Pre Budget Proposals for Fiscal Year 2012-2013

PRE BUDGET PROPOSALS FOR FISCAL YEAR 2012-2013 PRE BUDGET PROPOSALS FOR FISCAL YEAR 2012-2013 By Qamar-ul-Islam, Advocate High Court, Karachi ISSUANCE OF FORGED AND BOGUS FOREIGN REMITTANCES CERTIFICATES BY COMMERCIAL BANKS ON 1.5% Income Tax payers for whitening their black/untaxed money obtain foreign remittances certificates, from commercial banks on nominal charges of 1.5%. To certify that, certificate issuing Commercial Banks on receiving their percentage of 1.5% open a bank account in name of person demanding such foreign remittances certificate, deposit the required amount of foreign remittance in his account, withdraw the amount in his name, issue the required certificate and close the account. This fact is in absolute knowledge of all Income Tax authorities invariably as most of them are return fillers themselves of their clients and also use this corrupt system of the corrupt officials of bank for themselves also. To give protection to foreign remittances, in form of economic policies introduced by Nawaz Sharif's Government, maximum benefit of which was also enjoyed by Sharif's and their allies i.e. Mansha Group etc., Income Tax authorities are not allowed rather are prohibited/ forbidden to probe and go behind the foreign remittances transaction, to check that such certificates are issued even to those, in whose favour never ever any remittance is received or could be received as none of their any person is in any foreign country. This all illegal 'racket' is minting money under the nose of 'State Bank of Pakistan' Central Bank of Country. A detailed enquiry on this front is required to be conducted by State Bank of Pakistan, against all those banks who are involved in such maniac and due punitive, administrative, regulatory, disciplinary action as prescribed for the purpose be initiated for this heinous crime, which has helped tax evaders to legalize their untaxed amount, deprived public kitty of due tax on one hand, deprived public of the taxed amount, discriminated other tax payers, who have paid correct taxes, the act is highly immoral and extremely corrupt as well on both sides. PRO BANK AND ANTI PUBLIC MONETRY POLICY OF STATE BANK All policies of State Bank/Federal Bank of Country are pro bank and anti-public, which has resulted in anti-service to depositors/ accountholders, undue exorbitant profits in the hands of bank itself available for its corrupt extravagant employees, who also neither offer due share of profit to accountholders nor declare fair dividends to their shareholders, affairs of State owned banks, are extremely corrupt, mismanaged, unaccountable, rough, in-disciplined and indecent in incompetent hands. Deliberate bad debts are sanctioned and deserving are denied. Services charges at the peak and highest scale are charged. Request of account holder to stop payment of a cheque is charged at Rs.300 plus Excise duty of Rs. 48. Highest cost is recovered for Pay orders and Demand drafts, which is benefiting more to foreign Banks. STATE BANK/CENTRAL BANK OF PAKISTAN AND FINANCE MINISTER/ADVISER FAIL RATHER REFUSE TO PERFORM THEIR ADVISORY DUTIES TO GOVERNMENTS Because State Bank of Pakistan, which is Central Bank of Country also and Finance Minister/Adviser, entire finance ministry, Planning Commission fail to perform their advisory duties, so they resort to only option of over issue and exaggerated reporting which is corrupt also. Need of time is that some control, check and balance is employed. All the provincial governments with federal are throwing rather flooding paper money on various unproductive Schemes, naming them on their Party Leadership. NOT AID BUT TRADE SLOGAN What product country has to offer to other countries? To replaceaid into trade? Economy of country is agriculture base, ample resources, state of minerals, hardworking labour force is a common talk by all, government and opposition, so called economists and writers, columnists, anchor, analysts etc. To over emphasize, what is not there is also an act of befooling nation for one's ulterior motives. Agriculture sector is regularly and fast destroying every day, youths of country are fast shifting to crimes; political activists want them for their personal projection. All foreign ambassadors, of USA Britain, Australia, Canada, New Zeeland, Germany, Cyprus, Malaysia, Malaya, Turkey, Mauritius, Hong Kong are. propagating their Universities, Colleges, facilities, offering and inviting this country students and our ambassadors are busy in arrangements of visits of our huge luxurious extravagant teams of so called VIPs of country, arranging their private and treatment trips, meetings of their children studying abroad, shopping etc., in those and other countries. Law and order situation does not permit hosting of games and tourists. Country has no Water, Fuel, Energy, Electricity, and Gas. Provinces do not trust each other. FAILURES OF INSTITUTIONS All institutions of country are in corrupt hands. Public servants occupying places in all institutions are involved in loot and plunder, extortion of money from tax payers. They are appointed with a mandate from recruiting authorities to loot public, it is commonly known that all the appointments and jobs are sold, with an authority given to appointee not only to recover his/her investment in form of compound interest calculated at his/her rate regularly sharing with his/her superiors, in order to continue on lucrative lines, as a continued partnership in perpetuity, without any interruption. Government insists that all institutions are working in accordance of Constitution, whereas every institution is corrupting not, only itself but the entire system, public as well. Those in power defend the government and its institutions and those outside power talk of revolution. Even some one already in power, speaks of bringing revolution and changes, when in all the institutions it's party workers are corrupting the institution, question arises that whether he is talking to bring revolution against himself, if absolute power is granted to him. Country has even such Political Parties who are collecting money in name of social services but are using it in politics.. Even professional bodies are captured by effluent and exploitive class. Majority member's job is only to pay costs and subscriptions. Constitution, supremacy of parliament is much talked about, when institutions are not for itself or employees in institutions, all institutions are to serve tax payers of country, which every citizen invariably is paying. A wrong conception about strength of tax payers is given. It generally alleged that very small number of persons pays tax in country. Now advance Income Tax is collected on all Mobile phones irrespective of bill and call, Advance Income Tax is collected on every Commercial and Industrial Electricity bills, on all commercial and industrial line phones bills exceeding Rs.1,000 on all cash withdrawals exceeding Rs.25,000 both Income Tax and Sales Tax is deducted at Clearance/ Custom stage on all imports, no refund is given to Commercial importers, thereby both taxes passes to ultimate consumer of the product, Tax deducted on debt profits/amount in PLS , with Banks, tax on dividend, on CNG, Transport business, petroleum product