2/12/2014 Withdrawal of tax exemptions/concessions: Rs 520 billion impact to help bridge fiscal deficit | Business Recorder

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Withdrawal of tax exemptions/concessions:Rs 520 billion impact to help bridge fiscaldeficitFebruary 12, 2014

ZAHEER ABBASI & SOHAIL SARFRAZ

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The government provides over Rs 520 billion annual tax exemptions and concessions

through Statutory Regulatory Orders (SROs) to wealthy, influential, and affluent people.

The withdrawal of these concessions can help reduce the fiscal deficit. The International

Monetary Fund (IMF) Mission Chief Jeffrey Franks in an exclusive interview to Business

Recorder revealed that tax authorities have determined the monetary value of these

exemptions and concessions at 2 percent of the GDP.

At present, a committee constituted by Prime Minister is reviewing income tax, sales tax and customs duty concessions and

exemptions granted through SROs. The FBR will begin amending existing SROs subsequent to suggestions of all the

stakeholders. Sources said the withdrawal of exemptions and concessions allowed through SROs may be politically

challenging for the government. The business community is PML-N''s major constituency which accounts for the withdrawal of

numerous budgetary proposals that affected the business community in recent months. At the launch ceremony of money

whitening scheme on November 29, Finance Minister Ishaq Dar disclosed that 25 proposals out of 26 presented by the

business community have been implemented by the government.

On the following day, speaking at a seminar, Member Inland Revenue of Federal Board of Revenue (FBR) stated that the tax

authorities have been facing pressure from business community not to begin implementation of the budgetary tax measures. If

the budget approved by the Parliament is not acceptable to some then Parliament and not the FBR, has the right to reverse

those decisions.

Withdrawal of exemptions and concession could increase the tax collection by Rs 520 billion, help broaden the much needed

tax base and ultimately reduce the fiscal deficit. Sources said the monetary impact of 0.4 percent of GDP through withdrawal of

exemptions and concessions from next fiscal year, as stated by the IMF Mission Chief, are estimated to generate over Rs 105

billion.

According to officials in Finance Ministry, the government is going to withdraw all exemptions and concessions granted to

various sectors through SROs except those pertaining to essential commodities, goods and pharmaceuticals. The phase-wise

implementation which was previously planned from April 1, 2014, may now begin from next fiscal year. He further stated that, in

principle, the decision to this effect has been taken and now the business community is being taken on board.

The official further stated that meetings have been going on during the last four months in the Finance Ministry with Dar in the

chair with the senior officials of the FBR to run through the entire list of SROs issued by successive governments providing

exemptions to various sectors. Items have been categorised for withdrawal of exemptions under a phase-wise plan with the

first proposed phase for implementation commencing in the fourth quarter of the current fiscal year.

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2012 PTD 554 = 2013 108 TAX 155

[Federal Tax Ombudsman] Before Dr. Muhammad Shoaib Suddle, Federal Tax Ombudsman

WAHEED SHAHZAD BUTT

Versus

SECRETARY, REVENUE DIVISION, ISLAMABAD

Complaint No.286/LHR/IT/(240)/577 of 2011, decided on 16th December, 2011.

(a) Income Tax Ordinance (XLIX of 2001)---

----S.153(1)(b)---F.B.R. letter C.No.1(6)WHT/2009 dated 4-7-2009---F.B.R. Circular

No.3 of 2009 dated 17-7-2009---F.B.R. Circular No.6 of 2009 dated 18-8-2009---

F.B.R. Letter C.No.1(10)WHT/2006-Part-III dated 1-11-2010---F.B.R. letter

No.1(25)WHT/2009 dated 26-4-2011---Payments for goods, services and contracts---

Services---Despite imposition of minimum withholding tax @ 6%, the Commissioner

issued exemption certificate to taxpayer providing services and falling under the ambit

of S.153(1)(b) of the Income Tax Ordinance, 2001 being corporate taxpayer---

Validity---Clarifications circulated by the Federal Board of Revenue to

its field formations were sufficient proof that the amendment made in

S.153 of the Income Tax Ordinance, 2001 through Finance Act, 2009

had ousted all the National Tax Number holders whether individuals,

Association of Persons or Companies providing services from Normal

Tax Regime/Final Tax Regime and brought them under the Minimum

Tax Regime---Exemption certificate issued by the Commissioner on the request of

some corporate taxpayer prior to issuance of Circular No.6 of 2009 dated 18-8-2009

were withdrawn when the legal position was explained to the Commissioner---Prima

facie, it seemed that the corporate sector providing services thereafter approached the

Federal Board of Revenue and Circular No.6 of 2009 dated 18-8-2009 was issued,

ousting the corporate sector from Minimum Tax Regime of S.153 of the Income Tax

Ordinance, 2001 (as amended) without withdrawing the Federal Board of Revenue's

earlier clarifications issued through its letter dated 4-7-2009 and Circular No.3 of

2009 dated 17-7-2009---Exemption Certificate was wrongly issued in the month of

July 2009, when changed position of applicability of S.153(1)(b) of the Income Tax

Ordinance, 2001 was clear---Clarification issued vide F.B.R. letter

C.No.1(6)WHT/2009 dated 4-7-2009 and F.B.R. Circular No.3 of 2009 dated 17-7-

2009 were not followed while issuing exemption certificate---Ambiguous

clarification was issued through Circular No.6 of 2009 dated 18-8-2009

which was withdrawn on 26-4-2011---Revenue admitted that public

exchequer suffered losses because of issuance of Circular No.6 of 2009

dated 18-8-2009 and the exemption certificate issued by the Commissioner all over

Pakistan---No measures were taken by Federal Board of Revenue to recoup the losses

because corporate taxpayers were still issuing bills to their customers with a printed

note that they were exempt from deduction of withholding tax and the same was not

being deducted by many service recipients---Circular No.6 of 2009 dated 18-9-2009

was wrongly issued and the Commissioner issued exemption certificate contrary to

law and in departure from Federal Board of Revenue's earlier clarifications, which

was tantamount to maladministration---Federal Tax Ombudsman recommended that

Federal Board of Revenue to initiate appropriate action against officials who

approved/issued Circular No.6 of 2009 dated 18-9-2009; initiate appropriate action

against officials who issued exemption certificate to unduly benefit the corporate

entities; ascertain the particulars and the amount of tax not withheld @ 6% from each

service provider; take immediate measures to recover the loss of revenue, as per law

and direct the concerned officials to take suitable action to ensure that the

taxpayers, including the cellular companies, issue bills/invoices without

reference to exemption from withholding tax.

(b) Establishment of the Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

----S.9---Jurisdiction, functions and powers of the Federal Tax Ombudsman---

Complaint in public interest---Investigation by Ombudsman on its own motion---

Jurisdiction---Scope---Objection raised by the Revenue regarding matter being sub-

judice in High Court or regarding jurisdiction of Federal Tax Ombudsman to

investigate the complaint in public interest were not legally tenable---No evidence had

been submitted to prove that the issue was sub judice before the High Court prior to

filing of application---Section 9(1) of the Establishment of the Office of Federal Tax

Ombudsman Ordinance, 2000, empowers the Federal Tax Ombudsman to investigate,

on his own motion, any allegation of maladministration on the part of Revenue

Division or any tax employee.

Muhammad Munir Qureshi, Advisor Dealing Officer.

Ramzan Bhatti Adviser

Waheed Shahzad Butt for Applicant.

Dr. Muhammad Iqbal, Chief, F.B.R., AsifRasool, Secretary, F.B.R. and Ashfaq

Ahmad, DCIR Departmental Representatives.

