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BUDGET PROPOSAL 2009ON INCOME TAX

The Income Tax Bar Association, In Collaboration with

Pakistan Tax Bar Association, KarachiApril 25, 2009

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 Federal Board of Revenue (FBR) 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 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.

SMEIt is proposed that reduced rates be Extended for Small Company and Medium Enterprise (SME), and those companies incorporated before July 01, 2005.

(Contd…)

TAX REFORMS

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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.

Tax payers may be given incentive if they give documented bills for sales and supply, contracts or services.

(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

(Contd…)

TAX REFORMS

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

Quarterly statements should be reintroduced instead of monthly statements.

IRRITANTS

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 three (3) years.

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

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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). 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 Sub-section (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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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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TAXABILITY OF EMPLOYEES

CONTRIBUTE TO PROVIDENT FUND

Section 12, Sixth Schedule Part I Rules 3.

ISSUE By virtue of an amendment made in Rule 3 of Part I of the Sixth Schedule to the Income Tax Ordinance, 2001, any amount in excess of Rs. 100,000/- paid to an employee by a Provident Fund is taxable in the hands of the employee.

PROPOSAL It is proposed that this additional burden on the salaried class may be withdrawn.

RATIONALE Since the salaried class is the most tax compliant class of people and paying their due share of taxes as applicable, they should not be further burdened.

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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 NTN 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.

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 Security Exchange Commissioner of Pakistan (SECP) and rules to be framed by FBR.

PROPOSAL Two years have elapsed and yet the corporate governance requirements and rules of the FBR have not been enacted. A draft rule has been now circulated vide SRO 301(I)/2009 dated April 07, 2009 along with 98 other changes. We hope that this will finally be adopted soon.

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

PROPOSAL Since a new draft rule has now been circulated vide SRO 301(I)/2009 dated April 07, 2009 we are optimistic that this will be enacted soon.

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 limit of investment should be increased to Rs. 500,000/-

RATIONALE To encourage investment for industrialization.

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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 FBR in the Income Tax Rules, 2002 and for the purposes of Immovable properties, changes have been suggested in SRO 301(I)/2009 dated April 07, 2009. However, for the basis of valuation of constructed properties the fair market value is to be determined by the Commissioner of Income Tax. It is suggested that the collector valuation should be accepted on one side and the valuation table of the collector should be substantially increased to being it in close proximity to the actual market price.

RATIONALE To eliminate the chance of encouraging corruption.

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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 115(4)&172(3)(C)

ISSUE Companies paying dividends to non-residents may be treated as representative and asked to file statements under section 115(4) by the commissions.

PROPOSAL It is proposed that such companies may not be treated as “Representatives” for the purposes of dividends declared if they file the statement under section 165 (as is the case of salary income).

RATIONALE To reduce burden on companies for filing returns as representatives.

FURNISHING OF RETURN AS REPRESENTATIONS

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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 may also be introduced to redress the grievance of taxpayers, if the said application is rejected by the Commissioner of Income Tax.

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. Even otherwise, once the Commissioner grants time, it will be very harsh in genuine cases.

(Contd…)

EXTENSION OF TIME FOR FURNISHING

RETURN & OTHER STATEMENTS

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Section 129

DECESION IN APPEAL BY

THE COMMINISSIONS

ISSUE Upto the year 2005 the Commissioner of Income Tax (Appeals) [CIT(A)] had the power to set aside orders framed by the assessing offices.

PROPOSAL It is, proposed that this power to set aside the appeal should be re-incorporated in the law.

RATIONALE It has been noticed that to give relief, the CIT(A) is required to examine evidences. However due to paucity of time and with the staff that is posted with the CIT(A) it is not possible for the CIT(A), hence this power to set aside be re-incorporated in the law.

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Section 132(2)

DISPOSAL OF APPEALS BY

APPELLATE 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 Income Tax Appellate Tribunal (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.

(Contd…)

DISPOSAL OF APPEALS BY

APPELLATE TRIBUNAL

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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 Central Board of Revenue (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

(Contd…)

ALTERNATE DISPUTE RESOLUTION

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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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ISSUE Group companies which share common expenses reimburse the same to the company that actually pays the expenditure, after deduction of the relevant tax.

PROPOSAL It is, proposed that reimbursement of expenses, between group companies should be exempted from the deduction of tax.

RATIONALE To reduce the cash flow burden and also the process of refund.

Section 153

EXEMPTION CERTIFICATE

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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 CIT(A).

RATIONALE No time frame prescribed.

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Section 165

STATEMENT REGARDING

IMMOVABLE 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 this 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

“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 also.

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Section 223(2)(F)

INCOME TAX PRACTITIONER

ISSUE Appearance before tax authorities.

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

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

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Section 231A

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/-

RATIONALE Relief for small Withdrawals.

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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 and are exempted for deduction of tax but have to pay tax on filing of the annual return.

PROPOSAL They should be given special relief, by exempting them from tax on these certificates and accounts.

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 II

RATE OF TAX – QUOTED COMPANIES

ISSUE Applicable rate of tax.

PROPOSAL It is proposed that the rate of tax for quoted public companies be presently 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 – COMPUTER

TRAINING 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