Budget Proposal 2008on Income Tax

The Income Tax Bar Association, Karachi March 24, 2008

Presented by:

Ali A. RahimDirector

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Bigger the Tax Base-Lesser the Rates

It is now well settled through studies that bigger the tax base is, the lesser the rates of tax can be

Further, efforts must be made to bring more people into tax base.

TAX REFORMS

Establishment of Research and Development Department under the auspicious of CBR in corroboration with Business Community,

Professionals, Tax Advisors and other Stake holders:

Area of Studies-Examples -

Undocumented economy E-Commerce Economic and Tax Factors Contribution by different Sectors According to percentage of G. D. P.

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Further, encouragement and Incentives to be provided for Savings and Investment

New provision to be introduced for Tax Credit for investments made in National Saving Schemes and quoted and unquoted mutual funds to give incentives for savings which will create investment and employment

It is proposed that tax should be imposed on all segments of the society. Exemptions and concessions to certain classes of income or classes of persons be abolished.

(Contd…)TAX REFORMS

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SME

It is proposed that reduced rates be Extended for Small Company and Medium Enterprise (SME), and those Companies Incorporated before July 01, 2005.

CAPITAL GAINS

Capital gain on sale of properties should be reintroduced by the provincial governments and collection of this tax should be handled by the FBR and then transferred to the Provinces.

Capital gain on sale of shares should only be exempted subject to certain conditions.

(Contd…)

TAX REFORMS

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For automation and facilitation Common Tax Identification (CTI) number to be introduced for Companies and Firms and CNIC for Individuals.

Efforts to be made for effective legislation of Regulations which require mandatory incorporation of the above on all the documents executed in any form, at any stage. e.g.

(a) Transfer of Properties (b) Transfer of Shares (c) Transfer of Vehicles any model or cc(d) Bank Documents(e) Travel Documents(f) Large Expenditures

IRRITANTS

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Return forms which remained constant for a few years were changed last year. This should not be changed for the next few years, so that they become user friendly.

Quarterly statements to be reintroduced instead of monthly.

Filing of monthly or quarterly statements should only be done in one zone.

IRRITANTS(Contd…)

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e-filing of returns and statements should not be made mandatory.

Jurisdiction for monitoring of tax on deductions be clearly made and these should be checked once in there (3) years.

Selection of cases for audit should be made on scientific basis, after only cross verification with third party information.

IRRITANTS(Contd…)

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PERMANENT ESTABLISHMENT

Section 2(41)

ISSUE The perusal of the definition shows that under Sub section (d) and (f) any services or any substantial equipment installed or other assets or property capable of activities giving rise to income has been included

PROPOSAL Since, the industrial growth has been promised by the government. It would be appropriate that a minimum period of suitable time be included in Sub section (d) and (f) as was done in Sub section (3) A Minimum period, therefore, is suggested to also be 90 days.

RATIONALE To correspond the provisions with treaty provisions

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ROYALTY

Section 2(54) (g) & 37(5)

ISSUE The consideration for the disposal of any property or right referred to in sub-clauses (a) through (e) are included within the definition of term royalty. If the definition of the capital assets as contained in Sub section (5) of section 37 is read, the disposal of any property or right falls under the purview of subsection (5) of section 37

PROPOSAL It is, therefore, suggested that clause (g) of section 2(54)be deleted which is overlapping section 37(5).

RATIONALE To avoid confusion and overlapping

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ORDINANCE TO OVERRIDE OTHER LAWS

Section 3 & 54

ISSUE Ordinance to Override other laws

PROPOSAL Words “Subject to this Ordinance” be inserted at the start of Section 3.

RATIONALE Contrary Provision by inserting Proviso to Section 54 has been made. As such additions of words proposed are necessary to avoid doubt and confusion. In our opinion Section 3 and amendment made through proviso to Section 54 are contrary to each other. It is therefore, proposed that either Section 3 be deleted or in the alternate, the proviso inserted in Section 54 be shifted and annexed with Section 3.

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ROYALTY & FEE FOR TECHNICAL SERVICES

Section 6 & Rules 18 & 19 of the Income Tax Rules, 1982

ISSUE Option under Rules 18 & 19 of the Income Tax Rules 2002 read with Section 6

PROPOSAL The said concession should either be brought in through an amendment in section 6 or it may be put in Second Schedule, which is part of the statute itself

RATIONALE The intention of the lawmaker appears to be to allow the non-resident persons having a permanent establishment in Pakistan to avail final tax basis assessment as provided under section 6 read with section 8. According to the rules of interpretation, rule cannot override the main statute, the concession given to the non-residents in the said rules is not legally proper, this is despite the fact of usage of words “Subject to the Ordinance” appearing in the beginning of Section 6.