FINDINGS/RECOMMENDATIONS

DR. MUHAMMAD SHOAIB SUDDLE (FEDERAL TAX OMBUDSMAN).---The issue involved in this complaint taken up under "own motion" jurisdiction

conferred under section 9(1) of the FTO Ordinance, 2000, is illegal issuance of

exemption certificates, particularly by RTO, Karachi and LTU Islamabad.

2. Under the Finance Act, 2009, an amendment was made in section 153 of the

Income Tax Ordinance, 2001 (the Ordinance) rendering all service sector taxpayers

subject to minimum withholding tax @ 6% of gross receipts. It meant that neither a

refund could be allowed nor an exemption certificate issued to such taxpayers if their

assessed income tax was less than the amount withheld @ 6% of gross receipts. After

the amendment, the F.B.R. issued letter C.No.1 (6) WHT/2009 dated 4-7-2009

advising the Directors General, LTUs/RTOs, that the tax deducted under section

153(1)(b) of the Ordinance would be the "minimum tax". The F.B.R. also issued a

Circular No.3 of 2009 dated 17th July, 2009, advising the field formations that tax

deducted under section 153(1)(b) would be considered "minimum tax" and all

taxpayers falling in the ambit of this provision of law shall file returns under the

normal tax regime instead of statement under final tax regime.

3. However, despite the imposition of minimum withholding tax @ 6%, the

Commissioners, Inland Revenue issued exemption certificates to taxpayers providing

services and falling under the ambit of section 153(1)(b) of the Ordinance. In

particular, the Commissioner, RTO, Karachi and Commissioner, LTU, Islamabad

issued, exemption certificates to Messrs LEOPARDS Courier and MessrsMobilink

respectively on 9-6-2009 and 8-8-2009. When the Commissioners, Inland Revenue,

RTO, Karachi, and LTU, Islamabad, were informed of the illegality in issuance of

exemption certificates, they withdrew the certificates on 5-8-2009 and 12-8-2009

respectively.

4. The ubiquitous maladministration of the Department further came to light

when F.B.R. issued Circular No.6 of 2009 (on 18-8-2009), stating that the status of

corporate sector companies rendering services remained unchanged even after the

amendment in section 153 of the Ordinance, and so the corporate sector companies

would remain subject to minimum tax @ 0.5% as provided under section 113 of the

Ordinance. Thereafter, the LTUs and RTOs again started issuing the exemption

certificates, including to Messrs Pakistan Mobile Communication Ltd., Islamabad,

reiterating that no tax would be deducted/withheld on payments made on account of

providing/rendering services.

5. The F.B.R. through e-mail dated 20-10-2010 was again informed of the

inaccurate computation of tax on service sector leviable under section 153(1)(b) of the

Ordinance, using the software available on F.B.R. website for filing of income tax

return for tax year 2010. Secretary (Withholding Tax), F.B.R., through letter

C.No.1(10)WHT/ 2006-Part-

III dated 1st November, 2010 clarified that the law did not allow to club income

on account of services rendered by professionals --- on which minimum tax @ 6%

had already been deducted --- with other sources of income for further taxation under

the normal tax regime.

6. Thereafter, the applicant filed Complaint No.719/LHR/IT(594)/ 1258/2010

alleging that the return form for tax year 2010 placed on F.B.R's. web portal was

faulty and erroneous. The Hon'ble FTO decided the complaint on 25-4-2011, directing

the F.B.R. for removal of defects in the return form placed on web portal, besides

retrieval of loss of revenue in service sector through appropriate measures.

7. As the applicant in the meanwhile continued to send repeated representations

through e-mails to the F.B.R., the Chief (ITP), F.B.R., through Letter

No.1(25)WHT/2009 dated 26th April, 2011, clarified that "the matter has been

examined again and it is ruled in supersession of earlier instructions issued through

Circular No.6 of 2009 that the tax deducted on payments made for rendering or

providing of services is to be treated as minimum tax and the taxpayers falling in the

ambit of section 153(1)(b) of the Ordinance shall file return of income instead of a

statement under Final Tax Regime." Additional Secretary, Revenue Division, also

clarified through statement published in daily Business Recorder dated 28-4-2011 that

"every person whether a company, Association of Persons (AOP) or individual

providing or rendering services will pay minimum tax @ 6% under section 153(1)(b)

of the Ordinance."

8. Commenting on the prevalent confusion on the issue, the applicant felt that

F.B.R. functionaries were either not fully aware of the changes made in section 153 of

the Ordinance, 2001, through the Finance Act, 2009, or were wrongly interpreting the

law with ulterior motives. He further alleged that the functionaries of F.B.R. by not

taking the applicability and enforcement of law seriously were quality of negligence,

inattention and arbitrariness in the discharge of their duties and responsibilities.

9. The complaint was sent on 8-6-2011 to the Secretary, Revenue Division, for

comments. In response, Mr. Muhammad Imtiaz, Secretary (Withholding Tax), F.B.R.,

filed comments through F.B.R's. Letter C.No.4(577)/TO-I/2011 dated 18th June,

2011, which were sent to the applicant for rejoinder, if

any. The applicant filed a rejoinder on 4-7-2011, stating that the F.B.R. had

accepted that Circular No.6 of 2009 dated 18th August, 2009 was issued solely to

benefit some blue-eyed taxpayers who obtained exemption certificates and avoided

the deduction of 6% minimum withholding tax on their gross receipts. The applicant

also claimed that F.B.R. had deliberately avoided to comment on the issues raised and

had wrongly construed that the applicant wanted to claim any refund.

10. During the hearing, the applicant contended that the functionaries of the

F.B.R. had deliberately mis-interpretered the provisions of section 153 of the

Ordinance as emended by the Finance Act, 2009. They had issued Circular No.6 of

2009 and the exemption certificates in order to benefit certain taxpayers. In support of

this allegation, he contended that a report was published on 28-4-2011 in the widely

circulated Business Recorder that the concerned F.B.R. functionaries had made a

commitment with mobile phone companies to change the withholding tax regime of

minimum tax @ 6% into an adjustable tax regime. He maintained that all the telecom

operators/ cellular companies were doing businesses of several hundred billion rupees

but were continuously showing operational losses. The applicant apprehended that by

making the minimum withholding tax @ 6% of gross receipts as an adjustable tax, the

public exchequer would be bearing a colossal loss of revenue as all the mobile

telephone companies would claim refund of the withheld amount of tax.

11. The applicant requested that F.B.R. be directed to initiate disciplinary

proceedings against its functionaries who had issued exemption certificates and

Circular No.6 of 2009. He also requested that loss of revenue had to be recouped

either by amending the tax return form for Tax Year 2010 or by asking the taxpayers

providing services to file revised returns on the new return form prescribed for Tax

Year 2011. The applicant also contended that many taxpayers particularly cellular

companies were still sending bills/invoices with a note that they were exempt from

withholding tax deductible @ 6% on gross receipts. Resultantly, no tax was being

withheld by many recipients of services causing a huge loss of revenue.

12. The DR, Mr. Asif Rasool, Secretary, F.B.R., raised legal objections by stating

that the Hon'ble FTO was not competent to decide the cases on the basis of

applications for suomoto investigations in the public interest. He, however, admitted

that the applicant had raised valid objections and stated that the mistakes made by

F.B.R. were later rectified through clarificatory letters. He stated that the income tax

return form for the year 2010 could not be legally amended/re-issued as the benefit

once given could not be withdrawn with retrospective effect. The DR also claimed

that the F.B.R. was considering other alternatives to recoup the loss of revenue caused

due to wrongly issued exemption certificates, Circular 6 of 2009 and faulty income

tax return form for the year 2010.