etc. Those who are none return filers or non NTN holders, payments collected by them or on their behalf, users or last consumers are not refunded, as such even those government whom does not record in tax net, are tax payers, so there hardly any person left who does not pay tax, or does not contribute to kitty. EMBEZZLEMENT AND MISUSE OF TAX PAYERS AMOUNT AND PUBLIC MONEY Embezzlement of public money by all most all the public and private sector is now a growing press and media item, and no fruitful is done. NO RELIEF IS AVAILABLE IN FISCAL STATUTE BOOKS/ POLICY, OF FEDERAL, PROVINCIAL, CIVIC OR MUNI-.CIPAL FOR DISABLED AND MENTALLY HANDICAPED PERSONS Exemptions and reliefs are given to industrialists, business community, tycoons, defense personals, bureaucrats, foreign, locals, institutions, institutions no run for profits, political parties etc. but advance taxes on income of disabled and mentally handicapped persons under various deducting sections of Income Tax Ordinance, 2001 are deducted. In federal, provincial and civic bodies statutes, rules, regulations ,,and policies, reliefs are prescribed for government employees etc., but no relief is granted to disabled and mentally handicapped persons. On the contrary if parents of such persons who are also called as 'special persons' purchase properties or invest in their name or for them, operate banks accounts, deposit any amount in PLS or in National investments, advance tax is deducted from those account as normal and disabled persons have also to pay property taxes, water and conservancy on their property or properties held by parents, in their name. On rental income if any such special persons also are required to pay Income tax as Property income. It is, therefore, suggested that a comprehensive liberal provision be legislated in all respective federal, provincial, civic and utilities statutes, that no tax/charge be levied/imposed directly or indirectly on disables persons, even the properties earmarked for them or for their purpose or benefits, be declared exempted from all taxes andlevies, charges and recoveries, even if it is misused by parents or guardians of disabled persons. LOCALS OF KARACHI ARE DEPRIVED OF THEIR DUE SHARE IN REVENUE AND REPRESENTATION IN JOBS On account of vested interest, Karachi is in control .of various fractions of militant groups, road crimes, abductions, target killings, occasion break up in law and order situation, politics at Karachi is supported by admitted militants groups. Both Federal and Provincial taxes are discriminately collected from Karachi but nothing is distributed in form of jobs, development and other facilities,.as compared to other cities of country. On account of prejudices, discrimination and prejudices, representation of locals of Karachi in services, provincial governments, departments, judiciary, in offices of Prosecutor General, Advocate General, Attorney General, Education Department, Banks, Insurance, KW&SB, Police, Rangers, other departments etc., is diminishing with passage of every day. Step motherly treatment with Karachi and Balochistan is worsening the situation policy adopted for East Pakistan is still continuing against Karachi and Balochistan is alarming. Both places are developing as safe haven for Criminals under protection of Political activists, Police, Rangers and LEAS. 'Every one aspires to capture Karachi as well Baluchistan, instead free its residents to vote on their free will and conduct politics in free atmosphere. PEAK LEVEL OF CORRUPTION IN FBR AND ITS FIELD OFFICES Under the garb of delegation of power rather to make fun of it, all Inland Revenue Officers who comprise of direct and departmental promotes, of Inspector level of Income Tax and Auditor levels of Sales tax, have become de facto Zonal Commissioners, rather Chief Commissioner. In form Chief Commissioner above Commissioner a greater sharer in bribe has multiplied the rate of corruption, now all, right from clerks to Inland. Revenue Officers are given bribes budget and targets by Additional Commissioners, Commissioners and Chief Commissioner to collect their own bribes and also shares.of all high ups a major chunk is to be sent up, to FBR etc. No doubt to big fishes Additional Commissioner, Commissioners and Chief Commissioners deal directly also, whom they call VVIPs. Now all the decorated offices of Additional Commissioners, Commissioners, and Chief Commissioners are converted into a decorated attached side arrangements of small kitchenette, and ever time electric tea and coffee kettle is on, but only those are entertained who are with money/ bribe proposals, all those who still believe in merit are turned back on the pretext that, they are busy in preparing presentations etc., when the actually, are busy discussing bribe, shares with their subordinates, making chit chats with friends, and all merit dreamers are returned back to come on next date, which never ends, and most of the time these Additional Commissioners, Commissioners and Chief Commissioners, arrogantly reply that well it is the Inland Officer who has to look your matter, be it refund or else. They instruct to refuse, if no bribe is involved. CULTURE OF RED CARPET RECEPTIONS AND LUNCHES Or FBR MEMBERS AND CHAIRMAN BY FIELD OFFICERS A culture to invite in routine FBR Meniuers and Chairman by field officers has grew amongst field officers. which in addition to extra burden tax payers, extra pomp and show has encouraged and fasten corruptions. Public servants now are not available for public service but are busy in greasing each other in their private 'Damay Dermay and Sukhnay'. They now are so close and open to each other that they can not check each other with reference to public complaints, and only helpful to each other to demand rather force tax payers to increase the volume of bribe as the payment is now shared by all. Now there is no privacy and secrecy between or any reservation between grade-1 officer to grade-22 officer, all are naked in same club. It is only the public which has obey them according to their ranks, peons installed at gate arc to check public entry and not the any grade of subordinates, regular private visitors or persons coming to pay bribes because all peons' and subordinates know that 'Sahab kay /lay passa laya hai our hainko bhi dey ga' VICIOUS CIRCLE OF CHIEF COMMISSIONERS, WHO STILL WISH TO BE CALLED DIRECTOR GENERALS, AS THE LATTER SOUNDS BIGGER THAN FORMER When there was one RTO (Regional Tax Offices) and one Director General honest Tax payers and honest Representatives were more comfortable than with 3 RTOs at Karachi. In matters of jurisdiction in refund cases field officers only rush after those cases who offer them bribe, so bribe offerers have no problems, but where no bribe is offered, field offers refuses the case so does his Chief Commissioner and in result tax payer is fixed on running from Nipa Chowrangi to Sabzi Mandi, Sabzi Mandi to Income Tax House, which may repeat many times. CONFUSED JURISDICTION Jurisdiction on nature of business is absolutely confused and incomplete. And no proper assistance is available with department. Even placing of officers and staff is a bigger 'BHOOL BHULIAN' than of Nawab Wajid Ali Shah at Lucknow U.P. India. PROBLEM OF NATURE OF BUSINESS Code for nature of business