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Section 15(2)

INCOME FROM PROPERTY

ISSUE Under this section, a charge is created on rent received or rent receivable by a person in a tax year other then the rent exempt from tax under this Ordinance. Sub section (2) defines the term “Rent” which means any amount received or receivable by the owner of land or a building as consideration for the use or occupation of, or the right to use or occupy, the land or building and including forfeited deposit paid under a contract for sale of land or a building

PROPOSAL It is suggested that in Sub section (2), where-ever the word “or” has been used between the expressions "the land” “building” said “or” be replaced by “and”

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Section 15(2)

INCOME FROM PROPERTY

RATIONALE Under the provisions of section 39 (1)(d), ground rent has been specially dealt with arising out of the land alone. Since the word “or” has been used in definition clause in between land and building, it is suggested that according to the rules of interpretation, it connotes disjunctive consideration. It seems the intention of legislature is that if an amount is received or receivable by the owner of land/building, such amount would be treated as rent. As such, rent of land is being specially and separately dealt with under Section 39

(Contd…)

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Section 34(5)

ACCRUAL BASIS OF ACCOUNTING

ISSUE Where liabilities are not discharged within three years

PROPOSAL It is, proposed that words used in Sub section (5) “Expenditure” be replaced by word “Trading liability”

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Section 35

STOCK IN TRADE

ISSUE Under this section, the concept of determination of the cost of Stock in trade disposed of has been introduced. Generally in the cases of companies, the valuation has to be mandatorilly made on the basis of International Accounting Standards

PROPOSAL It is, therefore, proposed that in Section 35, where-ever word “person” has been used, words “other than companies” may be inserted

RATIONALE Conversance of Tax laws with International Accounting Standards

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ISSUE Loan, Advances, Deposit for issuance of shares and gifts otherwise than by a crossed cheque drawn on a bank or through Normal Banking channel from person holding NTN Card. However practical difficulties arise in respect of payment received as loan or gift from Non-Resident to family members.

PROPOSAL It is therefore, proposed that a proviso be added for dispensing with the condition of NTN (Certificate) for amounts received from abroad.

Section 39(3)

INCOME FROM OTHER SOURCES

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ISSUE The world is moving very fast. The concept of paper money is being replaced by Plastic money. The normal banking practices are now absorbing concept of Electronic Banking. One may receive loan, gift or advance through other mode of transfers

PROPOSAL (a) It is, therefore, suggested that the condition of holding an N. T. N. should be abolished. Since all bank accounts have CNIC's

(b) Advance Rent received be included Sub section

(4) subject to just and reasonable restrictions to further increase documentation of the economy.

Section 39(3)

INCOME FROM OTHER SOURCES

(Contd…)

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Section 59(AA)

GROUP TAXATION

ISSUE This concepts were introduced in 2007, but was subject to corporate governance requirements, specified by SECP and rules to be framed by CBR.

PROPOSAL One year has elapsed and yet the corporate governance requirements and rules of the CBR has not been enacted. Hence these should be urgently enacted.

(Contd…)

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ISSUE This concept was introduced in 2004 and was amended in 2007, that was subject to such corporate governance requirements specified by SECP and designated as companies entitled to claim relief.

PROPOSAL Even after such a long gap, the rules have not yet been enacted. It is therefore proposed that the same should be urgently enacted

Section 59(B)

GROUP RELIEF

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Section 62

INVESTMENT IN SHARES

ISSUE Increase in investment rebate.

PROPOSAL It is proposed that the investment should be increased to Rs. 500,000/-

RATIONALE To encourage investment

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Section 68

FAIR MARKET VALUE

ISSUE Discretion of the Commissioner

PROPOSAL It is, proposed that suitable parameters for valuation may be prescribed by the Central Board of Revenue in the Income Tax Rules, 2002 and for the purposes of Immovable properties, parameters defined under Rule 228 of the income Tax Rules, 2002 be adopted and corresponding amendment be made in Rule 228 accordingly.

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Section 79(1) (d)

NON-RECOGNITION RULES

ISSUE Under Section 79(1) under clause (d) no gain or loss shall be taken to arise where the asset is compulsorily acquired under any law, but a condition has been put that such gain or loss will not be taken if consideration received is reinvested by the recipient in any asset of a like kind within one year of the disposal

PROPOSAL It is, proposed that words “of a like kind” be deleted

The period for reinvestment i.e. one year is too short. This may be increased to atleast three years

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Section 79(2)

NON-RECOGNITION RULES

ISSUE Sub Section (2) of Section 79 stipulates that provisions of Section (1) shall not apply where person is a non-resident. This seems to be discriminatory and could cause unnecessary hardship in the case of gift and transmission of the asset to an executor or beneficiary on the death of a person and distribution of assets to non-resident members of an AOP or non-resident shareholder in the case of a company, in the event of liquidation of the company or dissolution of an AOP.

