Pre Budget Proposal – Income Tax 1 Income Tax Bar Association Karachi Budget Proposals on I NCOME...

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Pre Budget Proposal – Income Tax

Income Tax Bar Association Karachi

Budget Proposals

on

IINCOME NCOME TTAX AX

at

Income Tax Bar Association – Karachi

April 21, 2006

Presented by : ARSHAD SIRAJ MEMON

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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.

•Efforts to be made to bring more people in to tax base–

•Efforts to be made to effective legislation of Regulations which mandatorily require NTN Certificate in all the documents executed in any form at any stage. E.g.

(a) Transfer of Properties. (b) Transfer of Shares. (c) Transfer of Vehicles. (d) Bank Documents. (e) Credit/Debit/ATM Cards. (f) Travel Documents.

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•For automation and facilitation common identification number to be introduced.

•Establishment of Research and Development Department under the auspicious of CBR with corroboration with

Business Community – Tax Advisor and other Stake holders –

Area of Studies-Examples Undocumented economy. Double Taxation Agreements E-Commerce. Economic and Tax Factors.

TAX REFORMS

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•Encouragement and Incentives to be provided for Savings and Investment.

•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.

•The frequent changes made in the return form are an irritant which has caused hurdles in expansion of Tax base. The return forms should be designed on permanent basis and while designing such forms, the literacy rate, socio economic and judicious norms should be considered rationally

TAX REFORMS

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•Islamic Banking -

Issues regarding withholding of Taxes and taxation to examined to promote Islamic mode of Banking.

•It is proposed that different reduced rates be introduced for Small Company and Medium Enterprise (SME) .

•Separate Schedule for financial services to be introduced for Banking and Finance Business.

TAX REFORMS

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•New provision to be introduced for Tax Credit for investments

made in National Saving Schemes to give incentives for savings

which will create investment and employment.

TAX REFORMS

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ISSUE The definition of ‘assessment year’

PROPOSAL It is suggested that the definition of term

“assessment year” be reproduced in Clause (5A) of

section 2.

RATIONALE Consolidation

Assessment Year Section 2(5a)

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Permanent Establishment Section 2(41)

ISSUE The perusal of the definition shows that under Sub-Clause (c),

a building site, a construction, assembly or installation project

or supervisory activities connected with such sites or projects

have been included in the definition of term “permanent

establishment”. Similarly, under Sub-Clause (f) in substituting

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 appreciated that a minimum period of

suitable time be included in Sub-Clauses (c) and (f)

accordingly. Minimum period, therefore, for such clauses is

suggested to be 6-months.

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) be deleted which is overlapping section 37(5). Or in the alternate, Royalty be excluded from the definition of “Capital Assets” in 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. I

RATIONALE : Complementary 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 complementary 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 Section3.

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Royalty and Fee For Technical ServicesSection 6 and Rule 8 & 9 of the Income Tax Rules, 1982

ISSUE : Option under Rule 8 & 9 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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ISSUE : Salary

PROPOSAL : Conveyance Allowance be increased from Rs.3,600 to

Rs.15,000

RATIONALE : Conveyance Allowance has remained static since ages

Section 12 Read with Rule 6

Increase of Exemption for Conveyance Allowance

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Income from Property Section 15(2)

ISSUE : Under this section, 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 subsection (2), where-ever the word “or” has been used between “expressions the land” “building” said “or” be replaced by “and”.

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. .

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Section 17

ISSUE : Deduction in Computing Income Chargeable under the Head

“Income from Property”.

PROPOSAL : It is proposed that deduction should be allowed to taxpayer/owner

of the building if such commission on rent is paid through

recognized normal banking channel to the estate agent.

RATIONALE : This amendment will not only give benefit to the owner but will also

be an instrument to bring such class of persons engaged in the

business of estate agency into the tax net, which will facilitate the

broadening of tax base..

Income from Property

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Section 21(K)

ISSUE : Taxability OF Excess Perquisites.

PROPOSAL : It is, therefore, proposed that where taxable salary of a tax payer increase to such an extent where perquisites become taxable in the hands of an employee, the deduction may not be treated as inadmissible in the hands of the employer. Necessary amendment is proposed to be made accordingly.

RATIONALE : Conceptually Clause (k) of Section 21 is analogous to the provisions of Clause (i) of Section 24 of the Repealed Ordinance. Under the repealed Income Tax Ordinance, excess perquisites were added in the income of the employer u/s 24(i). The philosophy behind such addition in the income of employer was that perquisites were exempt for considerable time in the hands of the employee. It was only in the final stages of the repealed Ordinance that perquisites were taxed. Since the perquisites are now taxable in the hands of employees whose taxable salary exceeds the threshold of Rs. 600,000, therefore, in our considered opinion, there is no rationale for making addition of excess perquisites in the hands of employers under the Clause (k) of section 21. .

Income from business – Deductions not allowed

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Section 21(I)

ISSUE : Deduction not allowed

PROPOSAL : Since the expenditure can be paid through and by

different modes of baking channels, it is proposed

that words “other than by a crossed bank cheque or

crossed bank draft” be substituted by the words

“otherwise than a recognized banking channel”.