fed to F.B.R. system is very limited, confusing and incomplete, which is not open to filer also, to able him to feed the nature of business of his/her choice. It is advised that it .be opened to filer's choice. CHECK- ON MONOPOLIZED AUDIT PROFESSION AND ADVOCAY Entire audit profession is monopolized in hands of members of Institute of Chartered Accountants, as a result fairness in reporting has completely vanished, to introduce a fair competition, members of Institute of Chartered Certified Accounts, be also recognized, as this Institute is already working and most of members are common members of both Institutes. Disproportionate fee can well be adjudged from the fee charged by few firms with commoners, 0.05 million as compared to 5 million, 10 million and even more. Wealth declared by Aitezaz Ahsan and Babar Awan is a proof of disproportionate, fee charges in profession, question arises that what extraordinary, they performed. ELECTION COMMISSION OF PAKISTAN FAILS TO CHECK THE EXTRVAGANT AMOUNT SPENT BY FEW POLITICAL PARTIES ON THEIR FREQUENT PUBLIC MEETINGS, ETC. That from where is the amount flooding, which from no common sense can be contributed by members, sympathizers, public donations or whatever name called; except collections through crime, spent frequently one after the other, crossing such show off in billions of rupees, which is of no use or any benefit to public and country otherwise except problems, hassles, road blocks, fatal or ailing senior citizens, agony or mental torture to public etc. BROADENING???????? OF?????? TAX??? BASE? WITHOUT???? MAKING HINDRANCES TO THE ORGANIZED SECTOR AND HONEST TAX PAYERS Concrete measures on the part of the Government are needed to enhance revenue collection via tax receipts. The past few years have seen an increasing reliance on the organized sector by the Government in terms of achieving revenue targets. The practice has increasingly dented the investment climate as honest taxpayers are burdened with increasing tax rates as well imposing new levies frequently. Furthermore the practice of introducing amendments in. the law without taking .full consensus of all stake holders In our opinion to encourage compliance, any major amendment to taxation law should be implemented after taking key stakeholders into confidence. CORPORATE TAX RATE IN COMPARISON WITH THE REGION Pakistan is a place where income is taxed -at a substantially higher rate than the rate applicable in the neighboring countries. The rate of corporate tax throughout the developed world has been brought down below 30 percent. In our country the income of corporate entities are taxed under the three different enactments namely Income tax Ordinance, Companies Profits (Workers Participation) Act sand Workers Welfare Funds. The combined rate of taxation comes to 42% starting 35% being the corporate income tax with 7% both for WPPF and WWF (i.e. 5 and 2 % respectively). China, which provides reasonable opportunities for the establishment of manufacturing sector, operates with the rate of around 15 to 20 percent, and similarly there are many examples of India, Bangladesh, and Malaysia etc. where rate is around 30 percent. Pakistan is a place where income is taxed at a substantially higher rate than the rate applicable to head office of a multinational group. It .is urged that the corporate tax rate of 35% which is the highest among the region should be reduced for the revival of industrial growth and industrialization in the country. TAX CREDIT FOR EQUITY INVESTMENT FOR BMR/ EXPANSION IN INDUSTRIAL UNDERTAKING (SEC 65E) With the avowed objective of promoting and encourage industrial investment in the country by the. corporate section, the Finance Act, 2011 introduced section 65E. The newly introduced section 65E is meant to provide tax credit on investment by a company with 100% equity investment in balancing, modernization, replacement, or for expansion of the plant and machinery already installed, in an industrial undertaking set up in Pakistan before the. 1st day of July 2011 subject of the fulfilment of condition specified in the provisions. The legal construction of the new section leaves a lot to be desired to remove various ambiguities to promote and encourage industrial investment in the country by suitable explanation and clarification to avoid tax dispute between the taxpayers and the authorities. Following areas require clarification/explanation and legal protections. The provision provides the manner of calculating the amount of tax credit against the tax payable which is the same proportion which exists between the total investment and such equity investment made by the industrial undertaking. However, the term total investment have not been defined in the existing provision whether it has the same meaning as was assigned in the normal accounting terminology. Secondly in the second year the amount of total investment will remain same as in the first year or it include further investments of the second year. Explanation for entitlement of the following equity investment requires immediate attention. ? ???? Investment through accumulated profit ???? Investment through right shares ADVANCE TAX (UNDER SECTION. 147) Section 147 required companies to pay advance tax on the basis of estimates of current year's income. If the income is likely to be more than latest assessed income. In case tax payers fails to pay advance tax or the tax so paid is less than 90%0 of the tax chargeable for the relevant tax year, additional tax @ KIBOR plus 3% per annum is levied on the amount of tax so chargeable or the amount by which the tax paid by the company falls short of the 90% as the case may be. Due to uncertainty of economic and political condition in Pakistan it is very difficult to estimate the taxable income in these volatile times. In our opinion assessed refunds should be allowed to be deducted from the gross advance tax liability to arrive at the net advance tax payable. Through the Finance Act 2010 a change has been introduced in the payment dates of advance tax i.e. 25th day of each quarter and reduced time period by 20 days. Before the amendments it was become due on 15th of next month of each quarter. These revised dates are creating immediate liquidity problems in the difficult economic times of today to discharge the advance .tax liability before the end of each quarter. In our opinion the advance tax payment dates should be preferably brought back to previous position or to be fixed at least 5 to 10 days after the end of each quarter. ABOLISHMENT OF WITHHOLDING TAX COLLECTION AS AN AGENT OR COMPENSATION TO WITHHOLDING AGENT The administrative cost of corporate withholding tax agents is increasing day by day for the provisioning the service of collection of tax and maintaining complete records of deduction made for the compliance of various requirements on behalf of tax authorities, which is continuously enhancing the duties and responsibilities of withholding tax agents. Or Companies should be allowed to deposit all withholding taxes deducted during the month of 10th of the following months and withholding tax statements on the 15th of the following month. It is urged that FBR should mechanize an effective and efficient taxation system, so that the system of businesses acting as withholding