PROPOSAL It is, proposed that Sub section (2) be deleted

RATIONALE To eliminate discrimination

(Contd…)

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Section 119(2)

EXTENSION OF TIME FOR FURNISHING RETURN & OTHER STATEMENTS

ISSUE Application to the Commissioner.

PROPOSAL It is proposed that right of representation before the Director General of Region may also be introduced to redress the grievance of taxpayers.

RATIONALE Principles of Natural Justice.

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Section 119(6)ISSUE According to Sub section (6) extension of time

granted under Sub section (3) shall not for the purpose of charge of additional tax under sub section (1) of section 205 change the due date for payment of income tax under Section 137. The interpretation of this Sub section (6) plainly shows that addition tax imposition shall not stop running

PROPOSAL It is, proposed that sub section (6) may kindly be deleted

RATIONALE It is submitted that once extension is granted by the Commissioner, it cannot be said that Taxpayer has failed. Therefore, even otherwise, once the Commissioner grants time, it will be very harsh in genuine cases

EXTENSION OF TIME FOR FURNISHING RETURN & OTHER STATEMENTS (Contd…)

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Section 132(2)

DISPOSAL OF APPEALS BYAPPELLATE TRIBUNAL

ISSUE Appeal can be dismissed in default

PROPOSAL It is, proposed that said Sub section (2) may accordingly be amended in the following manner –

“The Appellate Tribunal shall afford an opportunity of being heard to the parties and in case of failure to attend the appeal by the person filing the appeal, the Tribunal may proceed ex-parte to decide the appeal on the basis of the available record”

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Section 132(2)

RATIONALE In fiscal laws, and more particularly law governing Income tax, it has been the practice to decide the matters on merits, as ITAT is the last fact finding authority and by virtue of Sub section (1) of Section 132, the decision of the Appellate Tribunal on an appeal shall be final

In our considered opinion, the language used in Sub section (2) is defective and needs suitable amendment as it cannot be presumed that legislature intended to cause injustice

DISPOSAL OF APPEALS BYAPPELLATE TRIBUNAL(Contd…)

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Section 134A Read with Rule 231(c )(6)

ALTERNATE DISPUTE RESOLUTION

ISSUE Time limit of 30 days for disposal

PROPOSAL Period for disposal of application by ADR Committee to be extended from 30 to 90 days

RATIONALE Reasonable period for effective decision making

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Section 134A Read with Rule 231(c )(15)

ISSUE - Time limit for decision by CBR

- Rejection of recommendation by CBR

PROPOSAL - Appropriate time limit for decision by CBR preferably Six Months be incorporated

- Cogent reasons for disagreement with recommendation of the committee must

be given by FBR.

RATIONALE Effective decision making

ALTERNATE DISPUTE RESOLUTION(Contd…)

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Section 137

STAY OF DEMAND

ISSUE Unrealistic and frivolous demands are created by the tax authorities due to pressure on them.

PROPOSAL Automatic stay of demand upto 85% for first stage of appeal and 50% till the ITAT stage of appeal be provided (as was provided in the repealed Ordinance 1979).

RATIONALE Principles of Natural Justice.

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Section 147(4)&(4b)

ADVANCE TAX

Appropriate amendment be made to adjust - Unadjusted amount of tax of one quarter to another within the same Tax year (refer to the formula)

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Section 159

EXEMPTION OR LOWER RATE CERTIFICATE

ISSUE Grant of an exemption or lower rate certificate

PROPOSAL It is, proposed that words “within 15 days” may be inserted after the words “ the Commissioner shall” in sub Section (1)

The right of appeal be provided to challenge the refusal of application before the Commissioner of Income Tax (Appeals)

RATIONALE No time frame prescribed

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Section 165

STATEMENT REGARDINGIMMOVABLE PROPERTIES

ISSUE In the Repealed Ordinances, under the provisions of Section 143A every Registering officer, Revenue officer or other officer appointed to register any documents relating to property (other than agricultural land) under the Registration Act, 1908 was required to furnish a statement regarding the properties the value of which was not less than Rs. 50,000/- registered with him during the preceding financial year

PROPOSAL It is recommended that provision be brought in under the Income Tax Ordinance, 2001.