RATIONALE : To streamline the provisions with transactions of

Banking.

Income from business – Deductions not allowed

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Bad Debts Section 29(1)(b)

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 year or in any previous tax year

or assessment year; and”.

RATIONALE : Facilitation

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Accrual Basis of Accounting Section 34

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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Stock in Trade Section 35

ISSUE : Under this section, concept of determination of the cost of Stock is 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 : Convergence of Tax laws with International Accounting Standards.

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Income from Other Sources Section 39

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.

PROPOSAL : The word “Card” used after National Tax Number be replaced by word “Certificate”, as through Finance Ordinance, 2002, word “Card” was replaced by word “Certificate” in Section 181 of the Income Tax Ordinance, 2001.

ISSUE : There is no cavil to the purported purpose of Section 39 (3). 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 Card (Certificate) for amounts received from abroad.

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Section 39

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 expression “otherwise than by a recognized banking channel” be substituted for words “otherwise than by cross cheque drawn on a bank”

(b) Advance Rent received be included Sub-section (4) subject to just and reasonable restrictions

Income from Other Sources

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ISSUE : Set Off /Carry Forward of Loss

PROPOSAL : Carry Forward to be restricted/reduced to five years

prospectively

RATIONALE : Increase in Tax Base and discouragement for

frivolous claim of losses

Section 57A Set-off / Carry Forward of Losses

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Set-off / Carry Forward of Losses

ISSUE : Set Off /Carry Forward of Loss

PROPOSAL : Carry Forward to be restricted/reduced to five years

prospectively

RATIONALE : Increase in Tax Base and discouragement for

frivolous claim of losses

Section 57(2)

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Fair Market Value Section 68

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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Non-Recognition Rules Section 79(1)

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 and 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 at least by two years.

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Section 79(2)

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, or 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.

Non-Recognition Rules

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Extension of time for furnishing return and other Statements Section 119(2)

ISSUE : Application to the Commissioner

PROPOSAL : It is proposed that right of representation before the

Regional Commissioner, be introduced to redress the

grievance of tax payers.

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

Extension of time for furnishing return and other Statements.

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Disposal of Appeals by Appellate Tribunal Section 132(2)

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.”

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.

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Reference to the High Court

PROPOSAL : Rule to be deleted.

RATIONALE : High Courts regulate their own functions and

procedures through their respective Rules.

Section 133 Read with Rule 78

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Alternate Dispute Resolution Section 134A Read

with Rule 231C(6)

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.

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ISSUE : Time limit for decision by CBR.

PROPOSAL : Appropriate time limit for decision by

CBR preferably Six Months.

RATIONALE : Effective decision making.

Alternate Dispute Resolution Section 134A Read

with Rule 231(15)

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Advance Tax Section 147

Appropriate amendment be made to adjust – Unadjusted amount of

one quarter to another within the same Tax year

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Exemption or Lower Rate Certificate Section 159

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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Statement regarding immovable properties Section 165

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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Refunds Section 170

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 sub-section (4) be amended as under: -

“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 lacuna.

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Penalty for Non-payment of Tax Section 183

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. 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 15 days.

RATIONALE : Curative amendment.

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Advance Ruling Section 206A

ISSUE : Advance Ruling provisions to Non Residents.

PROPOSAL : Appropriate amendment is proposed to widened and

extended the scope to other tax payers like tax

payers resident companies having foreign share

holders holding majority share, other Public

Companies, Public Limited Banking and Insurance

Companies.

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Tax withholding on cash withdrawal – 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

Section 231A

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Advance-tax on Recharging Accounts

ISSUE : Advance Tax on Telephones.

PROPOSAL : To be extended to Recharging accounts.

RATIONALE : To increase Tax base.

Section 236

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ISSUE : Advance Tax on Telephones

PROPOSAL : The Controversy of Pay Phone Companies be

amicably resolved

RATIONALE : Facilitation and resolving Disputes

Section 236Advance-tax on Telephone

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Exemption – Computer Training Institutes

ISSUE : To Computer Training Institutions

PROPOSAL : Period of Exemption be extended for three more

years.

RATIONALE : To promote Computer literacy.

Clause 93-Part ISecond Schedule

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Minor Corrective _??_

Reduction in Tax Liability – Income from Salary

Part III Clause (2) of Second Schedule – Needs appropriate amendments

Deduction of Tax at Source

Clause (36A) to be made as Part of Clause (59)

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National Tax Number - Section 181 read with Rule 83

Substitution of word card with certificate

Charges – Rule 230

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

Minor Corrective _??_

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Reduction in tax liability – Income from Salary

ISSUE : Reduction in Tax Liability- Salary Reduction of Tax.

PROPOSAL : Needs appropriate amendments.

RATIONALE : Corrective.

Part III Clause (2) of Second Schedule

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Thank you

Pre Budget Proposal – Income Tax 1 Income Tax Bar Association Karachi Budget Proposals on I NCOME...

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