tax collection agents should be gradually dispensed with and should provide Corporate WHT agents a justified tax credit on the cardinal principle of natural justice to minimize the burden of administrative cost. RATE OF TAX ON SALARIED PERSONS The tax system works against the middle class and continuing inflation has aggravated the problem. Besides payroll tax, salaried class also pays withholding income tax on utilities, phone bills. Rate of tax on salaried persons should be reduced to cope up give the high cost of living. Current Tax rate for salaried persons are quite high taking away substantial amount from the employee's salary. To give some relief to the salaried class Tax Credit for personal expenditure on medical and education of children should be introduced. This will encourage documentation and assist in bringing untaxed services sector into tax net. ABOLISH INCENTIVE TO EVADE TAXES Improvement in the tax base essentially requires elimination of all discriminations between tax payers with adequate penalties for defaulters. In our country this works in the opposite direction by way of Periodic Tax Amnesty Schemes offered by the Government. Possibilities of whitening untaxed money by misuse of provision provided in the law such as 'inward foreign remittance' also encourage the unorganized sector to continue with tax evasion. DELAY IN REFUNDS Continuous changes in original GST law have also distorted the system of refund claim processing. As a result huge amount of Sales Tax Refunds stuck with FBR. Deferment of sales tax refundable amounts relating to imports and export is unjustified when the original bills of entry are being submitted with the sales tax refund claim on the pretext that customs data is not available in PRAL. The taxpayer should not be penalized due to non-availability of data in FBR's system. Similarly apart from the list of supportive documents prescribed in Rule 38 of Sales Tax Rules 2006, the department requires the refund claimant to furnish various records pertaining to his suppliers to cross match the payment of output tax in case of manual overruling. Such departmental requirements are not backed by any regulatory enactment as the supplier is not bound to furnish his returns, summaries and other statutory declarations to his buyer. To streamline the entire refund verification and sanctioning process, the FBR should devise necessary mechanism in the light of section 10 and Sales Tax Rules 2006. Under the Sales Tax Rules a refund is to be issued after scrutiny of certain documents; however these rules do not specify any time frame for such scrutiny resulting in long delays in scrutiny/processing. A reasonable time frame should be defined for conducting scrutiny/processing of the refund claim INPUT ADJUSTMENT U/S 7 - BLACK LISTING Sales Tax department has classified certain sale tax registered person as suspicious supplier and disallows input adjustment in case purchase is made from suspicious/black listed/blocked suppliers. This penalizes a registered buyer who claims in adjustment on legitimate purchases with sales tax payment but both registered buyers and sellers are made to suffer for failure of the sale tax department to record tax payment in their data base. In our opinion input claims should be allowed to all registered persons who purchase goods on valid sales tax invoices showing tax payment in proof of payment under section 7, even if data base of FBR does not show input. The department may have reconciliation with registered seller before blocking the seller's registration number. REDUCTION/EXEMPTION OF WITHHOLDING TAX RATE ON IMPORTS OF RAW MATERIALS/CAPITAL GOODS BY MANUFACTURERS Under section 148 of the Income Tax Ordinance, 2011 and pursuant to Clause-9A of Part-II, Second Schedule to the Income Tax Ordinance, 2011, Income tax is collected @ 3% on import of raw materials and capital goods by an industrial undertaking for its own use. Only FBR is empowered to allow any exemption against withholding tax under section 148 to any person or class of persons under clause (2) of section 148. The Withholding Tax rate under section 148 shall be reduced from 3% to 1%, on import of raw materials and capital goods by industrial undertaking for its own use. Under section 148, the Commissioner of Income Tax is authorized to issue exemption certificate to industrial undertakings registered under Sales Tax Act, 1990, against import of raw materials/capital goods for their own use. The manufacturers, especially Auto-assemblers having reduced margins, pay huge amount of withholding tax on import of their raw materials and capital goods, which results in generation of income tax refunds. Reduction in withholding tax on imports under section 148 will reduce their burden of high financial and administrative costs on funds blockage and in obtaining refunds, respectively. Withholding tax under section 148 for manufacturers is adjustable and any rate reduction will not affect the revenue collection at all, as advance tax is being paid under section 147. Adjustable withholding taxes are never meant for generation of additional revenue. It will remove unnecessary administrative costs of F.B.R. in processing of huge refunds and leakages, if any arising thereon. The Commissioner of Income Tax was authorized to issue exemption certificate to the manufacturers up to 2007, however, the power was elevated to the Board on account of monitoring issues. Under current improved computerized system available with F.B.R. and strict monitoring of withholding taxes have significantly improved F.B.R. control procedures. Therefore, the power with the Board be shifted towards the Commissioner of Income _ Tax for issuance of exemption certificate under section 148. This will enable F.B.R. to focus more on policy making instead of dealing with routine operational matters. However, F.B.R. may also restrict such exemption to the manufacturers registered with sales tax only for enhanced control purposes. PAYMENT OF STAMP DUTY ON PURCHASE ORDERS UNDER STAMP ACT, 1899 Under Entry 15(b) of the Schedule to the Sindh Stamp Act imposes stamp duty of 0.2% on Purchase Order etc. of the Stamp. Act, 1899 - applicable to the province of Sindh. GoP has imposed Stamp Duty @ 0.2% on Purchase Orders, as a tax on instruments. The progressive nature of the tax is increasing the cost of doing business [More Purchases and More Tax] and further raises the issue of double taxation [As Sales/Revenues are taxed under Income Tax Ordinance, 2001; double taxed on Purchases @ 0.2%]. It is suggested to eliminate Stamp Duty @ 0.2% on purchase orders or to fix a nominal amount on each purchase orders or relevant instrument. This will reduce the cost of doing business in Pakistan, that will help maintaining current Business base and also to attract further foreign/local investors in Pakistan. MINIMUM TAX As per requirement of section 113 minimum Tax is applicable regardless that company is in profit or loss. The Minimum Tax regime does not take account of prior year losses available to set off which is allowable under the Income Tax Ordinance. Provision for minimum tax be abolished for companies who declare loss for a particular year or have carry over losses. Minimum tax regime is not justifiable as it does not account for actual