RATIONALE In our opinion, such statement is instrumental for broadening the tax base

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Section 170

REFUNDS

ISSUE Refund Applications and Order thereon

PROPOSAL It is, proposed that following amendment be made

In clause (b) of sub section 2 word “and” be deleted and Clause (c) (prescribing time limit to file Refund Application) be deleted

Without Prejudice:

In case no order is passed by the Commissioner on the said Application,

It is, proposed that a provisio be added after Sub section (4) as under: -

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Section 170

REFUNDS

“Sub Section (4)

Provided that if no order is passed within the time specified in this sub section, the application shall be deemed to have been accepted and all the provision of this Ordinance shall have effect accordingly

Without Prejudice to above

Sub Section (5) is not in conformity with Section 127, therefore, it is proposed that necessary amendments be made

RATIONALE Good governance and to fill up lacunas

(Contd…)

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Section 183

PENALTY FOR NON-PAYMENT OF TAX

ISSUE Penalty for non payment of tax (other then penalty) has been imposed on the failure of payment any tax due by the due date. A person is liable for penalty at various rates of penalties ranging for 5% to 100% of such tax due. No time frame is provided for imposition of penalties between each default

PROPOSAL It is proposed that a proviso be added to provide the time frame between each event

“Proviso”

Provided that no penalty shall be imposed in case of subsequent failure unless the time between passing of each order is not less than 30 days

RATIONALE Curative amendment

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Section 206A

ADVANCE RULING

ISSUE Advance Ruling provisions to Non Residents

PROPOSAL Appropriate amendment is proposed to widened and extended the scope to other resident taxpayers.

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Section 223(2)(f)

INCOME TAX PRACTIONER

ISSUE Appearance before tax authorities.

PROPOSAL It is proposed that Income Tax Practitioner (ITP) should be replaced with Federal Tax Practitioners (F. T. P.).

RATIONALE Since one window is being implemented for all Federal Taxes, so the person can also represent in Sales Tax and Federal Excise cases – Facilitation.

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Section 231A

TAX WITHHOLDING ON CASHWITHDRAWAL – INCREASE IN THRESHOLD

ISSUE Cash Withdrawal from Banks – Tax withholding

PROPOSAL Threshold be increased from Rs. 25,000/- to Rs. 50,000/- Exemption be granted to Salaried Class

RATIONALE Relief to Salaried Class

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Section 236

ADVANCE – TAX ON TELEPHONE

ISSUE Advance Tax on Telephones

PROPOSAL The Controversy of Pay Phone Companies be amicably resolved

RATIONALE Facilitation and resolving Disputes

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First Schedule Part-I Division 1

RATE OF TAX - NON SALARY

ISSUE Exemption limit

PROPOSAL Exemption should be increased to Rs. 250,000/-

RATIONALE Relief to taxpayers

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First Schedule Part-I Division 1A

RATE OF TAX - SALARY

ISSUE Exemption limit

Applicable rate of tax

PROPOSAL Exemption should be increased to Rs. 300,000/-

It is proposed that the slabs should be readjusted to provide relief to taxpayers.

RATIONALE Relief to the salaried class

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New Clause Part- I Second Schedule

EXEMPTION FOR WIDOWS & SENIOR CITIZENS

ISSUE Behbood Certificates and Pensioners Benefit Account can only be purchased by widows and seniors citizens who are burdened by cost of living, specially since the rate of profit has also been reduced.

PROPOSAL They should be given special relief.

RATIONALE To give benefit to the senior citizens for reduction of profit and effect of inflation.

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First Schedule Part-I Division 1I

RATE OF TAX – QUOTED COMPANIES

ISSUE Applicable rate of tax

PROPOSAL It is proposed that the rate of tax for quoted public companies be reduced to 30% from 35%.

RATIONALE To encourage companies to be quoted on the stock exchanges.

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Clause 93-Part-I Second Schedule

EXEMPTION – COMPUTERTRAINING INSTITUTES

ISSUE Computer Training Institutions (Expired June 2005).

PROPOSAL Period of Exemption be extended upto June 2010.

RATIONALE To promote Computer literacy

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MINOR CORRECTIVE AMENDMENTS

Deduction of Tax at Source

Clause (36A) of Part IV of Second Schedule to be made asPart of Clause (59) of Part IV of Second Schedule

Charges – Rule 230

Due to availability of returns and statements through internet Rule 230 to be deleted

National Tax Number – Section 181 read with Rule 83

Substitution of Word Card with Certificate

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Thank

You