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KARACHI TAX BAR ASSOCIATION SEMINAR ON PRE-BUDGET PROPOSALS 2014 - 2015 Held On May 07, 2014

KARACHI TAX BAR ASSOCIATION SEMINAR ON PRE-BUDGET PROPOSALS 2014 - 2015 Held On May 07, 2014. Contact Address: 4th Floor, Central Hotel Building Civil Lines, Mereweather Road Karachi - Pakistan Phone: 021-35644872-7 Fax: 021-35694573 Email: aar@mimandco.com. Presented By: ALI A. RAHIM

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KARACHI TAX BAR ASSOCIATION SEMINAR ON PRE-BUDGET PROPOSALS 2014 - 2015 Held On May 07, 2014

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  1. KARACHI TAX BAR ASSOCIATION SEMINAR ON PRE-BUDGET PROPOSALS 2014 - 2015Held On May 07, 2014 Contact Address: 4th Floor, Central Hotel Building Civil Lines, Mereweather Road Karachi - Pakistan Phone: 021-35644872-7 Fax: 021-35694573 Email: aar@mimandco.com Presented By: ALI A. RAHIM Director

  2. BROADENING OF THE AX BASE In order to broaden the desired tax base and document the economy besides reducing tax burden on the existing taxpayer, following areas are identified:- • FBR has a list of 2.6 million persons who: • Own property of 500 sq yards and above • Own a Motor Vehicle of 1000 cc and above • Have taken 2 or more foreign trips • Is maintaining a bank account The above persons do not have NTN numbers. • National Tax Number should be made mandatory for all type of commercial activities in the country. • Tax credit at the rate of 5% may be provided to those taxpayers whose 80% purchases are from persons who are registered as Sales Tax and/or Income Tax /taxpayers with the Tax Department. Cont’d P/2

  3. Page # 2 • A research and development wing may be created in the FBR in collaboration with Professional Organizations to check the avoidance/evasion of taxes in the following:- • FTA and double taxation treaties • To focus on sectors which are not contributing the due taxes to the exchequers for example agriculture, wholesalers & retailers and transportation etc. • Tax credit may be allowed to the new tax payers for first three years. • CNIC of an individual, Company’s Incorporation Number and Firm’s registration number may be adopted as “Common Tax Identifier” as National Tax Number. • The consumers (masses) should be motivated to get receipt of all purchases and for this purpose Lucky Draw Scheme should be initiated to discourage black economy and smuggling and encourage documentation of economy/ broadening of Tax Base.

  4. INCENTIVE FOR ENLISTMENT IN STOCK EXCHANGE UNDER SECTION 65C It provides that if company opts for enlistment in any stock exchange in the country, tax credit of 15% of the tax payable shall be allowed for the first year of enlistment. Proposal Enlistment of a Company in stock exchange requires compliance of many regulations therefore above incentive is very meager. The tax credit of 15% may be allowed for five years from the tax year in which the company is enlisted. Rationale For encouraging companies to be registered with the stock exchange.

  5. MINIMUM TAX UNDER SECTION 113, DIVISION (IA) OF PART -1 OF FIRST SCHEDULE Issues • Minimum Tax is levied @ one on the turnover of the taxpayer, where no tax is payable either due to loss during the year or due to brought forward losses of previous years or if the tax payable is less than the minimum tax on the turnover. However, the reduction in tax is available to the certain companies/persons. Such as for distributors of cigarette, it is reduced by 80% etc. • Minimum tax is also not payable by certain companies and sector. • This regime is effectively negating the provision of section 57 that allows for losses in tax year to be set-off against future profits and is thus forcing the taxpayer to pay more corporate tax that would otherwise have been due. Proposal To maintain a level playing field, it is proposed that other than the companies and sectors to whom the reduced rate or exemption is available; the general rate of minimum tax be reduced to 0.2% on the total turnover of the taxpayer.

  6. PROVISIONAL ASSESSMENT UNDER SECTION 122 If a person fails to file tax return in-spite of being asked, then the Commissioner is empowered to issue provisional assessment based on the information available with him and after expiry of 60 days it is deemed to be the final assessment. This time has been reduced to 45 days. Proposal The time for submitting the return should be brought back to 60 days. Rationale To meet the requirements of justice.