13. Dr. Muhammad Iqbal, Chief (ITP), F.B.R., who also

appeared as DR, admitted the maladministration by functionaries

of F.B.R. in issuing self-contradictory instructions and Circulars. The DR stated that many taxpayers had challenged the withdrawal of Circular No.6 of

2009 dated 18-8-2009 in the Lahore High Court, Lahore, and the matter being sub-

judice was out of the jurisdiction of Hon'ble FTO in terms of section 9(2) of the FTO

Ordinance, 2000.

14. The averments made and record produced has been examined. It is an admitted

fact that the F.B.R. through its letter C.No.1(6)WHT/2009 dated 4th July, 2009, had

issued guidelines to all the Director Generals of LTUs/RTOs in the country. The

F.B.R. also placed income tax return form (IT-2) with built in tax computation facility

for the year 2010 on its web portal which calculated the tax on service sector as

"minimum tax". The income tax form prescribed by the F.B.R. for tax year 2011 and

placed currently on its web portal also calculates the withholding tax deducted from

the service providers as a minimum tax.

15. The above clarifications circulated by the F.B.R. to its field formations are

sufficient proof that the amendment made in section 153 of the Ordinance through the

Finance Act, 2009 ousted all the NTN holders whether individuals, AOPs or

Companies providing services from Normal Tax Regime (NTR)/Final Tax Regime

(FTR) and brought them under the Minimum Tax Regime (MTR). The exemption

certificates issued by the Commissioners on the request of some corporate taxpayers

prior to issuance of Circular No.06 of 2009 dated 18-8-2009 were withdrawn when

the legal position was explained to the concerned Commissioners by the applicant.

Prima facie, it seems that the corporate sector providing services thereafter

approached the F.B.R. and Circular No.6 of 2009 dated 18-8-2009 was then issued,

ousting the corporate sector from Minimum Tax Regime of amended section 153 of

the Ordinance without withdrawing the Board's earlier clarifications issued through it

letter dated 4th July 2009 and Circular No.3 of 2009 dated 17th July, 2009.

16. The Exemption Certificates clearly were wrongly issued in the month of

July, 2009, when changed position of applicability of section 153(i)(b) was clear.

Clarification issued vide F.B.R.'s Circular/ Letter C.No.1(6)WHT/2009 dated 4-7-

2009 and Circular No.03 of 2009 dated 17-7-2009 were not followed while issuing

these Exemption Certificates. Moreover, an ambiguous clarification was issued

through Circular No. 6 of 2009 dated 18-8-2009 which was withdrawn on 26-4-

2011.

17. The objections raised by the DR regarding the matter being sub-judice in the

Lahore High Court, Lahore, or regarding the jurisdiction of Hon'ble FTO to

investigate the complaint in public interest are not legally tenable. No evidence has

been submitted to prove that the issue was sub judice before the Hon'ble Lahore High

Court, Lahore, prior to the filing of application by the applicant. Section 9(1) of the

FTO Ordinance, 2000, empowers the Hon'ble FTO to investigate, on his own motion,

any allegation of maladministration on the part of the Revenue Division or any tax

employee.

18. The DRs have admitted that the public exchequer suffered

losses because of issuance of Circular No.6 of 2009 dated 18-8-2009 and

the Exemption Certificates issued by the Commissioners of Inland Revenue all over

Pakistan. No measures were taken by F.B.R. to recoup the losses which according to

the applicant were several billion rupees because the corporate taxpayers were still

issuing bills to their customers with a printed note that they were exempt from the

deduction of withholding tax and the same was not being deducted by many service

recipients.

Findings:

19. In view of above, it is clear that the F.B.R.'s Circular No. 6 of 2009 dated

18-8-2009 was wrongly issued and the Commissioners Inland Revenues Issued

Exemption Certificates contrary to law and in departure from F.B.R.'s earlier

clarifications, which is tantamount to mal-administration as defined under section 2(3)

of the FTO, Ordinance, 2000.

Recommendations:

20. F.B.R. to--

(i) initiate appropriate action against officials who

approved/issued Circular No.6 of 2009 dated 18-8-2009;

(ii) initiate appropriate action against officials who issued

Exemption Certificates to unduly benefit the corporate entities;

(iii) ascertain the particulars and the amount of tax not withheld @ 6% from each

service provider;

(iv) take immediate measures to recover the loss of revenue, as per law;

(v) direct the concerned officials to take suitable action to ensure that the

taxpayer, including the cellular companies, issue bills/invoices without reference to

exemption from withholding tax; and

(vi) report compliance within 60 days.

C.M.A./284/FTO Order accordingly.

2013 PTD 2159 =2013 (108) TAX 164

[Federal Tax Ombudsman]

Before Dr. Muhammad Shoaib Suddle, Federal Tax Ombudsman

SECRETARY REVENUE DIVISION, ISLAMABAD

Versus

WAHEED SHAHZAD BUTT, ADVOCATE HIGH COURT Complaint No.286/LH R/IT (240)/577 of 2011, decided on 10th July, 2013.

(a) Establishment of the Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

----S. 9(1)---Jurisdiction, functions and powers of the Federal Tax Ombudsman---Scope---"Public interest"---Suo

motu notice in public interest by ombudsman---Necessity of complaint---Objection of the Department that "Federal

Tax Ombudsman could only assume jurisdiction if there was an aggrieved party", was misconceived---Allegations

of systemic maladministration were levelled against the functionaries of Federal Board of Revenue and the Federal

Tax Ombudsman took suo motu notice in public interest, under S.9(1) of the Establishment of the Office of Federal

Tax Ombudsman Ordinance, 2000---Investigation of the nature did not necessitate a complainant.

(b) Establishment of the Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

----S. 2(3)---Maladministration---Department contended that in the absence of mens rea in the

conduct of functionaries of Federal Board of Revenue, no disciplinary action was warranted against

them---Validity---Mens rea in proceedings before the Federal Tax Ombudsman was determined by

the attendant circumstances on the basis of balance of probability and not on the basis of

requirement of criminal law beyond reasonable doubt---Chain of transactions which could result in

loss of billions of rupees to the exchequer and a corresponding gain to the service provider

corporations could not be brushed aside as a bona fide error of judgment.

(c) Income Tax Ordinance (XLIX of 2001)---

----Ss.153 (1)(b), 153(6)(iii), 113 & 206---FBR Circular No.6 of 2009 dated 18-8-2009---FBR Circular C.No.196

WHT/2009 dated 4-7-2009---FBR Circular No.3 of 2009 dated 17-7-2009---S.R.O. 1003(I)/2001 dated 31-10-2011-

--Payments for goods, services and contracts---Tax on services---Minimum tax for service sector, corporate as well

as non-corporate---Minimum tax under Ss.153(1)(b)/153(6) of the Income Tax Ordinance, 2001, and after Finance

Act, 2001, Ss.153(1)(b)/153(3)(b) of the Income Tax Ordinance, 2001, was applicable in cases of all service sector

taxpayers, corporate as well as non corporate---FBR Circular No.6 of 2009 dated 18-8-2009 was based on wrong

and possibly motivated view of the law pertaining to minimum taxation under S.153 of the Income Tax Ordinance,

2001---FBR Circular No.3 dated 17-7-2009 was issued soon after the changes in S.153 of the Income Tax

Ordinance, 2001 were brought after enactment of Finance Act, 2009 under which 6% minimum tax was made

applicable to all taxpayers rendering services---Three illustrations provided in Circular No.3 covered corporate as

well as non-corporate taxpayers, wherein 6% tax deducted under S.153(1)(b) of the Income Tax Ordinance, 2001

was specifically categorized as minimum tax---Nothing was mentioned in Circular No.3 which had hinted, however

obliquely, at exclusion of the corporate sector from the purview of minimum taxation---Minimum taxation of all

service sector taxpayers was again re-affirmed in FBR Circular No.7 of 2001 when S.153 of the Income Tax

Ordinance, 2001 was re-cast, re-aligned and re-drafted to make it more comprehensible and easy to understand---

Earlier, Federal Board of Revenue through C.No.1(25)WHT/2009 dated 26-4-2011 superseded Circular No.6 and

clarified that 6% minimum tax applied to all taxpayers falling within the purview of S.153(1)(b) of the Income Tax

Ordinance, 2001 and thereby admitted that the contrary view expressed in Circular No.6 of 2009 was wrong.