results of the business. As a general principle tax should be applicable on profits not on revenue. Further, this section also does not cater for, Carry Forward losses which are allowed under Income Tax Ordinance. AUDIT OF TAX PAYERS Through the amendments introduced by the Finance Act, 2010, the Commissioner has been given powers to select any person for audit under section 177 of the Ordinance, where his assessment has been deemed to have been made and issued under subsections (a) and (b) respectively of section 120 of the Income Tax Ordinance, 2001, which department also terms the Universal Self-Assessment Scheme. Before such amendments, the Commissioner was required to select a person in accordance with the criteria laid down by the Federal Board of Revenue (FBR), however, now requirement has been removed. This serves to defeat the very concept of 'Self-Assessment' and vests undue discretionary powers with the Commissioner to reopen returns filed, hence drawing tax payers into cumbersome investigatory procedures. It is recommended that the earlier provision of the Ordinance, requiring the Commissioner to follow criteria set by FBR for the selection of Tax payers for Audit, should be restored. Accordingly, the taxpayers should only be selected under such criteria to add transparency and the element of impartiality to the overall process. This will remove the undue discretionary powers of Tax Authorities and will avoid the Taxpayers' harassment. TAX CREDIT FOR INVESTMENT IN SHARES Finance Act 2011 has substituted section 62, Investment in Shares, whereby, if a person disposes of the shares within 36 months of the date of acquisition, the tax credit allowed at the time of investment will be reversed in the year of disposal. The time limit to retain the investments should be restored to 12 months period. This will encourage the investments. REBATE ON TAX LIABILITY The documentation of economy and expansion of tax net are the two areas which have a large room for improvement: In the past administrative efforts were undertaken by the revenue collectors to promote their drive for documenting the economy and expansion of tax net. Further, a benefit in the form of rebate is also available to tax payers who are promoting the culture of tax compliance. The entities who are engaged in doing business with registered taxpayers are provided with a tax credit @ 2.5% on their 'liability. u/s.65A of the Income Tax Ordinance, 2001. However, the credit is available only if 90% of the sales are made to registered taxpayers, which is a very high bench mark, especially in view of current level of compliance. The fast moving consumer goods companies in particular are working in an environment which is not very receptive to documentation and is reluctant in getting them registered, particularly when the retail is largely out of tax net. We believe that increasing the tax credit to 5% will incentivize more companies to make an effort to restrict business with registered taxpayers. MULTIPLE AUDITS The well-established principle is that FBR will conduct an audit once a year; however, this rule is not being followed by FBR. The audits are conducted for a particular tax year more than once and additionally monitoring of withholding audits are also conducted. These recurring audits result in lack of trust between the taxpayer and the tax collector; and gives rise to litigation, which is not beneficial for both; the tax collector and tax payer. We understand that these recurring audits are squarely against the concept of self-assessment, rather than conducting audits of the same assesses, the audit web should be extended to other assesses who are not subject to audits earlier. We also like to recommend that at least the taxpayers who are falling under the jurisdiction of Large Taxpayers Unit, should not be subject to these audit exercises as these create hardship and discontentment among the taxpayers. OPERATIONAL PROBLEM ABOUT SECTIONS 209 AND 210 OF THE INCOME TAX ORDINANCE, 2001 Originality of the law is that it is believed that whole Income Tax Ordinance, 2001 revolves around Commissioner, but ground realities are quit different. Neither the Chief Commissioner nor the Commissioner is seen and found in any activity of judicial proceedings may it be monitoring or audit, his role somehow is seen in Refund approvals of his/her level or some statuary functions of issuance of exemption certificates, granting of approvals of Associations, Issuance of License of Authorized Representative of Tax payers etc. signing of intimation letters of selection of cases for audits under section 177 of the Income Tax Ordinance, 2001, which selection in fact is made by Officer Inland Revenue, who comprise of direct as well Departmental promotees Inspectors. Even on completion of audit, the same Officer Inland Revenue confronts the Tax Payer and issue amended assessment, or submit his/her report to his Additional Commissioner who confronts the Tax Payer and also issues amended assessment. Thereby in proceedings Commissioner only once comes into picture, so the belief and concept that legislature desires that the experience which a Commissioner has acquired working as Commissioner after being elevated as Commissioner is not re-dreamed. There are two opinions amongst field officers about section 210 of the Income Tax Ordinance, 2001, one group is of the opinion that specific power once delegated by Commissioner, to Inland Revenue Officer, or any person/officer, now the Commissioner cannot interrupt, in the proceedings conducted by officer/person whom specific power has been delegated, even on complaint of Tax Payer. Another group is of the opinion that Commissioner even after delegating specific powers still can not only monitor but also can interrupt proceedings. Besides the Operational Scenario is also altogether changed under section 209 of the Income Tax, 2001, dealing 'Jurisdiction of Income Tax Authorities', Officers Inland Revenue have been granted jurisdiction on 'nature of business basis/product basis'. Which jurisdiction now issued also refers section 210 of the Income Tax Ordinance, 2001, which is not proper, is giving rise to misuse, and litigation a clear and proper mechanism is required to be evaluated to abridge both sections. SECTIONS 120 AND 122 OF THE INCOME TAX ORDINANCE, 2001 ARE ALSO IN CONFLICT WITH EACH OTHER GIVING RISE TO LITIGATION. Time prescribed under subsection (6) of section 120 the Income Tax Ordinance, 2001 to issue notice under its subsection (3) is before the end of the financial year, whereas time fixed under subsection (6) to amend assessment under subsection (1) of the assessment is 5 years. Has the legislature desires to give/power to Commissioner to amend even a complete return, which has become an assessment? Honourable Appellate forums, so far and; so long Honourable Appellate Tribunals, are of the opinion that complete returns can not be selected for audit under section 177 or section 122 (5A) of the Income Tax Ordinance, 2001 can not be invoked, so far their findings are that Commissioner first should invalid the return then invoke reopening sections. TAX CHALLAN VERIFICATION (UNDER SECTION 176) Vide section 176, tax authorities are empowered to call for any information/documents from assesses as and when