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Tax Reform Proposal 2008: Creating a Bigger Tax Base and Encouraging Savings and Investment

This proposal discusses the need for tax reforms, including expanding the tax base, establishing a research and development department, providing incentives for savings and investment, and addressing irritants in the tax system.

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Tax Reform Proposal 2008: Creating a Bigger Tax Base and Encouraging Savings and Investment

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  1. Presented by: Ali A. Rahim Director Budget Proposal 2008 on Income Tax The Income Tax Bar Association, Karachi March 24, 2008

  2. TAX REFORMS • 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. • 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.

  3. TAX REFORMS (Contd…) • 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.

  4. TAX REFORMS (Contd…) • 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.

  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

  6. IRRITANTS (Contd…) • 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.

  7. IRRITANTS (Contd…) • 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.

  8. PERMANENT ESTABLISHMENT Section 2(41)

  9. ROYALTY Section 2(54) (g) & 37(5) ISSUEThe 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). RATIONALETo avoid confusion and overlapping

  10. ORDINANCE TO OVERRIDE OTHER LAWS Section 3 & 54 ISSUEOrdinance to Override other laws PROPOSALWords “Subject to this Ordinance” be inserted at the start of Section 3. RATIONALEContrary 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 SERVICES Section 6 & Rules 18 & 19 of the Income Tax Rules, 1982 ISSUEOption 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. INCOME FROM PROPERTY Section 15(2) ISSUEUnder 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”

  13. INCOME FROM PROPERTY (Contd…) Section 15(2) 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. ACCRUAL BASIS OF ACCOUNTING Section 34(5) ISSUEWhere 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”

  15. STOCK IN TRADE Section 35 ISSUEUnder 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 RATIONALEConversance of Tax laws with International Accounting Standards

  16. INCOME FROM OTHER SOURCES Section 39(3) 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. PROPOSALIt is therefore, proposed that a proviso be added for dispensing with the condition of NTN (Certificate) for amounts received from abroad.

  17. INCOME FROM OTHER SOURCES (Contd…) Section 39(3) 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.

  18. GROUP TAXATION Section 59(AA) ISSUEThis 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…)

  19. GROUP RELIEF Section 59(B) 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. PROPOSALEven after such a long gap, the rules have not yet been enacted. It is therefore proposed that the same should be urgently enacted

  20. INVESTMENT IN SHARES Section 62 ISSUEIncrease in investment rebate. PROPOSAL It is proposed that the investment should be increased to Rs. 500,000/- RATIONALETo encourage investment

  21. FAIR MARKET VALUE Section 68 ISSUEDiscretion of the Commissioner PROPOSALIt 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.

  22. NON-RECOGNITION RULES Section 79(1) (d) ISSUEUnder 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

  23. NON-RECOGNITION RULES (Contd…) Section 79(2) ISSUESub 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 RATIONALETo eliminate discrimination

  24. EXTENSION OF TIME FOR FURNISHING RETURN & OTHER STATEMENTS Section 119(2) ISSUEApplication to the Commissioner. PROPOSALIt is proposed that right of representation before the Director General of Region may also be introduced to redress the grievance of taxpayers. RATIONALEPrinciples of Natural Justice.

  25. EXTENSION OF TIME FOR FURNISHING RETURN & OTHER STATEMENTS (Contd…) Section 119(6) ISSUEAccording 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 PROPOSALIt is, proposed that sub section (6) may kindly be deleted RATIONALEIt 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

  26. DISPOSAL OF APPEALS BY APPELLATE TRIBUNAL Section 132(2) ISSUEAppeal 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”

  27. DISPOSAL OF APPEALS BY APPELLATE TRIBUNAL (Contd…) Section 132(2) RATIONALEIn 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

  28. ALTERNATE DISPUTE RESOLUTION Section 134A Read with Rule 231(c )(6) ISSUETime limit of 30 days for disposal PROPOSAL Period for disposal of application by ADR Committee to be extended from 30 to 90 days RATIONALEReasonable period for effective decision making

  29. ALTERNATE DISPUTE RESOLUTION (Contd…) 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. RATIONALEEffective decision making

  30. STAY OF DEMAND Section 137 ISSUEUnrealistic 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). RATIONALEPrinciples of Natural Justice.

  31. ADVANCE TAX Section 147(4)&(4b) Appropriate amendment be made to adjust - Unadjusted amount of tax of one quarter to another within the same Tax year (refer to the formula)

  32. EXEMPTION OR LOWER RATE CERTIFICATE Section 159 ISSUEGrant 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) RATIONALENo time frame prescribed

  33. STATEMENT REGARDING IMMOVABLE PROPERTIES Section 165 ISSUEIn 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. RATIONALEIn our opinion, such statement is instrumental for broadening the tax base

  34. REFUNDS Section 170 ISSUERefund 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: -

  35. REFUNDS (Contd…) Section 170 “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 RATIONALEGood governance and to fill up lacunas

  36. PENALTY FOR NON-PAYMENT OF TAX Section 183 ISSUEPenalty 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 PROPOSALIt 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 RATIONALECurative amendment

  37. ADVANCE RULING Section 206A ISSUEAdvance Ruling provisions to Non Residents PROPOSAL Appropriate amendment is proposed to widened and extended the scope to other resident taxpayers.

  38. INCOME TAX PRACTIONER Section 223(2)(f) ISSUEAppearance before tax authorities. PROPOSAL It is proposed that Income Tax Practitioner (ITP) should be replaced with Federal Tax Practitioners (F. T. P.). RATIONALESince one window is being implemented for all Federal Taxes, so the person can also represent in Sales Tax and Federal Excise cases – Facilitation.

  39. TAX WITHHOLDING ON CASH WITHDRAWAL – INCREASE IN THRESHOLD Section 231A ISSUECash Withdrawal from Banks – Tax withholding PROPOSAL Threshold be increased from Rs. 25,000/- to Rs. 50,000/- Exemption be granted to Salaried Class RATIONALERelief to Salaried Class

  40. ADVANCE – TAX ON TELEPHONE Section 236 ISSUEAdvance Tax on Telephones PROPOSAL The Controversy of Pay Phone Companies be amicably resolved RATIONALEFacilitation and resolving Disputes

  41. RATE OF TAX - NON SALARY First Schedule Part-I Division 1 ISSUEExemption limit PROPOSAL Exemption should be increased to Rs. 250,000/- RATIONALERelief to taxpayers

  42. RATE OF TAX - SALARY First Schedule Part-I Division 1A ISSUEExemption 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. RATIONALERelief to the salaried class

  43. EXEMPTION FOR WIDOWS & SENIOR CITIZENS New Clause Part- I Second Schedule ISSUEBehbood 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. RATIONALETo give benefit to the senior citizens for reduction of profit and effect of inflation.

  44. RATE OF TAX – QUOTED COMPANIES First Schedule Part-I Division 1I ISSUEApplicable rate of tax PROPOSAL It is proposed that the rate of tax for quoted public companies be reduced to 30% from 35%. RATIONALETo encourage companies to be quoted on the stock exchanges.

  45. EXEMPTION – COMPUTER TRAINING INSTITUTES Clause 93-Part-I Second Schedule ISSUEComputer Training Institutions (Expired June 2005). PROPOSAL Period of Exemption be extended upto June 2010. RATIONALETo promote Computer literacy

  46. MINOR CORRECTIVE AMENDMENTS • Deduction of Tax at Source • Clause (36A) of Part IV of Second Schedule to be made as Part 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

  47. Thank You

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