(d) Income Tax Ordinance (XLIX of 2001)---

----Ss.153(1)(b) & 153(6)(iii)---FBR Circular No. 6 of 2009 dated 18-08-2009--Tax on services--Exemption

certificate issued by commission for minimum tax---Interpretation of statutes was the exclusive prerogative of the

courts---One may refer to the issuance of exemption certificates by the Commissioners of Income Tax to corporate

entities, especially Cellular Companies, deriving receipts from rendering services after the changes were introduced

in S.153 following enactment of Finance Act, 2009---Issue of such certificates was clearly illegal as after

introduction of minimum taxation of all service providers through Finance Act, 2009, 6% tax withheld became the

minimum tax below which there was no possible threshold---No possibility of refund of tax withheld at source

existed on payments made to service providers and a corporate entity was bound to pay such minimum amount of

tax---No justification existed for issuance of exemption certificates to corporate entities---When matter was brought

to their attention, the Commissioner immediately cancelled the exemption certificates which evidently triggered a

huge effort by the affected corporate entities who obviously wielded considerable clout in the Federal Board of

Revenue---Circular No.6 of 2009 was issued after few days which "clarification" was expressly designed to take

companies rendering services out of the purview of minimum taxation under Ss.153(1)(b)/153(6) of the Income Tax

Ordinance, 2001---No greater indictment of a government agency charged with the mobilization of revenue

desperately could be needed by the State than what it did by issuing Circular No.6 of 2009---After withdrawal of

said Circular further clarifications/Statements/S.R.Os. were issued by the Federal Board of Revenue on 26-4-

2011, 28-4-2011, 17-6-2011 and 1-7-2011---Secretary Inland Revenue, on 6-9-2011 confirmed that

Circular No.6 was wrongly issued---Chief Income Tax Policy, also stated (during the

hearing of the Review Application) that Circular No.6 of 2009 was unlawful and he had

signed that Circular under pressure---All these admissions and clarifications notwithstanding, S.R.O. No.

1003 dated 31-10-2011 was issued to grant exemption to the corporate sector from minimum tax by inserting

Cl.79 to Second Schedule of the Income Tax Ordinance, 2001---Federal Board of Revenue issued

Circular No.6 of 2009 without mandate.

2010 PTR 1 and 1993 SCMR 1232 rel.

(e) Income Tax Ordinance (XLIX of 2001)---

----Second Sched., Part-II, Cl.79 & S.153---FBR Circular No. 7 of 2011 dated 1-7-2011---S.R.O. 1003 dated 31-10-

2011---S.R.O. 1003 dated 31-10-2011 was issued inserting Cl. 79 in the Second Schedule of Income tax Ordinance,

2001 without getting retrospective approval of the amendment in S.153 of the Income Tax Ordinance, 2001 by the

Parliament through Finance Act, 2011---Only subsections of S.153 of the Income Tax Ordinance, 2001 were

'realigned to provide clarity without changing the taxation regime through Finance Act, 2011 as explained by

Federal Board of Revenue itself in Para 19 of Circular No.7 of 2011 dated 1-7-2011---No approval of the

Parliament had been sought through Finance Act, 2012 or Finance Act, 2013 for the purpose.

(f) Income Tax Ordinance (XLIX of 2001)--- ----Ss.153(1)(b), 153(6)(iii) & Second Sched., Part-II, Cl.79---FBR Circular No.6 of 2009 dated 18-8-2009---

Payments for goods, services and contracts---Tax on services---Exemption to corporate sector service providers

from minimum tax---Validity---Federal Board of Revenue acted beyond its jurisdiction exempting corporate sector

service providers from minimum tax---Federal Board of Revenue's act of issuing Circular No.6 of 2009, and then

inserting Cl. 79 in the Second Schedule to the Income Tax Ordinance, 2001 effectively amending the provisions of

S.153 of the Income Tax Ordinance, 2001 without approval of the Parliament smacked of improper motive, as also

inefficiency, incompetence and ineptitude---Federal Board of Revenue had no authority to issue S.R.Os./Circulars

which contradict the statutory provisions of laws---As no amendment in S.153 of the Income Tax Ordinance, 2001

was approved by the Parliament, insertion of Cl.79 in the Second Schedule to the Income Tax Ordinance, 2001,

changing the whole spirit of taxation regime, was clearly an act without jurisdiction---Bumpy and conflicting

sequence of Circulars and S.R.Os. leading to insertion of Cl. 79 in the Second Schedule of the

Income Tax Ordinance, 2001 through S.R.O. 1003 dated 31-10-2011 being wilful and mala fide

came under the definition of "maladministration"---Review application was rejected by the Tax

Ombudsman accordingly.

2010 PTR 1 and 1993 SCMR 1232 rel.

Muhammad Munir Qureshi, Advisor, for the Dealing Officer.

Waheed Shahzad Butt for the Authorized Representative.

Asrar Rauf, Senior Member, FBR, Dr. Muhammad Iqbal, Chief ITP, FBR, Aftab

Ahmed, then Chief ITP, FBR, Taj Hamid, Secretary IR (Budget), FBR, Dr. Aftab Imam,

Secretary, FBR, Khalid Aziz Banth, then Member DT for the Departmental

Representatives.

Dr. Ikram ul Haq, Advocate Surpeme Court, Rana Munir Hussain, General Secretary-

APTBA, Habib Fakhruudin, Ex-Member FBR Syed Pervaiz Amjad, Ex-Member FBR, for the

Amici Curie

ORDER

DR. MUHAMMAD SHOAIB SUDDLE (FEDERAL TAX OMBUDSMAN).---The applicant has filed a

petition seeking review of the Findings/Recommendations of the Hon'ble Federal Tax Ombudsman's in Complaint

No.286/LHR/IT(240)/577 of 2011 disposed of vide order dated 16-12-2011 as under:--

Findings:

In view of above, it is clear that the FBR Circular No.6 of 2009 dated 18-8-2009 was wrongly issued and the

Commissioner Inland Revenue issued Exemption Certificates contrary to law and in departure from FBR's earlier

clarifications, which is tantamount to mal-administration as defined under section 2(3) of the FTO Ordinance, 2000.

Recommendations: FBR to ---

(i) initiate appropriate action against officials who approved/issued Circular No. 06 of 2009 dated 18-8-2009;

(ii) initiate appropriate action against officials who issued

Exemption Certificates to unduly benefit the corporate entities;

(iii) ascertain the particulars and the amount of tax not withheld @ 6% from each service provider;

(iv) take immediate measures to recover the loss of revenue, as per law;

(v) direct the concerned officials to take suitable action to ensure that the taxpayers, including the cellular

companies, issue bills/invoices without reference to exemption from withholding tax; and

(vi) report compliance within 60 days."

2. The Deptt. did not implement the Recommendations of the Hon'ble FTO within the given timeframe. Rather,

it filed a Review Application dated 7-2-2012 before the Hon'ble FTO, raising the following issues:--

Preliminary Submissions.

