BUDGET PROPOSAL UNDER INCOME TAX FOR THE YEAR 2005-2006
BUDGET PROPOSAL UNDER INCOME TAX FOR THE YEAR 2005-2006
By A. K. Shamim, Advocate, Karachi
I have the honour to submit the following Income Tax Proposals for your favourable consideration to be adopted in Federal Budget for the year 2005-2006.
Establishment of Industrial Security Force:
It is suggested that Industrial Security Force be established in line with Airport Security Force to control law and order in all the Industrial Zones in Pakistan with a view to provide security and safety to the Industrialist and also those intend to establish new industries, Industrial zone of Nooriabad 30 miles away from Karachi as well as other Industrial Zone in Hub and other parts of Balochistan are under the control of notorious gangs of criminals, Dacoits and Kidnaper and in the present days no industrialist have courage to face such situation and there is no industrialization in large Industrial Zones in Pakistan.
It is proposed that Industrial Security Force be established in line with Airport Security Force to be posted in all the Industrial Zone in Pakistan this scheme shall create jobs to the retired persons from forces, and others. This scheme shall create confidence among the Industrialist of the country and the expenditures thereon be adjusted by levy of Security Surcharge on Industries. Rate is proposed One Rupee per Square Yard per annum and on Open Industrial Plots @ 0.50 paisa per Sq. Yd.
This measures be taken with the .co-operation of the provincial Government as well as Ministry of Defence.
Capital Investment in New Industrial Units:
It is suggested that Capital investment in New Industrial Units and undertakings may not be probed with a view to bring Black money and other hidden money in circulation for the growth of Economy, Industrialization and job opportunities to technical and non-technical workers to be employed in new Industrial Units.
It is out of place to mention here that Black money or other money is invested in unproductive uses under the cover of artificial remittances without such. Remittances are arranged through Money Changers.
It is proposed that the capital investment in new industries may not be probed and entire capital investment in new Industrial Units/Undertakings by Individual/AOP or companies be accepted without enquiry of its sources with a view to promote Industrial activity.
Rate of Corporate Tax.---Rate on Private Limited Companies be reduced to 35%. It is suggested that payment of higher salaries/remuneration to the Directors be checked and restricted to 15% of the Income and also the uses of Vehicles and maintenance by the directors and depreciation thereon, which may not be allowed 10% or 15% of Income. Companies showing losses for the last 2 years should be discouraged by system of examination of accounts through panel consisting of one Commissioner of Income-tax, Chartered Accountant and one Member or nominee of Chamber of Commerce or Trade bodies and the activities and income of the Directors of the company be enquired through strict audit.
Tax incentive for senior citizens clause (1A) of Part III reduction in tax liability of the IInd Schedule:
The restriction of income limit of Rs.3,00,000 in clause (1A) of Part III of the IInd Schedule available for tax benefit is unjust. It is proposed that restrictions of income limit be removed and to allow 50% rebate of tax on their returned income.
Taxability of Interest or Profit:
Section 80B read with para. CC of Part I of First Schedule to the Repealed Ordinance provided that when any amount is received by or accrues or arises or is deemed to accrue or arise to an individual, unregistered firm, association of persons in respect of interest or profit on: --‑
(i) National Saving's Regular Income Certificates and monthly income savings accounts scheme;
(ii) on account or deposit maintained with any banking company or any financial institutions; and
(iii) bonds, Certificates, Debentures, Securities on instruments of any kind issued by any banking company or any company.
Were subject to tax @ 10% of such income and tax so deducted was full and final discharge.
It is submitted that prior to levy of 10% tax on profit earned on encashment of DSC exempt and the rate of return was more than 30% per annum.
The Income Tax Ordinance, 2001 however, has not only done away with the exemption but has removed the profit on debt from Presumptive Tax Regime and now such profits is clubbed with other income and taxed at normal rate.
This has also effected widows, pensioners who had invested their savings and Provident Fund in these schemes. Rates of profits on debt have been reduced and also have to pay taxes at higher rates on such income.