  7. POWERS TO MULTIPLE AMENDMENT OF ASSESSMENT UNDER SECTION 122(1)(4) (5&5A) Issues • Amendment of assessment order is possible under section 122 sub-section (5) and (1), and an amended assessment can only be done under sub-section (4). • However Commissioner may amend or further amend as assessment order under section 5A. This power of the Commissioner is against the principles of natural justice as if he is examining the tax records to ascertain whether the assessment order completed is prejudicial to the interest of revenue or not, he should examine all the areas once for all and amend the order accordingly. • Further sub-section (4) also provides that Commissioner may further amend the assessment order as many times as may be necessary. It means that the taxpayer will be at the mercy of revenue officer and his case will not be considered as closed transaction till at-least six years from the date of original assessment. Proposal The powers given to the commissioner should be reduced, as this only encourage corruption and harassment. Rationale This provision of law is against all the norms of justice and fair play.

  8. APPOINTMENT OF THE APPELLATE TRIBUNAL UNDER SECTION 130 Just to share with you, as we know that the decisions of Appellate Tribunal deciding on matter of fact are not challengeable before High Courts or Supreme Court of Pakistan, therefore appointment of competent person is essential. Qualification to be become Accountant member was of the rank of Regional Commissioner (BPS 21), as at this level understanding of the issues on disputed transactions is far better than junior \ level. However Finance Act 2007 expanded the criteria to qualify Commissioner of Appeals with 5 years experience to become an accountant member, subsequently the Finance Act 2010 further curtailed the qualifying service period from 5 years to 3 years. Proposal It should be reverted to chief commissioner. (BPS 21) Rationale To improve the quality of orders of the Appellate Tribunal.

  9. ALTERNATIVE DISPUTE RESOLUTION COMMITTEE UNDER SECTION 134A(4)(5) ADRC forum provides the taxpayer an easy and efficient dispute resolution mechanism to resolve tax related disputes. It is an independent body because of the nature of its composition and has a very strong element of credibility. Proposal • The recommendation made by the Committee should be accepted in a letter & spirit, unless there is any apparent legal mistake. • That instead of communicating the agreement to the appellate forum, the appeals filed by the respective parties should be withdrawn. • Cogent reasons including dissenting notes by the ADR Member must properly be provided and incorporated in the Order issued by the FBR. • Proper rules may be framed for formation of the committee, scope of work, conducting of ADR proceedings, stay of matter/demand, disposal of application by the ADR Committee, retention of record, remuneration for members of ADRC and etc. Rationale ADRC is the system being adopted all over the world for quick disposal of cases.

  10. DUE DATE FOR PAYMENT OF TAX UNDER SECTION 137(2) Notice issued by Commissioner for payment of tax liability is required to be paid within 15 days from the date of service of notice. However Commissioner may grant extension of time or installments for payment. The above provision provides arbitrary powers, resulting misuse in many cases. Proposal In order to check this power and in the interest of justice, equity and fair play, following proviso may be inserted in sub-section (2) of section 137:- “Provided that, where the assesses files an appeal under section 127, in respect of an order relating to the sum payable as specified in the notice under sub-section (1), the payment of 85% of the said sum shall be deemed to have been stayed till the decision of the first appeal under the said section, and 70% of the said sum shall be deemed to have been stayed till the decision of the appeal filed before the tribunal under section 131.” Rationale To reduce the harassment and corruption.

  11. LIABILITY OF MANUFACTURERS AS WITHHOLDING AGENT AND FINALITY OF THEIR SUPPLIES UNDER SECTION 153(1)(2)(3)(6A) Issues • It states that tax deducted on payment of sales of goods/services/ contract at 3.5% to 7% and @ 0.5% by an exporter on account of rendering services of stitching, dyeing, printing, embroidery, washing, sizing and weaving shall be a final tax on the income arising on these transactions. However, this sub-section excludes the tax deducted on payment received on sale or supply of goods by a Company being manufacturer of such goods and is adjustable. • GOP always excluded companies from the Final Tax Regime primarily on the premise that the company is withholding agent and in order to provide level playing field; the same have been excluded. However, the Finance Act 2008 and 2010 added clause (g) and (h) respectively in the list of prescribed person; whereby the scope of this section has been expanded to the AOP(s) and Individuals having turnover of Rs. 50,000,000/- in the tax year 2007 and 2009 onwards. • Now AOP and Individual are liable to deduct tax on the purchases and as payee the tax deducted on the sale of manufactured goods is considered as their full and final liability. This situation has created anomaly and discrimination between the different statuses of taxpayers doing the same business. Cont’d P/2