(1) The Hon'ble Federal tax Ombudsman was not competent to hear and investigate public interest complaints

such as the one filed by the complainant.

(2) Only an aggrieved person could file a complaint before the Hon'ble FTO and the complainant did not fall in

this category.

On Facts.

(1) No mens rea was evident in the conduct of FBR functionaries and therefore no disciplinary action was

warranted against them.

(2) The Hon'ble FTO had erred in the understanding of section 153(1)(b) along with its three provisions. The

third proviso related to Clause (iii) of subsection (6) only.

(3) The import of the word "further" in the second proviso and its absence in the third proviso was not fully

comprehended by the Hon'ble FTO.

(4) The Review was occasioned because of a complexity of construction, the true import of which escaped the

Hon'ble FTO."

3. The following officials of the Federal Board of Revenue were examined to ascertain the facts and also to

determine their role in the matter:--

(i) Mr. Taj Hamid, then Secretary IR Judicial, FBR, and presently Secretary IR (Revenue Budget)

(ii) Mr. Aftab Ahmad who issued FBR Circular No. 6 on 18-8-2009

(iii) Mr. Khalid Aziz Banth, then Member DT

(iv) Mr. Asrar Rauf, Additional Secretary Revenue

(v) Dr. Muhammad Iqbal Chief ITP

4. As regards the preliminary objection that Mr. Waheed Shahzad Butt, the complainant, is not an aggrieved

person and the Hon'ble FTO can only assume jurisdiction if there is an aggrieved party, this objection is

misconceived. Mr. Waheed Shahzad Butt levelled allegations of systemic maladministration against the FBR

functionaries and the Hon'ble FTO took suo motu notice in public interest, under section 9(1) of the FTO Ordinance.

An investigation of this nature does not necessitate a complainant.

5. On facts, it has been contended by the department that in the absence of mens rea in the conduct of FBR

functionaries, no disciplinary action is warranted against them. Mens rea in proceedings before the Hon'ble FTO is

determined by the attendant circumstances on the basis of balance of probability, not on the basis of criminal law

requirement of beyond reasonable doubt. The chain of transactions which resulted in loss of possibly billions to the

exchequer and a corresponding gain to the service provider corporations cannot be brushed aside as a bona fide error

of judgment.

6. The Review Application is signed by Mr. Taj Hamid, Secretary IR (Budget). He stated that he simply signed

the Review Application in a mechanical way. The Application was prepared by other officials. When confronted

with the tenor of the Review Application, he tendered an unconditional apology and held out the assurance that he

would never use inappropriate language in future.

7. Mr. Aftab Ahmad, the Chief ITP, stated that he signed the FBR Circular No. 6 on 18-

8-2009 under pressure from Member DT, Mr. Khalid Aziz Banth. He did not fully grasp

the significance of the Circular but just signed it. He stated that Mr. Khalid Aziz Banth had

made up his mind that companies deriving income from services ought not be subjected to

minimum tax @ 6% under section 153(1)(b) of the Ordinance. He remained upset by the

act of signing the Circular and ultimately on 26-4-2011 withdrew the notification. Also, he

was told by Mr. Banth that his predecessor had already approved the issuance of the

Circular. This assertion however turned out to be false.

8. Mr. Asrar Rauf, Addl. Secretary Revenue, said that the 6% minimum tax was never applicable to companies

rendering services. He said that it would not be in the ultimate interest of revenue as taxing the mobile phone

companies would lead to flight of capital from Pakistan. In his opinion an adjustable tax over the year would serve

Pakistan better.

9. Mr. Khalid Aziz Banth, then Member DT, made a written deposition dated 24-9-

2012. He stated that 1st Proviso to section 153(6) had excluded companies rendering

services (other than listed companies) from FTR and had also placed them out of the

Minimum Tax Regime. The 2nd proviso related to media services which were similarly

excluded. The 3rd proviso related to part (iii) of section 153(6) and covered the resident,

non-corporate sector. The corporate sector was already subject to minimum tax @ 1% of

receipts through section 113 of the Ordinance when the third proviso was added through

Finance Act, 2009. Therefore a second minimum tax under section 153(6)(iii) could not

relate to the corporate sector.

10. The Department explained that the minimum tax measure was revenue neutral and no significant tax yield

was projected through it.

11. The first point that needs to be resolved is the import of section 153(6)(iii). The 3rd Proviso clearly states

that sub-clause (b) of subsection (1) of section 153 shall be the minimum tax. Mr. Khalid Aziz Banth in his

statement maintained that this did not relate to the corporate sector. This contention is not based on any valid

argument except that section 113 makes the services performed by the corporate sector subject to a minimum tax @

1% of receipts. However section 113 applies only under certain conditions when no tax is payable by an individual,

an AOP or a company. If minimum tax above 1% is leviable, then section 113 is not applicable. Mr. Banth has also

sought the shelter of Circular No.3 of 2009 and the Finance Act of 2011. Both do not support the issuance of

Circular No. 6. This office is concerned with the motive of Mr. Banth in pressurising his

subordinates to issue Circular No. 6. The attendant circumstances tend to show that he was

doing this for improper motives. The service providers were first issued certificates of exemption by

Commissioners, which were withdrawn when the FBR realized that the law did not provide for such exemptions,

after Mr. Waheed Shahzad Butt lodged a complaint before the concerned Commissioners alleging huge loss of

revenue being allowed to certain corporate sector service providers. Mr. Butt also lodged a Complaint No. 1258 of

2010 in the FTO Office.

12. DRs Mr. Asif Rasool, Secretary FBR, and Dr. Muhammad Iqbal Chief FBR, accepted that mistakes had been

made while issuing Circular No. 6.

13. The Hon'ble FTO decided to obtain the assistance of the following amici curiae:--

(i) Dr. Ikram ul Haq Advocate Supreme Court, and International Tax Consultant.

(ii) Rana Munir Hussein, Advocate, General Secretary Pakistan Tax Bar Association.

(iii) Mr. Habib Fakhrudddin, FCA, Consultant (formerly Member Tax Policy, CBR).

(iv) Syed Pervaiz Amjad, Consultant (formerly Member Audit, CBR).

14. Their input was sought to the following four questions:--

(i) Whether FBR Circular No. 6 of 2009, dated 18-8-2009 effectively negates minimum taxation of service

sector receipts @ 6% of gross receipts as envisaged in the amendment made to second proviso to subsection

(6) of section 153 of the Income Tax Ordinance, 2001 through Finance Act, 2009?

(ii) Whether legislative intent in the amendments made in section 153 through Finance Act, 2009 is to

charge minimum tax on income/loss declared by all service providers @ 6% of gross receipts?

(iii) Whether FBR had the authority to interpret statutory provisions through 'Clarifications', 'Circulars'

and 'S.R.Os.'?

(iv) Whether the series of Clarifications/Circulars/S.R.Os. issued by FBR between 1-7-2009 and 31-10-

2011 establish mens rea on the part of FBR functionaries?

15. Rana Munir Hussein, Secretary General, All Pakistan Tax Bar Association was of the view that Circular No.

6 was not for interpreting the law but clarifying it as it pertained to companies rendering services. He said that

section 206 of Income Tax Ordinance, 2001 expressly empowered the FBR to issue Circulars to provide guidance to

the taxpayers as well as the functionaries of FBR. He pointed out that there was no such provision in the repealed

Income Tax Ordinance, 1979. The purpose of the provision was to ensure consistency in the administration of the

statute. Being a special law it would prevail over the general law. He said that by issuing Circular No. 6, FBR had

actually clarified the position with regard to section 153(6) of the Ordinance after amendments were made through

Finance Act, 2009. Had the Circular not been issued taxpayers and FBR functionaries would have remained

confused. Some taxpayers would have seen the levy as a Final Tax, others as an Adjustable Tax, and still others as a

Minimum Tax. FBR had only clarified matters and had not interpreted any law.