Amount received as a Loan, Advance, deposit or Gift otherwise than by Crossed Cheque/Payees Account.
Subsection (3) of section 39 provides that any amount received as a loan, advance, deposit or gift by a person in a tax year from another person (not being a banking company or financial institution) otherwise than by a crossed cheque drawn on a bank or through a banking channel . from a person holding a National Tax Number shall be treated as income chargeable to tax under the head "Income from other Sources" for the tax year in which it was received.
The existence of condition to receive loan, advance, deposit or gift through crossed cheque is impractical and illogical.
The words "otherwise than by a crossed cheqe drawn on a bank or through a banking channel from a person holding a National Tax Number be substituted with the words "otherwise than by any prevalent mode of banking transaction". Considering present Information Technology and E. Commerce.
(a) Tax on Dividends
There is no concept of group taxation in Pakistan and therefore each company is treated as a separate taxpayer even though it may be a wholly owned subsidiary. When a company declares a dividend and the recipient is not a listed company or an insurance company, the rate of tax to be withheld is 10% of the gross dividend and when the recipient declares a further dividend to its shareholders, it would again be taxed at 10% resulting in double taxation.
That the dividend paid to the holding companies by its subsidiaries may be exempted to avoid double taxation.
(b) Group Relief
Section 59B of the Income Tax Ordinance, 2002 states that any company, being a subsidiary of a public company listed on a registered stock exchange in Pakistan, owning and managing an industrial undertaking, may surrender its assessed tax loss in favour of its holding company provided such holding company owns seventy five percent or more of the share capital of the subsidiary company.
That the same provision of law may also be applicable in the case of private limited companies and no restrictions be imposed on companies engaged in industrial undertaking only.
Investment in shares
Section 62 of the Income Tax Ordinance provides that a person other than a company shall be entitled to a tax credit in respect of the cost of acquiring in the year new shares offered to the public by a public company listed on a stock exchange in Pakistan where the person (other than a company) is the original allottee of the shares or the shares are acquired from the Privatization Commission of Pakistan. Under the prevailing laws an investor would be entitled to an allowance not exceeding 10% of his income or Rs.1,00,000 only. To encourage investment climates by general public in equity sector.
The ceiling of investment allowance may be increased to Rs.5,00,000 to encourage public, to invest in shares.
Fair Market Value Section 68
By virtue of subsection (3) of section 68 of the Finance Act, 2003 the Commissioner has been empowered to determine the fair market value of property or rent, asset, service, benefit or perquisite when the fair market value is not ordinarily ascertainable. Under the 'repealed Ordinance DCIT was required to determine the fair market value after obtaining approval of Inspecting Additional Commissioner of Income-tax in writing.
At the end of subsection (3) the following may be added:
"after obtaining the approval of the Regional Commissioner of Income-tax in writing."
Foreign Losses under section 104 of the Income Tax Ordinance, 2001
It is proposed that section 104 of the Ordinance be deleted.
Un-explained investment, etc., deemed to be income under section 111
In the Repealed Ordinance the Income Tax Officer was required to provide reasonable opportunity to the assessee of being heard before making addition of any value or the amount thereof, whereas sub-section (3) of section 111 which is corresponding section of the Repealed Ordinance authorized the Commissioner to include the difference in the person's income chargeable to tax without providing him a reasonable opportunity of being heard while making addition of any amount thereof. This is against natural justice.
(1) After the words "the Commissioner may, "the words" after giving to the taxpayer a reasonable opportunity of being heard and "may be inserted.
Amendment of Assessment under section 122
(1) It is proposed that once the assessment is amended it may further be amended only when the department acquires definite information, that the income has been concealed or inaccurate particulars of income have been furnished or the assessment is otherwise incorrect.
(2) That re-opening of the case should be made only by the Regional Commissioner of Income-tax after giving proper opportunity to the taxpayer of being heard by issuing specific show-cause notice in this regard. It is against the principal of justice that the same Commissioner of Income-tax who has completed the assessment, re-opens the case on the basis of the same material/evidence which is already available on record and is deemed to have been considered at the time of original assessment.