  12. Page # 2 Proposal Like Company, Individual and AOP being manufacturer may also be excluded from the Final Tax Regime on the income arising on supply of goods and tax withheld under sub-section (1) of section 153. The concept of carry forward of unabsorbed tax credit should be introduced, carry forward of unabsorbed tax credit to be allowed as it is available in section 65E (3) & (4) of the Ordinance. Rationale For being fair and equitable for all types of Taxpayer being deducting authorities.

  13. PAYMENT OF TAX COLLECTED/DEDUCTED UNDER SECTION 160 AND RULE 43 Issues It provides that tax collected or deducted is required to be deposited within 7 days from the end of each week as per SRO 392(I)/2009. GOP should appreciate that this service is voluntary, therefore restriction of payment in such short time is cumbersome and creating hardship. Proposal Deposit of withholding of tax should be allowed within 7 days from the end of previous month.

  14. CERTIFICATE OF COLLECTION OR DEDUCTION OF TAX UNDER SECTION 164 Presently, a certificate issued by a withholding agent for tax collected or deducted is treated sufficient evidence for claiming credit under section 168. This facility was withdrawn in the Finance Act, 2013. Proposal • The original status to be restored. • However supporting documents, if required, such as copies of challans / receipts of payment with the return of income should be specified. • Credit should automatically be given in the account of the person who pays the tax or in whose name the tax has been deducted and deposited the said person be allowed to have access for his tax payments.

  15. FILING OF MONTHLY STATEMENTS OF WITHHOLDING OF TAX UNDER SECTION 165 Issues It is required to be furnished by 15th day of the month following the month to which withholding pertains. It coincides with the date for filing of monthly sales tax return and monthly statement of income tax. Proposal Date for filing to be changed to 25th day of the month following the month to which withholding pertains. Furthermore filing of monthly statements may be substituted with quarterly statements.

  16. FURNISHING OF INFORMATION BY BANKS UNDER SECTION 165A In this every banking company shall make arrangements to provide following to the FBR: • Online access to its central database containing details of its account holders and all transactions made in their accounts; • List containing particulars of deposits aggregating Rs. 1,000,000/- or more made during the preceding calendar month; • List of payments made by any person against bills raised in respect of a credit card issued to that person, aggregating Rs. 100,000/- or more during the preceding calendar month; • Consolidated list of loans written off exceeding Rs. 1,000,000/- during a calendar year; and • Copy of each Currency Transactions Report and Suspicious Transactions Report generated and submitted by it to the Financial Monitoring Unit under the Anti-Money Laundering Act, 2010. Cont’d P/2

  17. Page No. 2 Proposal This provision is a source of great concern as the tax authorities have been given wide powers to probe into banking transactions in general. Also, the effect of this provision overriding other important legislations will also likely lead to litigation and, therefore, the provision needs to be revisited and suitably tailored so as to be enforced judiciously and fairly, even through the FBR has stated that this shall not apply to persons registered and having a valid NTN. Rationale To reduce corruption.

  18. REFUND VS. MODE OF RECOVERY OF TAX UNDER SECTION 170 The Ordinance is very tough for recovery of tax, there are number of provisions in the Ordinance whereby the Commissioner has been empowered to proceed to recover the tax through attachment, sale of property, rights to arrest up to 6 months, seizure of bank accounts, imposition of penalties and additional tax etc. On the other hand the rights for obtaining the refund of tax paid in excess to the amount chargeable to tax under are not adequately taken care off. Proposal • Section 170(4) may be amended, and rather than 60 days should be paid within 15 days after the Commissioner passes the order, and in case of failure to pass the order within the stipulated period of 15 days, the refund application should be deemed to have been accepted by him, and profit thereon at KIBOR would be payable by the department. • Provision be made in section 170(2)(c); whereby the Commissioner may be authorized to admit an application made even after the expiry of the stipulated period of 2 years on genuine reason. Rationale To meet the requirements of natural justice.