16. Rana Munir Hussein said that he was of the considered view that earlier Circulars (C.No.1(6)WHT/2009

dated 4-7-2009 and Circular No.3 of 2009 dated 17-7-2009) and S.R.Os. issued after Circular No.6 for corporate

taxpayers' income tax returns (S.R.O. 1158(I)/2010 dated 30-12-2010 and S.R.O. 850(I)/2011 dated 17-9-2011 to

notify electronic returns for Tax Years 2010 and 2011) were illegal because they did not support the law pertaining

to levy of minimum tax as enacted by the Parliament.

17. Rana Munir Hussein's answer to Question No. (iii) was that while FBR did not have the power to

interpret law, it had been empowered, through section 206 of the Income Tax Ordinance, 2001, to

issue Circulars to clarify the law for taxpayers and tax functionaries alike.

18. He said that there was an interesting feature to the charge of minimum tax in that a Proviso had been made

the charging section to levy minimum tax which was against the scheme of law incorporated in the Income Tax

Ordinance, 2001. He said that the correct way to levy tax was through an independent Section, not a Proviso.

19. Coming to Question No. (iv) as to whether the series of conflicting Clarifications issued by FBR showed

mens rea of the functionaries involved, Rana Munir Hussein said that in his view mens rea was not involved when

there was an honest difference of opinion or a change of opinion on a subject. Rather, mens rea was present only in

the case of intentional, wilful action to do something that was not the right thing to do. He said in the present case

this was not so and the FBR viewpoint with regard to minimum tax had simply undergone a change since minimum

tax was levied through Finance Act, 2009 and certain functionaries chose to differ from those who held the contrary

view.

20. Mr. Habib Fakhruddin, FCA, Consultant, formerly, Member Tax Policy, CBR, said that rather than going

into interpretation, which was an accepted prerogative of the Courts, what was relevant to this discussion was

whether the series of conflicting Clarifications/ Circulars issued by FBR amounted to maladministration by the

functionaries involved. He said that he wanted to draw attention to the concluding paragraph of the Deptt. Review

Application. In that paragraph, which was akin to a prayer, the Deptt. asserted that the issuance of Circular No. 6

was valid and FBR had done nothing wrong in the matter. However, it was interesting that FBR had considered it fit

to file a Review Application after it recognized that the issuance of Circular No.6 had been a mistake. He further

pointed out that as against the single Circular No. 6 that asserted that there was to be no 6% minimum tax on

companies rendering services, there were a host of other Circulars and Clarifications that affirmed quite the

opposite. He said that it was important to find out why this was so. He pointed out that initially, after changes were

made in section 153 through Finance Act, 2009, a Commissioner issued exemption certificates to some corporate

service providers. The certificates were withdrawn after the Commissioner was told that the law with regard to

taxation of services sector income having been changed through Finance Act, 2009, no exemption from tax was

available for such taxpayers. Within a few days, however, Circular No. 6 was issued by FBR. This again

made it possible for corporate taxpayers rendering services to obtain exemption certificates. It was

thus obvious that certain taxpayers with influence in the corridors of power were behind the move

to get Circular No. 6 issued.

21. Mr. Habib Fakhruddin said that while it was important to see whether companies rendering services attracted

levy of minimum tax or not, it was equally important to ascertain what would be the mode of levy of minimum tax

on non-corporate taxpayers rendering services. He said that the opinion held by some FBR functionaries that the

minimum tax was a final discharge of tax liability and could not be clubbed with other-source income was, in his

words, a criminal view of the levy because it should be obvious to all, and especially FBR functionaries, that after

the amendments made in section 153 of the Ordinance through Finance Act, 2009, the minimum tax levy could not

fairly be visualized as a final tax. Rather, after clubbing of income etc. the tax rate could go up to 25% (non-

corporate cases) or even higher (35% in corporate cases) and the 6% threshold was only the minimum tax liability

under sections 153(1)(b)/153(6) of the Ordinance.

22. Mr. Habib Fakhruddin pointed out that it was important to see what was the legislative intent behind such

taxation moves. In order to do so, the first post-budget Circular issued by FBR was very important. He said that the

first such Circular made it clear that minimum tax did apply to corporate entities rendering services and that the

legislature intended it to be so levied. He said that a detailed budget brief invariably accompanies a taxation measure

giving the pros and cons of the measures and forms the basis of any FBR Circulars. FBR Circular No. 3 relied

on such a budget brief and correctly explained the law after amendments made in section 153

through Finance Act, 2009. The subsequent Circular No. 6 was an odd, Circular, not based on a

budget brief. Furthermore, the notifications for corporate returns for Tax Year 2010 and Tax Year

2011 were in line with Circular No.3 that correctly explained the minimum tax levy and were

against Circular No. 6 and its distorted view of minimum tax. It was significant that the legislature

totally disregarded Circular No. 6 of 2009 while approving tax returns for Tax Years 2010 and 2011

for corporate taxpayers.

23. According to Mr. Habib Fakhruddin, the changes introduced in a re-drafted section 153 through Finance Act,

2011 were significant in that there was no longer any doubt regarding minimum tax on companies. Circular No. 7

issued in the wake of Finance Act, 2011 made it clear that the purpose of re-designed section 153 was to provide

clarity and re-align existing provisions without changing the taxation regime. It is thus evident that the legislature

visualized the minimum tax levy to be fully applicable in the case of companies.

24. The issuance of S.R.O. 1003(I)/2011 dated 31-10-2011 to undo the minimum tax levy for companies was

very revealing. Whenever

an exemption from tax is intended, the start date for availability of exemption is specified. However, in S.

R.O. 1003(I)/2011 dated 31-10-2011 no start date was specified. That meant the exemption would be available

from the date that the S.R.O. was issued, i.e. 31-10-2011.

25. All this suggests that with regard to charge of minimum tax on corporate service providers, there was

something seriously amiss with FBR. It appeared to be adrift, without any clear long term policy or coherent plan for

effective resource mobilization. The net result of the repeated FBR somersaults and flip flops with regard to levy of

minimum tax on companies left taxpayers more confused than ever and the situation has not been properly resolved

to this day.

26. Syed Pervaiz Amjad, FCA, Consultant, formerly, Member Audit, CBR, was of the view that new taxation

measures were generally meant to seek increase in revenues. However, Circular No. 6 went against this

objective and was a strange 'Clarification' of the law after changes were made in section 153

through the Finance Act, 2009. In his view, Circular No.6 gave unwarranted relief from minimum

tax to certain blue-eyed taxpayers. The withdrawal of Circular No. 6 by Mr. Aftab Ahmed who also

issued the earlier Circular was, in his view, proof of intentional wrong done by FBR functionaries

that was directly linked to the resultant losses in revenue which ran into billions. In his view, mens

rea of FBR functionaries was clearly established by the sequence of events following amendments

made in section 153 of the Ordinance through Finance Act, 2009. He disagreed with the FBR view that the presence

of an aggrieved person was necessary before the Hon'ble FTO could start investigation in a matter. He said that

Hon'ble FTO could intervene whenever FBR's policies adversely affected more than one taxpayer. Information

leading to an investigation could come to him from any source.