required. This also includes verification of tax deducted at source, tax deduction challan and tax certificates issued to different vendors. Despite implementation of electronic/automatic filing of monthly and annual statements of tax deduction and maintenance of database at PRAL, notices under section 176 are still issued to the taxpayers for verification of data already available at the PRAL. This results in duplication and unnecessary hassle for the taxpayers. Minimized paperwork and lower number of notices issued is likely to facilitate taxpayers. Taxation Officers from various regions of the country frequently approach companies for obtaining information regarding subscribers, rentals and franchisees, which are already provided to Federal Board of Revenue (FBR) through e-filing of monthly/quarterly statements of tax deduction or collection. The field tax formation should be given access to the available information with FBR and should be restricted to issue notices under section 176 of Income Tax Ordinance, 2001 to the companies for obtaining only such information which is not available with FBR. RECOVERY OF TAX NOT WITHHELD UNDER SECTION 161 OF THE INCOME TAX ORDINANCE, 2001 As per provisions of section 161 of the Income Tax Ordinance, 2001, FBR may recover the amount of tax not withheld by the withholding agent along with additional tax under section 205. This amount of tax may also be recovered from the recipients of the payment under section 162 of the Ordinance. However, in practice such tax is first recovered from the withholding agent along with the additional tax for late deposit of such tax. It is proposed that the amount of tax should be recovered from the recipient and only additional tax should be recovered from the withholding agent as that is enough a penalty for causing revenue loss to the Government Treasury. Recovery of tax from the withholding agent is discriminatory as such is not the actual liability of such taxpayer. LETTER FROM MUHAMMAD SHAHID BAIG, ATTORNEY-AT-LAW TO THE MEMBER, INLAND REVENUE, FEDERAL BOARD OF REVENUE. (Re: Sales Tax Act, 1990 - Proposed Amendments) The Member, Inland Revenue, Federal Board of Revenue, Constitution Avenue, Islamabad. SUBJECT: SALES TAX ACT, 1990 - PROPOSED AMENDMENTS. Respected Sir, Aslam-o-Alekum! As you know, a pre-budget Seminar was conducted by the Lahore Tax Bar Association on 21-4-2012 at the Auditorium of Tax House, Nabha Road, Lahore. On this occasion, I was honoured to place certain proposals with reference to the Sales Tax Act, 1990, before the House. Your good self required me to send you the said proposals, in writing. The same are accordingly summarized as under:-- SECTION -3 SCOPE OF TAX It is proposed that standard rate of sales tax may please be reduced from 16% to 15%. You may appreciate that while introducing draft for Reformed GST and VAT, 15% uniform rate was proposed. Furthermore, tax rate is not directly proportional to TAX - GDP ratio; as is apparent from the following list of various countries of the World. Sr.No. COUNTRY NAME VAT RATE TAX-GDP RATIO 1 CANADA 7% (33.4) 2 AUSTRALIA 10% (30.5) 3 SWITZERLAND 6.5% (30.1) 4 SOUTH AFRICA 14% (26.9)- 5 INDIA 12.5% (17.7) 6 MALAYSIA 5% (15.5) 7 PAKISTAN 16% (9) The reduction in sales tax rate shall be a positive change to reduce burden on the end-consumer and to reduce inflation in the society. However, to bridge the deficit, undue exemptions, concessions, Zero ratings can be abolished. You can adopt various other measures to generate more revenue like effective control on fictitious units, flying invoices and bogus refunds. It is further proposed that deficiencies of infrastructure of the Department should be immediately removed. The stakeholders have already placed various proposals in this regard. Another important' measure is to broaden the tax base. The remedial provisions like sections 36 and 11 etc. should be re-drafted to cater for any possible situation to retrieve the loss of revenue and the case-law, so far developed in this regard, can be consulted for better drafting. Proper taxation of Services in other three Provinces, like Sindh, is also very essential, as per 18th Amendment made in the Constitution of Pakistan. Likewise, Ordinance relating to sales tax on Services for Islamabad Capital Territory also needs the attention of the Federal Government to incorporate more Services in the `Schedule' to broaden the tax base. To promote better results, you can take on board technical experts, chartered accountants and legal experts to help the Department in audit procedures, assessments, recovery drive and to face complex court proceedings. SECTION 11A - SHORT PAID AMOUNTS RECOVERABLE WITHOUT NOTICE. This section was inserted by Finance Act, 2006. It provides where a taxpayer makes short payment of tax, recovery shall be made from him without issuing any notice by stopping removal of any goods from his business premises and through attachment of his business bank accounts. Furthermore, no notice will be issued to impose and collect the default surcharge. It may please be noted that the entire recovery procedures-laid down in section 48 as well as in the related Sales Tax Rules, 2006. The measures of recovery, as intended in section 11A, can be taken in the light of section 48 and there was hardly a need to mention these measures in section 11A. Moreover, a notice must be issued to the registered person for imposing/charging default surcharge, as an ex parte action would be contrary to the principles of natural justice. You may further appreciate that as per Chapter-II of the Sales Tax Rules, 2006, every registered person is required to file his return electronically. So, the liability is generated through automated system of F.B.R. Unless that amount is paid in treasury, the return cannot be submitted through F.B.R. e-Portal. Thus, there is hardly a possibility to file any return without payment of admitted tax liability. Prima facie, there is no justification to keep this provision in tact in the present form.. It is, therefore, proposed that it may please suitably be amended. REGISTRATION - SECTION 14 AND CHAPTER 1 OF THE SALES TAX RULES, 2006. The present procedure of registration is very troublesome, lengthy and. time-consuming. It needs to be simplified and decentralized. A time limit of 15 days is given for rejection of application but there is no time frame for acceptance of the application for registration. It is, therefore, proposed that besides simplifying the process of registration, the applicant should be allotted a provisional number or permission be granted to him to use NTN as his provisional STRN till the date of his registration. However, the incumbent can be required to furnish necessary security/guarantee; if so, required. Likewise, the procedure regarding change in particulars of registration also needs to be decentralized and simplified. Furthermore, it is not very clear from the related provisions of law that from which date sales tax is liable to be paid i.e. from the date of application or date of registration. In case, the sales tax is liable to be paid from the date of application for registration, then, what should be the fate of the input tax involved in connection with the invoices received by the applicant prior to the date of application