  19. ADDITIONAL PAYMENT FOR DELAYED REFUNDS UNDER SECTION 171 Previously refund become due, if not paid within three months from the date of the assessment of income by the Commissioner. However in the Finance Act 2013, it is applicable from the date of the refund order is made on an application under sub-section (1) of section 170, and not from the date of assessment of income treated to have been made by the Commissioner under section 120. Proposal It appears it has been done to negate the judgment of the Appellate Tribunal Inland Revenue where it was held that the refund shall be treated due on the date the deemed assessment is treated to have been made in terms of section 120. The previous system should be restored. Once the assessment is amended any further amended should only be done when the department acquires definite information that the income has been concealed or inaccurate particulars of income have been furnished or incorrect information is provided. That re-opening of the case should be made only by the Chief Commissioner IRS ,after giving proper opportunity to the taxpayer of being heard by issuing specific show-cause notice in this regard. Cont’d P/2

  20. Page # 2 Rationale It is against the tenets of justice that the same Commissioner of Income Tax, who has completed the assessment, re-opens the case for additional assessment. - Further an assessment should only be amended once for the specific item. It should not be allowed to reopened every time on the same issue. - The time period to amend the assessment order should be reduced to 3 years.

  21. AUDIT UNDER SECTION 177 AND 214C Issues Commissioner is authorized to select and conduct audit under section 177 of the Ordinance. This nullifies the effect of the decision of the Lahore High Court that “powers to select tax payers’ cases for audit only vested with FBR.” Proposal Selection of audit should only be carried out through computer ballot under section 214 C; in case it is required to be done under section 177 than it should only be done after approval of FBR, by informing the FBR of the complete synopsis and reason of the said case. Rationale This will go a long way to reduce harassment and corruption.

  22. OFFENCE EXISTING AND PROPOSED PENALTY UNDER SECTION 182 OLD Where any person fails to furnish a return of income as required under section 114 or wealth statement within the due date. 0.1% of the tax payable for each day of default subject to a minimum penalty of Rs 5,000/- and a maximum penalty of 25% of the tax payable in respect of that tax year. New Where a person fails to file a return of income under section 114, penalty at 0.1% of the tax payable for each day of default subject to a minimum penalty of Rs. 20,000/- and a maximum penalty of 50% of the tax payable in respect of that tax year. Where any person fails to furnish a statement as required under section 115, 165 or 165A within the due date penalty of Rs. 2,500/- for each day of default subject to a minimum penalty of Rs. 50,000/-. Where a person fails to furnish wealth statement or wealth reconciliation statement penalty of Rs. 100/- for each day of default is liable to be paid. Cont’d P/2

  23. Page # 2 Proposal • Levy of penalties to be reviewed. Rationale This was imposed as an education for Tax prayers and not a revenue source which it has now become.

  24. DEFAULT SURCHARGE UNDER SECTION 205(1B) Issues It states that if tax payable under section 147 is paid less than 90%, than he is required to pay default surcharge at the rate of KIBOR plus 3% per quarter. Proposal • The bench mark of 90% may be reduced to 75%. • The default surcharge of KIBOR plus 3% to be reduced to only KIBOR, this will be in line with compensation payable under section 171 of the Ordinance. Rationale For having fair play in the system.

  25. DIRECTORATE GENERALS OF LAW, RESEARCH & DEVELOPMENT UNDER SECTION 230 B&C New directorates within FBR relating to functions, jurisdiction and powers are specified for: • Directorate - General Law • Directorate - General Research and Development” Proposal • Commissioner appeals may operate under Directorate General Law and their subsequent transfer as member of the Appellate Tribunal. • Directorate - General Law should be placed under the Ministry of Law Rationale This will improve the quality of the judgment of the Tribunal and will also away from having influenced by the Commissioner who have framed the order.

  26. DISTINCTION BETWEEN TAXPAYER AND NON-TAXPAYERRE CASH WITHDRAWAL FROM BANKS UNDER SECTION 231A It is collected @ 0.3% of the cash amount withdrawn from bank. Proposal A clear distinction should be made between the taxpayer and non-taxpayers by imposing higher rate of taxes to non tax payers. For example the withholding tax under section 231A collected indiscriminately be withdrawn from the NTN holder, however from non-taxpayers it should be collected @ 0.5%. Rationale To encourage people having registered with the FBR.