27. Dr. Ikram ul Haq, Advocate Supreme Court, said that the statute was required to be read as a whole and not

piecemeal. He said that the rationale for levy of alternate minimum tax was clear. So many inflated expenses are

booked by taxpayers when filing returns that the tax base is drastically eroded and tax yield plummets to an

intolerably low level. The only way out of this predicament is to resort to measures like enactment of alternate

minimum tax. He further said that instead of creating consistency by issuing Circulars, FBR was actually creating

inconsistency. He said that in the presence of back up material it was not possible to presume that FBR was unaware

that minimum taxation applied to the corporate sector. FBR made repeated mistakes in matters pertaining to levy of

minimum tax and it was just not plausible that only one Circular was correct (i.e. Circular No.6) and all other

Circulars/ Clarifications (about twelve in number) were wrong.

28. Summing up, three of the four amici curiae unequivocally held that minimum tax under sections

153(1)(b)/153(6), and, after Finance Act, 2011, sections 153(1)(b)/153(3)(b), was for all service sector

taxpayers, corporate as well as non corporate. All three affirmed that Circular No. 6 was based on a wrong

and possibly motivated view of the law pertaining to minimum taxation under section 153. They pointed out that

Circular No.3 dated 17-7-2009 was issued soon after the changes in section 153 were brought on the statute after

enactment of Finance Act, 2009 under which 6% minimum tax was made applicable to all taxpayers rendering

services. The three illustrations provided in Circular 3 covered corporate as well as non-corporate taxpayers,

wherein 6% tax deducted under section 153(1)(b) was specifically categorized as minimum tax. There was not a

word in Circular No. 3 that hinted, however obliquely, at exclusion of the corporate sector from the purview of

minimum taxation. Minimum taxation of all service sector taxpayers was again re-affirmed in Circular No.7 of 2011

when Section 153 was re-cast, re-aligned and re-drafted to make it more comprehensible and easy to understand.

Earlier, FBR through C.No.1(25)WHT/2009 dated 26-4-2011 superseded Circular No 6 and clarified that 6%

minimum tax applied to all taxpayers falling within the purview of section 153(1)(b) of the Ordinance and thereby

admitted that the contrary view expressed in Circular No.6 of 2009 was wrong.

29. It is evident that FBR issued Circular No. 6 of 2009 for which it had no-mandate. The

interpretation of statutes is the exclusive prerogative of the courts as held by the Supreme Court of Pakistan in the

Central Insurance Company case 1993 SCMR 1232 = 1993 PTD 766. In order to better comprehend FBR's actions,

one may refer to the issuance of exemption certificates by certain Commissioners of Income Tax to corporate

entities, especially Cellular Companies, deriving receipts from rendering services after the changes were introduced

in Section 153 following enactment of Finance Act, 2009. The issuance of such certificates was clearly illegal as

after introduction of minimum taxation of all service providers through Finance Act, 2009, the 6% tax withheld

became the minimum tax below which there was no possible threshold. There was no possibility of refund of tax

withheld at source on payments made to service providers and a corporate entity was bound to pay this

minimum amount of tax. There could thus be no justification for

issuance of exemption certificates to corporate entities. When the matter was brought to their attention, the

Commissioners immediately cancelled the exemption certificates. This evidently triggered a huge effort by the

affected corporate entities who obviously wielded considerable clout in the FBR. Within a few days, Circular No. 6

was issued. This so called 'Clarification' was expressly designed to take companies rendering services out of the

purview of minimum taxation under sections 153(1)(b)/ 153(6). There could be no greater indictment of a

government agency charged with the mobilization of revenue revenues desperately needed by the

State than what it did by issuing Circular No.6.

30. The Findings/Recommendations given on 16-12-2011 were on the basis of maladministration discerned

through in-depth investigation. All the issues relevant to a just and fair decision of the Review Application have

again been thoroughly re-examined. The averments of the concerned officials of the FBR and the departmental

representatives have been taken. Inputs of four amici curiae have also been appraised and are grateful

acknowledged.

31. After withdrawal of Circular No. 6 of 2009, further Clarifications/Statements/S.R.Os. were issued by the

FBR on 26-4-2011, 28-4-2011, 17-6-2011, and 1-7-2011. On 6-9-2011, Secretary IR, confirmed in a hearing at the

FTO Secretariat that Circular No. 6 was wrongly issued. Mr. Aftab Ahmad, Chief Income Tax

Policy, also stated (during the hearing of the Review Application) that Circular No. 6 of

2009 was unlawful and he had signed that Circular under pressure. All these admissions and

clarifications notwithstanding, on 31-10-2011, S.R.O. No. 1003 was issued to grant exemption to the corporate

sector from minimum tax by inserting Clause 79 to the Second Schedule of the Income Tax Ordinance, 2001.

32. The superior judiciary has declared any S.R.Os./Circulars for inserting Clauses in the Second Schedule of

Income Tax Ordinance, 2001 against the express provisions of law as unlawful. The Hon'ble Supreme Court in a

case reported as 2010 PTR 1 (S.C.Pak) in Civil Appeals Nos.1525 to 1536 and C.P. No.143-L of 2008, endorsing

the decision of Lahore High Court dated 20-6-2008, had declared a similar S.R.O. as null and void. The FBR vide

S.R.O. No. 847(I)/2007 dated 22-8-2007 had inserted Clause 46-B in exercise of its delegated powers. The Supreme

Court, referring to its earlier judgment (1993 SCMR 1232), gave the following verdict:-

"Having gone through the available record as well as judgment of the High Court wherein

the above aspect of the case has been attended to at length by examining the addition of items Nos.46-A and 46-

B, in the Second Schedule vis-a-vis the provisions of section 153(6-B) reproduced hereinabove, we find no ground

to differ with the opinion of the learned High Court, since perusal of Clause item 46-B clearly indicates that it has

travelled beyond the scope of Section 153(6-B) of the Ordinance. Therefore, we are of the considered opinion that

addition of Clause 46-B by amending the Second Schedule in the exercise of delegated powers was not permissible.

The judgment of the High Court is plainly correct to which no exception can be taken".

In its judgment 1993 SCMR 1232, the Hon'ble Supreme Court had observed that interpretation made by FBR

through the Circulars was not in conformity with the provisions of Income Tax Ordinance, 2001, and that FBR was

not a judicial or quasi judicial forum to interpret the law:

"Any interpretation placed by the CBR on statutory provisions

can not be treated as a pronouncement by a forum competent to adjudicate upon such a question judicially or

quasi-judicially."

33. It is quite intriguing that S.R.O. No. 1003 dated 31-10-2011 was issued inserting Clause 79 in the Second

Schedule without getting retrospective approval of the amendment in section 153 by the Parliament through Finance

Act, 2011. Only subsections of section 153 were 'realigned to provide clarity without changing the taxation regime'

through Finance Act, 2011 as explained by FBR itself in para. 19 of Circular 7 of 2011, dated 1-7-2011. Nor has the

approval of the Parliament been sought through Finance Act, 2012 or Finance Act, 2013.

34. It is evident that FBR acted beyond its jurisdiction in exempting corporate sector service providers from

minimum tax. The FBR's act of issuing Circular No. 6 of 2009, and then inserting Clause 79 in the Second Schedule

effectively amending the provisions of section 153 of the Ordinance without approval of the Parliament smacks of

improper motive, as also inefficiency, incompetence and ineptitude. The FBR has no authority to issue

S.R.Os./Circulars which contradict the statutory provisions of tax laws, as held by the Hon'ble Supreme Court. As

no amendment in section 153 was approved by the Parliament, the insertion of Clause 79 in the Second Schedule,

changing the whole spirit of taxation regime, was clearly an act without jurisdiction.

