Court, particularly in dissenting Judgments of different High Courts, as it happens to be the highest authority in finally laying the law and deciding a question of law, binding upon all other Courts in Pakistan, under article 189 of the Constitution. Let Clause (2), instead of Clause (3) of Article 185 of the constitution continue to apply in such cases. Our Government is fond of making serious changes every now and then in laws of the land without any sound reasons and material & substantial effect. To grant relief to salaried assessees, standard rate structure for all assesses was kept intact in table of Part 1 of Division 1 of First Schedule, and concessional slab was provided in part III of second schedule ranging from 70% reduction down to 5% reduction in tax liability on income of Rs. 60,000 to Rs. 10,00,000. This indirect relief already given to salaried assessees, is now proposed to be reflected in direct reduced rate structure, with added relief ranging roughly from 6% to 10% progressively from lower slab of rupees one lac to higher slab of rupees forty eight lac. The difference noticeable in direct relief method is that it is progressive from lower to higher @ 6% to 10% whereas the indirect relief was progressive from higher to lower slab @ 5% to 70%. In view of the entirely earned income of the salaried person, the amendment is quite justified. The final tax-liability of contractors, other than sellers of goods and providers of services, being 5% upto three crore and 6% over, is now enhanced to 6% in all cases. Final tax liability in respect of sellers of goods shall be 6%, whereas adjustable deduction in respect of providers of services shall also be 6%. Final tax-liability of deduction at source of tax on commission and brokerage income is proposed to be 5% of the amount paid to indenting commission agents, advertising agents and yarn-dealers, whereas 10% on all others. Telephone having become a common 'man' use the progressive slab of Rs.50 on monthly bills of Rs.1000 to Rs.2000, Rs.100 on Rs.2000 to Rs.3000 Rs.200, on Rs. 3000 to Rs.5000 and Rs.300 above Rs.5000 is proposed to be deducted at the uniform rate 10% on bills exceeding Rs.1000 which being non progressive, is not justified. Another significant unwarranted and undue amendment proposes to grant exemption from tax on income derived by an individual from transfer of his membership rights or shares of a stock exchange in Pakistan to a Company at any time between the first day of July, 2005, and the thirtieth day of June 2006. Concession of 50% rebate to senior citizens aged 65 years or more presently available upto income not exceeding 3 lac is proposed to be enhanced to the limit of income upto rupees 4 lac, which, in view of money losing all its purchasing power is justified. Likewise relief of 50% of tax-liability permissible to the teachers and researchers is further enhanced to 75%, which is a reasonable incentive to useful citizens. The provisions of section 111 relating to UNEXPLAINED INCOME OR ASSETS under Chapter VIII (ANTI AVOIDANCE) have been qualified by clauses 5 to 10 of part IV (EXEMPTION FROM SPECIFIC PROVISIONS) of Second Schedule. The provisions of clause (7) relating to THREE YEARS FOREIGN CURRENCY BEARER CERTIFICATES and clause (8) relating to cash withdrawn or assets purchased from Private Foreign Currency Accounts or Certificates or US Dollars Bearer Certificates and Foreign Currency Bearer Certificates have been carried over to clause (5), which has been redrafted and these clauses (7) and (8) are accordingly omitted. Clauses (6) and (9) were already omitted in the year 2003. Provisions of section 113 relating to minimum tax on the income of certain persons under Chapter IX (MINIMUM TAX) were excluded from their application by virtue of clauses 11 to 25 of Part IV of Second Schedule. These clauses are now proposed to be amended by including almost all the provisions of clauses (12), (13), (13A), (15), (16), (18), (20), (21), (22), (22A), (23), (24) and (25) into clause (11). These clauses have accordingly been omitted, whereas clauses (14), (16) &(19) have been retained. Likewise Provisions of section 148 relating to IMPORTS under Division II (Advance Tax Paid to a Collecting Agent) of Part IV of Chapter X (Procedure) are qualified by clauses (26), (27), (28), 29, (30), (31), and (31A) of Part IV of Second Schedule. All these clauses excepting clause (29) are proposed to be omitted. Likewise the provisions of Section 151 (PROFIT ON DEBT) Division III (Deduction of Tax at Source) of Part IV of Chapter X are qualified for exemption by clauses (33), (34), (35), (36), (36A), (37), (38), (38A) & (38B) of Part IV of Second Schedule. Out of it clauses (34), (35) & (37) have been retained and others are omitted. Exemption regarding profit on National Savings Schemes presently appearing in clause (7) of Part II of Second Schedule has been omitted there and brought alongwith Term Finance Certificate here in Part IV of Second Schedule. Subsection (6) of section 153 (Payments for Goods & Services) relating to finality of tax on income was qualified by clause (40) of Part IV of Second Schedule. This Clause is now proposed to be omitted. Since clauses (26), (27), (28), (29), (30), (31) and (31A) relating to IMPORTS have been omitted, alternative clause (56) consisting of as many as twelve sub-clauses excluding application of the provisions of section 148 is proposed to be inserted. Third Schedule Part I (Depreciation) enumerates thirteen classes of assets providing separate rates of depreciation on their written down value. This Class of Assets is now proposed be reduced to FOUR only providing (a) Building @ 10% (b) Furniture, Plant & Machinery, Motor Vehicle Ships, Technical or Professional Books @ 15% (c) Computer Hardware @ 30% (d) Mineral Oil Concerns-below ground Installation 100% and offshore platform and production installations @ 20%. The revision is simplified and justified. Another substantial relief to corporate sector is provided by inserting clause (6A) in Fourth Schedule which relates to Rules for the Computation of the Profit & Gains of Insurance Business. This new clause is inserted to provide the exemption of Capital Gains, from the sale of shares, modaraba certificates, or any instrument of redeemable capital, or shares of a Public Company, derived upto the Tax Year ending on thirtieth day of June 2007. A regrettable apparent error of clerical nature mentioning section 2(49) relating to definition of the term `RENT' instead of the correct figure 2(48) relating to the definition of the term RECOGNIZED PROVIDENT FUND appears in the heading of Part 1 of the Second Schedule, which is now proposed to be rectified on the Law Ministry having awakened after four long years of slumber. One cannot restrain requesting the Government of Pakistan to engage atleast one Local Draftsman competent to read and write correct Legal English, and review all the Federal Statutes that they get enacted and administer, mainly the Fiscal Statues that create monetary liability of the Citizens. Before concluding this treatise I may invite the attention of the worthy Government to seriously peruse my Article titled "Alternate Dispute Resolution (in the Law of Income Tax)" recently published in PTD, May 2005 Journal Page 94 & Daily Dawn dated: 23/08/2004, instead of continuing to waste their precious time on making changes and amendments in it.