as well as subsequent to the filing of the application till the date of registration? As per section 23(1)(b), the invoice shall contain the sales tax 'registration Number of the buyer. Likewise, section 7(2)(i) says a registered person shall not be allowed to deduct input tax unless he holds a valid invoice in his name bearing his registration number etc.' section 8(3) says: `No person other than a registered person shall be allowed to claim any deduction on account of input tax against taxable supplies.' Similarly, there is another provision i.e. clause (37) of section 2, which says that making a taxable, supply without getting registration amounts to tax fraud. So, in -the given circumstances, a clarification may please be issued that from which date the tax is to be paid by the applicant and in case the tax is to be paid from the date of application, then, the said provisions must be relaxed relating to the period starting from date of application:-- Furthermore, as per section 59, tax Paid on goods Purchased by a Person, who is subsequently registered, shall be treated as Input Tax, Provided that such goods were Purchased from a registered Person, who issued invoices under section 23 during a period of 30 days before making an application for registration. Here the Question arises, invoices so issued shall not contain STRN of the Buyer, then in the presence of sections 23(i)(b), 7(2)(1) and "8(3), whether Input Tax shall be allowed or not? Proviso to section 59 Provides that where a Person imports goods, the tax paid by him during a Period of 90 days before making an application for registration shall be treated as input tax. If we look at section - 14 and Rule - (4) of Chapter-I of the Sales Tax Rules, 2006 `zero is the threshold for an Importer for registration, so every importer is liable to be registered. Hence, there is no scope to make any imports without Sales Tax registration. Thus, the said Proviso has become infructuous and redundant. SECTION 21 - DE-REGISTRATION, BLACKLISTING AND SUSPENSION OF REGISTRATION As per subsection (2) of section 21, if a registered person has committed tax fraud, the Commissioner may blacklist such person or suspend his registration in accordance with the procedure laid down by F.B.R. Prima facie, this provision has not been properly drafted; as an option is available to the Commissioner to either suspend, or blacklist the concerned taxpayer. Principally, as a first step, the registration is required to be? suspended, followed by an inquiry and if tax fraud is established in inquiry, then, only the registered person should be blacklisted through an order, in writing. More over, subsection (3) of section 21 also needs amendment. This provision was inserted in the Statute Book through Finance Act, 2011. It, inter-alia, provides that: (i) during the period of suspension of registration, the invoices issued by such person shall not be entertained; (ii) when such person is blacklisted, the invoices shall not e entertained issued by such person whether prior or after sue blacklisting unless the registered person has fulfilled his responsibilities under section 73. (iii) Now, there are a few queries about this particular Provision: (i) When the taxpayer has made the payments through banking instruments, as provided in section 73, on account of the transactions exceeding Rs.50,000 each, to the supplier (Registered Person) who was subsequently blacklisted; whether the invoices issued by him before the date of suspension/ blacklisting will be allowed for adjustment of the input tax without any hesitation? (ii) Whether, where genuine transactions were made involving payments, less than Rs.50,000, which were not routed through proper banking channels as those were not required by section 73, input tax shall straight away be rejected? (iii) Where legitimate invoices issued by the said person before the date of his suspension/blacklisting will straightaway be disallowed or be allowed or disallowed after causing necessary verification? As per practice prevailing in the Inland Revenue Department, once a person is blacklisted, all invoices issued by him are rejected without due application of mind. In the opinion of the department, the blacklisting of any registered person is sufficient evidence to reject all the invoices issued by him without considering that his earlier invoices issued to various suppliers were valid, genuine and legitimate. Moreover, the order of blacklisting is an executive order. The Supreme Court of Pakistan in a judgment reported as 2005 SCMR 492 has held that: "It is well settled principle of Law that the executive order or notification, which confer rights and are beneficial, would be given retrospective effect and those which adversely affect or invade upon vested right cannot be applied with retrospective effect." So, in this view of the matter, there is an urgent need to suitably amend the above Provision and to clarify the intent of the legislature to save the taxpayers from undue hardships. SECTION 26(3) REVISED RETURN As per subsection (3) of section 26, a rearm can be revised with the approval of the Commissioner within 120 days only. If we look at section 114(6) of the Income Tax Ordinance, 2001',p it provides that if any person discovers any omission or wrong statement in the original term, he can file a revised return subject to the condition that it is accompanied by revised accounts or revised audited accounts, whichever applicable. Moreover, reasons for revision of return, in writing, duly signed by the taxpayer, should also be filed with the Return. This provision may also be amended in the same spirit as the taxpayers are facing undue hardships due to this provision of Law. Moreover, this provision has unduly burdened the Commissioners with extra load without any reason or justification. Moreover, the limit of 120 days should also be waived of and this provision should be redrafted in accordance with the provisions like sections 24, 36 and 11 whereby the revenue is entitled to retrieve the loss of revenue by taking remedial actions within a period of five years. Moreover, period for retention of record and documents has been fixed `six years' (in the light of Section 24). It is also to be pointed out here that STR 11 (Challan) can be generated without approval of the Commissioner, so, if tax can be paid without approval of the Commissioner, then, why revised return cannot be filed without obtaining approval of the Commissioner. It is also relevant to add that the revised return would not curtail any of the powers of the Department to initiate any legal action whatsoever including invoking of any of the relevant provisions for retrieving the loss of Revenue. Thus, there is hardly a reason to impose the above embargo. SECTION 40B - POSTING OF INLAND REVENUE OFFICER As per proviso to section 40B, if the Commissioner, on the basis of material evidence, has reason to believe that a registered person is involved in evasion of tax or tax fraud; he may, by recording the reasons in writing, post an officer of Inland Revenue to the Premises of such Registered Persons to monitor Production or Sale of taxable goods and the stocks position. This provision is being recklessly used by the Commissioners without any check, whatsoever. No rules have