Budget Proposal 2007on Income Tax

The Income Tax Bar Association, Karachi April 17, 2007

Presented by:

Ali A. RahimDirector

2

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 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 Double Taxation Agreements E-Commerce Economic and Tax Factors Contribution by different Sectors According to percentage of G. D. P.

(Contd…)

3

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.

TAX REFORMS

(Contd…)

4

Islamic Banking & Insurance

Issues regarding withholding of Taxes and taxation to be examined to promote Islamic mode of Banking & Insurance

SME

It is proposed that reduced rates be Extended for Small Company and Medium Enterprise (SME)

TAX REFORMS

5

IRRITANTS

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

(Contd…)

6

Return forms have remained constant and thus are now user friendly. However, frequent changes of quarterly and monthly statements are an irritant. These should also be designed on permanent basis and while designing such forms, the literacy rate, socio economic and judicious norms should be considered rationally.

Quarterly statements to be reintroduced instead of monthly.

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

IRRITANTS

(Contd…)

7

Employers should be allowed to deduct tax after giving adjustments for investment rebates, donations, medical expenditure etc.

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

Jurisdiction for monitoring of tax on deductions made.

Selection of cases for audit.

IRRITANTS

8

PERMANENT ESTABLISHMENTSection 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, for Sub sections is suggested to also be 90 days.

RATIONALE To correspond the provisions with treaty provisions

9

ROYALTYSection 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) be deleted which is overlapping section 37(5).

RATIONALE To avoid confusion and overlapping

10

ORDINANCE TO OVERRIDE OTHER LAWSSection 3 & 54

ISSUE Ordinance to Override other laws

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

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.

11

ROYALTY & FEE FOR TECHNICAL SERVICESSection 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.

12

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”

(Contd…)

13

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

14

Section 29(1)(b)BAD DEBTS

ISSUE Allowability of bad debts in a tax year

PROPOSAL It is proposed that in order to undo hardship clause (b) of Sub section (1) of the section 29 may be rephrased as under : -

“29(1)(b) the debt or the part of the debt is written-off in the accounts of the person in the tax year or in any previous tax year or assessment year; and”

RATIONALE Facilitation

15

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”

16

Section 35STOCK 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

17

Section 39(3)INCOME FROM OTHER SOURCES

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

(Contd…)

18

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

19

Section 68FAIR 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

20

Section 79(1)NON-RECOGNITION RULES

ISSUE Under Section 79(1) and 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

21

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

22

Section 62INVESTMENT 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

23

Section 119(2)

EXTENSION OF TIME FOR FURNISHINGRETURN & 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.

24

Section 119(6)

EXTENSION OF TIME FOR FURNISHINGRETURN & OTHER STATEMENTS

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 Commission or it cannot be said that Taxpayer has failed. Therefore, even otherwise, once the Commissioner grants time, it will be very harsh in genuine cases

25

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”

(Contd…)

26

Section 132(2)

DISPOSAL OF APPEALS BYAPPELLATE TRIBUNAL

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

27

Section 134A Read with Rule 231(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 60 days

RATIONALE Broadening the time limit for effective decision making

28

Section 134A Read with Rule 231(15)ALTERNATE DISPUTE RESOLUTION

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.

RATIONALE Effective decision making

29

Section 147

ADVANCE TAX

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

30

Section 159EXEMPTION 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

31

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

32

Section 170REFUNDS

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: - (Contd…)

33

Section 170REFUNDS

“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

34

Section 183PENALTY 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

35

Section 206AADVANCE RULING

ISSUE Advance Ruling provisions to Non Residents

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

36

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 to be extended to Salaried Class

RATIONALE Relief to Salaried Class

37

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.

38

Section 236ADVANCE – TAX ON TELEPHONE

ISSUE Advance Tax on Telephones

PROPOSAL The Controversy of Pay Phone Companies be amicably resolved

RATIONALE Facilitation and resolving Disputes

39

First Schedule Part-I Division 1RATE OF TAX - NON SALARY

ISSUE Exemption limit

PROPOSAL Exemption should be increased to Rs. 200,000/-

RATIONALE Relief to taxpayers

40

First Schedule Part-I Division 1ARATE OF TAX - SALARY

ISSUE Exemption limit

Applicable rate of tax

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

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

RATIONALE Relief to the salaried class

41

First Schedule Part-I Division 1IRATE 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.

42

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

43

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

44

Thank You