  27. DEPARTMENTAL AUDITS Issues - Currently there are three Audits for checking the Income Tax Assessment , two from within the Tax Department third from Revenue Department, Islamabad. However no parameters are fixed for these Audits, revenue department initiate checking after 2 to 4 years of the completion of assessments. - Further due to non-availability of scope of audit, these auditors tend to start Re-Assessment of the completed Assessment. Frivolous demands are created against the taxpayer. Proposal Parameters of Audits by Revenue Department should be fixed.

  28. TAX ON INTER-COMPANY DIVIDENDS Issue • The concept of holding companies has helped many economies of the world to grow, however in Pakistan it has not grown as desired, mainly because of the concept of holding company in the existing laws. • For example tax on Inter-Company is a hindrance for offering dividends by the company. • Although Clause 103A of Part I of Second Schedule, exempts any income derived from inter-corporate dividend; but the same is available and such inter-corporate dividend which are within the group companies entitled to group taxation under section 59A or section 59B. Proposal The tax on inter-company dividend received by the companies should be exempted from tax. Rationale To encouraging the concept of holding companies which is essential for growth of the economy.

  29. COMPUTATION OF CAPITAL GAINS ON DISPOSAL OF SECURITIES BY NON- RESIDENTS / FOREIGN CURRENCY INVESTMENTS In Pakistan, there is a technical flaw in the manner of calculation of capital gains in the case of investment in shares, where the investment is made in foreign currency. Such a gain is calculated in historical rupee terms. Due to this reason a tax liability may arise to a non-resident due to devaluation of Pakistani rupee vis-à-vis foreign currency even if the shares are sold at the same value in foreign currency or even at a loss. This manner of calculation of capital gain needs to be corrected. Proposal Therefore to protect and encourage foreign investment from sharp depreciation in Pakistan Rupee and to help attract foreign investment it is proposed that a proviso similar to section 48 of the Indian Income Tax Act, 1961 be inserted in section 76 of the Ordinance relating to cost of investment for the purpose of determination of capital gain. Rationale To encourage foreign investment in the country.

  30. ENHANCEMENT OF RATES ON IMPORTS OF CERTAIN ITEMS Presently Clause (13G) of Part II of the Second Schedule provides that the tax under section 148 on the import of Gold, Mobile telephone sets and Silver, shall be collected at the rate of 1% of import value as increase by Customs Duty, Sales Tax and Federal Excise Duty, if any levied thereon. All the above items are being used by the well to do segment of the society and do not justify any reduction in rate of tax. Proposal Rate of tax on the above imports be brought at par with the other goods imported for commercial purposes.

  31. CHILD EDUCATION & MEDICAL ALLOWANCES AND INVESTMENT ALLOWANCE It is suggested that burden of Salaried Class should be mitigated by offering them above allowances to be offset against their salary income provided documentary evidences containing name, address and National Tax Number of Educational and Medical Institution are provided. Proposal Taxpayers should also be given adjustment against their tax liability like that available in respect of allowable investment, and also the limit of investment amount should be enhanced.

  32. TAXABILITY OF PROVIDENT FUND CONTRIBUTION Sub-rule (a) of Rule 3 of the Sixth Schedule provides that any contribution made by an employer to a provident fund in excess of 10% of the salary or Rupees 100,000/-, whichever is lower, shall be deemed to be income of the employee. Proposal The deeming of income of an employee may be restricted to 10% of salary only and the restriction of monetary amount of Rs. 100,000/- per annum may be removed. Rationale To give due regretted to the salaried class who are paying their true quota of tax.

  33. INCENTIVES FOR THE SALARIED TAX PAYERS POST RETIREMENT MEDICAL FUND As per income tax law approved retirement benefit plans are not subject to tax at the hands of the beneficiary and is also an allowable expense of the company. However Medical plans operational by the company for their employees are not approved under the ambit of income tax law and hence companies which provide such essential benefits to their retired employees are not entitled to claim these expenses in their tax returns. Proposal Approved medical benefits may also be allowed as per approved retirement benefits. Rationale This will benefit both the individuals and GOP improve the standard of living of its citizens.

  34. Thank You

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