35. The bumpy and conflicting sequence of Circulars and S.R.Os. leading to

insertion of Clause 79 through S.R.O. 1003 dated 31-10-2011 being wilful and mala fide

comes under the definition of mal-administration in terms of section 2(3) of the

F.T.O. Ordinance, 2000. 36. The Review Application is accordingly rejected in above terms, except that as a related aspect of

Recommendation (iv) [para 1] is sub judice in the Hon'ble Lahore High Court, its implementation will be taken up in

due course, in the light of final determination of the matter by the superior judiciary.

CMA/142/FTO Application rejected.

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You are here: Home » Taxation » Pakistan » WHT on service providers: FBR mulling over rate reduction to one

percent

WHT on service providers: FBR mulling over rate reduction toone percent

The Federal Board of Revenue (FBR) has decided to reduce 6 percent

withholding tax on service providers to one percent minimum tax under

section 153 (1) (b) of the Income Tax Ordinance 2001. Sources told

Business Recorder here on Thursday that the FBR had sought opinion of

the Law and Justice Division for making 6 percent minimum tax as

adjustable. Law Division has informed the FBR that the Board should go to

the Parliament for obtaining approval.

The FBR cannot itself change minimum tax into adjustable tax which was approved by the Parliament. According

to sources, FBR is examining pros and cons of the proposal before notifying reduction from six to one percent on

the minimum tax for service providers in the light of the viewpoint of the Law and Justice Division. The present

status of the proposal is that the FBR has obtained the approval from the Ministry of Finance for issuance of

notification. So far, the FBR has yet not issued the notification for reducing 6 percent withholding tax on all service

providers to one percent minimum tax under section 153 (1) (b) of the Income Tax Ordinance 2001.

Sources said that the FBR is planning to reduce 6 percent withholding tax on all service providers covered under

section 153 (1) (b) of the Income Tax Ordinance 2001 to one percent minimum tax, causing massive revenue loss

of around Rs 21 billion to the national exchequer.

The FBR is seriously considering to reduce withholding tax on service providers from 6 percent to one percent

minimum tax, which may cause huge revenue loss to the national exchequer. The FBR has worked out the

revenue loss following a proposal of a private sector to make 6 percent withholding tax on service providers

adjustable instead of minimum tax. The FBR is working on a proposal to change the withholding tax regime for

service providers under section 153 of the Income Tax Ordinance 2001. In case of minimum one percent tax on

certain categories of companies under section 153 of the Ordinance 2001, it would result into massive revenue

loss to the tune of Rs 21 billion. Some of the service providers having status of corporate taxpayers are already

subjected to one percent turnover tax under section 113 of the Income Tax Ordinance, 2001.

When one percent turnover tax is applicable on a sector, it is yet not clear that how the same sector would again

be subjected to one percent minimum tax as compared to other sectors subjected to 6 percent withholding tax

under section 153 of the Income Tax Ordinance 2001. The idea is not to make existing 6 percent tax as adjustable

for these companies but to make it minimum tax causing loss to the national exchequer.

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PPP AAAPakistan Telecommunication Authority

Annual Report 2013-2014 23

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Figure 2 : Telecom Revenues

Note: Revenues for PTCL, Telecard, Witribe, Worldcall, Wateen and CVAS licenses for

FY2014 are estimated.

Revenues of telecom operators can be divided into voice and data. During FY2014 data

revenues of telecom sector were Rs. 90 billion, registering a growth of 24.6%, which is

more than double the growth of 11.66% during FY2013. In particular, data revenues

of cellular mobile segment have shown a growth of 47.4%, reaching Rs. 47 billion

during FY2014. This is a healthy sign in the wake of 3G/4G services in the country

Telecom Revenues

Annual revenues from telecom sector reached to an estimated Rs. 465 billion during

FY2014, up from Rs. 440 billion last year, and registering an annual growth of 5.6%.

Annual revenue growth of 5.6% during FY2014 has been slower than the growth of

7.4% in FY2013. The cellular mobile segment has the largest share (69.7%) of total

telecom revenues, followed by Local Loop (18.9%) and LDI (8.7%). Over the years,

cellular mobile's share in total revenues has increased from 63.6% in FY2009 to the

current level of 69.7%; comparatively, LDI segment's share has declined to 8.7% from

14.4% in FY2009 due to low international trafc. Telecom operators are continuously

striving for new avenues of revenue growth by introducing innovative packages and

value added services according to consumer demands, market trends and

advancement in technology/solutions. Therefore, despite slow economic growth and

low purchasing power of vast majority of population, revenues of telecom sector are

registering positive growth, albeit high revenue growth has not been witnessed over

the last few years.

PPP AAAPakistan Telecommunication Authority

Annual Report 2013-201424

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and shows that the use of internet and data services on the cellular mobile has been

increasing. CMOs will also have more sustainable revenue streams in future. Overall,

the share of data revenues in total telecom revenues has increased to 19.3% during

FY2014 compared to 16.4% last year. Similarly, cellular data revenue share has also

increased to 10.1% from 7.3%. The data revenue trends are expected to take further

momentum in coming years with an increasing use of smart phones, iPads and

laptops in the society and an uptake of Over the Top (OTT) services, replacing

traditional voice communication.

Figure 3 : Data Revenues of Telecom Sector

Note: Estimated data Revenues of LL and LDI

Telecom Contribution to National Exchequer

Telecom sector is a signicant source of revenue generation for the national

exchequer. During the last three years, telecom sector was contributing an average of

Rs. 124.8 billion annually to the national exchequer in terms of taxes, regulatory fees,

initial and annual license fees, activation tax, and other charges. During FY2014,

telecom sector has contributed an all time high Rs. 243.8 billion, registering a growth

of 95.8% over the last year. This jump in contribution is due to auction of 3G and 4G

cellular mobile licenses in April 2014. PTA has deposited to the Government Rs. 96.5

billion out of the total value of US$ 1.11 billion of the NGMS spectrum auction and the

remaining amount of US$ 147.5 million along with markup @ LIBOR+3% per annum

will be paid by the operators in equal annual installments in the next ve years.

PPP AAAPakistan Telecommunication Authority

Annual Report 2013-2014 25

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Figure 4 : Telecom Sector Contribution to National Exchequer

* GST and other taxes for 2013-14 are estimates.

Source: Federal Board of Revenue and Pakistan Telecommunication Authority.

Note: PTA's contributions comprise of all its receipts including Initial and Annual License Fees, Annual

Radio Frequency Spectrum Fee, Annual Spectrum Administrative Fee, USF and R&D Fund

Contributions, APC for USF, Numbering Charges, License Application Fee, etc.

Others include custom duties, WHT and other taxes.

to average GST of about 16% and 10% WHT in other sectors. Telecom sector of

Pakistan is considered amongst the highly taxed sectors in comparable countries.

Rationalization of taxes on telecom services can positively contribute to the telecom

sector growth and contribution in the economy.

stEffective from 1 July, 2014, Federal Government has reduced GST/FED on telecom

services from 19.5% to 18.5% and Withholding Tax (WHT) from 15% to 14%. This tax

reduction is applicable to Islamabad, Balochistan, FATA, AJK and Gilgit Baltistan

regions. The provincial tax departments of Punjab, Sindh and Khyber Pakhtunkhwa

did not reduce taxes. Telecom sector is subject to higher GST and WHT rates compared

Telecom Investment

The Government liberalised investment policies allowing foreign investors in the

telecommunications sector to own all the shares in a company and repatriate all of the

prot. Such policies have attracted signicant FDI. During FY2014, cellular mobile

operators have invested US$ 1,789.7 million on account of acquiring 3G and 4G

spectrum and deployment of advanced telecommunication networks.