been framed in this regard by F.B.R. This Provision does not provide any time frame, to check how long the Sales Tax Officers can stay at the business premises of the registered person. Likewise, timings have also not been mentioned any where. Moreover, it is not clear: (1) Whether any documents can be obtained by the officers, so deputed, from the registered person; like invoices, cash memos etc? (2) Whether the officers so deputed can note gas and electricity consumption etc.? (3) Whether the officers, so deputed, can directly interact with the customers/clients/visitors? (4) Whether they can force the taxpayers to sign the information, so recorded by them? (5) Whether the provisions of section 40B can be invoked in case of unregistered persons also? (6) What would be the use of the information, so collected? (7) How the assessment will be made and for which period? (8) Whether remedial provisions can be invoked in this situation or not? It is, therefore, suggested to frame necessary rules in this regard, so that, these provisions should not be misused by the Department. SECTION 57 - CORRECTION OF CLERICAL ERRORS ETC. This section provides that clerical or arithmetical errors in any assessment, adjudication order or decision, may, at any time, be corrected by the officer of Inland Revenue, who made the Assessment, adjudication or passed such order or decision or by his successor, in office. This provision is incomplete and sketchy. If we look at section 221 of the Income Tax Ordinance, 2001, it provides that mistakes apparent from the record can be corrected. However, no order shall be rectified after five years. This provision i.e. section 57 also needs to be re-drafted so that besides arithmetical errors, other mistakes could also be rectified within a given span of time. CONSOLIDATION AND CODIFICATION OF EXEMPTIONS As per subsection (2) of section 50, all rules made under subsection (1) of section.50 or any other provision of the Sales Tax Act, 1990, shall be collected, arranged and published along with general orders and departmental instructions and rulings, if any, at appropriate intervals and sold to the public at reasonable price. So, the consolidation and codification of exemptions, zero ratings, S.R.Os. Rulings, general orders, circulars, clarifications, is very much essential. It is very difficult for the stakeholders to consult all the related provisions of such a rapidly growing Law. It is accordingly proposed that all the constituents of subordinate legislation should be compiled and published by F.B.R. at appropriate intervals and offered for sale to the general public at a reasonable price. S.R.O. 191(I)/2012 DATED 23RD FEBRUARY, 2012 Earlier, S.R.O. No.821(I)/2011 dated 6th September, 2011, required that all registered manufacturers, importers and exporters making taxable supplies to unregistered persons shall issue invoices containing CNIC numbers or NTNs of such unregistered Buyers. Prima facie, the above S.R.O. has silently over-ruled the S.R.O. 821(I)/2011 dated 23rd February, 2012. Through the current S.R.O., a new Chapter viz. XIV has been added in the Sales Tax Rules, 2006. This S.R.O., inter-alia, provides that it is applicable to registered manufacturers, importers, exporters making taxable, dutiable and exempt supplies. Rule 150B(1) provides that invoice shall be issued by the registered manufacturers, importers and exporters containing NTN or CNIC number of the un-registered Buyer. However, this scheme shall be followed in phased manner i.e. 60% sales shall be made to identifiable persons in March 2012, so, sales tax registration number or NTN or CNIC shall be provided in the monthly sales tax return. Likewise, this condition will be applicable to 70%, 80%, 90% and 100% sales relating to the periods April, May, June and July, 2012. As per sub-Rule (3) of Rule 150B, if supplies to identifiable persons fall short of requisite percentages, input tax shall be disallowed proportionally. As per sub-Rule (4), if NTN or CNIC number is not verifiable from the F.B.R. database or database of the National Registration Authority, a penalty of Rs.5,000 or 3% of the tax involved, which ever is higher, shall be imposed. As per sub-Rule (5), payments should be made by the buyers to the suppliers through banking instruments as provided in section 73. With reference to sub-Rule (3), which. speaks about disallowance of input tax, it may be pointed out that it has been provided in the two judgments reported as 1999 SCMR 1442 and 2006 PTD 2066 Karachi High Court that no subordinate legislation can expand or restrict the substantive provisions contained in the Act. Any attempt in this behalf shall be termed as conflicting to the substantive provisions and shall, to that extent, have to give way to the substantive provision contained in the Act. Prima facie, input tax is a vested right, which cannot be taken away through any piece of subordinate legislation by the F.B.R. If we look at S.R.O. 191(I)/2012 dated 23rd February, 2012, it says that FBR has derived powers from sections 50, 8(2), 8B(2)(ii), 9, 10, 14, 21, 28, clause (c) of subsection (1) of section 22, 1st Proviso to subsection (1) of section 23, section 26, subsection (6) of section 47A, sections 48, 50A, 52, 52A and 66 of the Sales Tax Act, 1999 to disallow the input tax proportionally for the supplies made to un-identifiable persons. I have minutely examined all these provisions of Law and found that no where, powers have been given to F.B.R. to disallow the input tax, in any case. Prima facie F.B.R. has stretched its powers while issuing this notification. This is contrary to the said judgment of the 'Supreme Court of Pakistan as well as of Karachi High Court. Thus, in my view, it cannot sustain in the present form at least. Moreover, while proposing to impose penalty, the Federal Board of Revenue has adopted the role of full-fledged legislature. A specific section i.e. section 33 is available in Law to provide various penalties in different situations; so an appropriate entry can be added in section 33, but of course by legislature. Without prejudice to the above, Entry No. 17 of section 33 provides that any person who fails to follow any notification of F.B.R. shall pay a penalty of Rs.5,000 or '3% of the tax, whichever is higher. Thus in the presence of this entry, there was hardly a reason to provide any other penalty by the F.B.R. Furthermore, penalty has been proposed to be levied on the supplier, if NTN/CNIC provided by the buyer is incorrect. Since, the supplier has no authority or direct access to the NADRA's database to verify the veracity of his buyer's CNICs, so, the seller cannot confirm the genuineness of CNICs furnished by his customers. Although one indirect method is available to confirm the veracity of CNIC from NADRA's database i.e. by sending SMS at 7000, but it casts Rs.12 per verification or so. This condition needs to be rationalized. Moreover, F.B.R's. Letter No. C.No.3 (36) STP/99 (PTL) dated 14th July, 2004 has already clarified that provisions of Section 73 would not be applicable in respect of unregistered persons. So, how they can be forced to make payments through banking channels in the light of section 73 of the Sales Tax Act, 1990. This provision also needs fresh appraisal and necessary modification.