(3) Moreover where an assessment is required to be amended under section 122(5A) that can be amended only once and thereafter this subsection cannot be invoked.
Disposal of appeals by the Appellate Tribunal
That subsection (2) of section 132 may be substituted with the following:--‑
"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" and on merit.
Alternate Dispute Resolution under. section 134-A
Section 134A introduced first time through Finance Act, 2004.
The original idea of providing taxpayer a forum to resolve tax related disputes was provided in the Sales Tax Act under section 47A through Finance Act, 2003.
This scheme is new though similar with the previous scheme of settlement commission, the success of this scheme is possible provided the following suggestions be taken into consideration and amendments be made accordingly:--‑
(1) Formation of Committees
Committees shall consist of four members (1) Commissioner of Income-tax, (2) Advocate, (3) Chartered Accountant and (4) Member from Chamber of Commerce or its nominee.
As the present committees are not consisting of Advocate and member or nominees of Chamber of Commerce.
Committee shall have powers to decide and resolve the dispute and no approval may be required from C.B.R. as committees should be independent Chairman and Members should be impartial and their decision should be final, except that the order or decision may be issued through C.B.R.
Suggestion is made to ensure the Taxpayers that the committees should be fair, impartial and independent and shall work without any influence of C.B.R.
Direct appeal to the High Court
Prior to substitution of section 136 of the Repealed Ordinance in the year 2000 the taxpayer or Commissioner was allowed to file appeal directly to the High Court against the order of the Income Tax Appellate Tribunal. However, now they both are required to apply to ITAT to refer to the High Court any question of law arising out of order of the ITAT. This has created delay in finalization. of pending issues and burden of additional cost to the taxpayer.
It is therefore proposed that the provisions prior to amendment made in the year 2000 in the Repealed Ordinance for direct appeal to the High Court may be restored.
Payments for Goods and Services Section 153(4)
Provides that the Commissioner may, on application by the recipient of a payment referred to in subsection (1) or (3) and after making such enquiry as the Commissioner thinks fit, allow, by order in writing, any person is exempted from deduction of tax.
The above provision of law is encouraging but requires fixation of time limit for passing an order under this subsection. It would also be in the interest of justice if a reasonable opportunity of being heard is granted to the taxpayer before any adverse order is being drawn by the Commissioner.
(i) Subsection (4) be substituted with the following:--‑
"The Commissioner may, on application made by the recipient of a payment referred to in subsection (1) or (3) and after making such enquiry and providing a reasonable opportunity of being heard to the applicant and pass order in writing within one week from the date of receipt of application. "A person dissatisfied with the order issued by the Commissioner under section (a), may file a review application to the RCIT and the decision of the RCIT on such application shall be final."
Payment on account of supply of goods, contract, services etc.
Clause (xii) (a) and (b) of S.R.O. 586(I)/91, dated 30th June, 1991 provides that the provisions of subsection (4) of section 50 of the Income Tax Ordinance, 1979 (Section 153 of the Income Tax Ordinance, 2001) shall not apply to the following persons receiving payments:--‑
(a) not exceeding rupees twenty five thousand on account of supply of goods, in a financial year, and
(b) not exceeding rupees ten thousand on account services rendered or execution of a contractor, in a financial year.
The amount of Rs.25,000 on account of supply of goods and Rs.10,000 on account of services rendered or execution of contract may be raised to Rs.1,00,000 and Rs.25,000 respectively.
Power to enter and search premises under section 175
The provision is harsh. It also provides action to be initiated by the Commissioner without any prior notice, which is against the principle of natural justice.
It is suggested that Appropriate amendment be made that before any action under this section is taken by the Commissioner he should issue a show cause or prior notice is to be issued and served on the taxpayer and the access does not extend to entering residential premises,
Audit under section 177
Section 177 of the Income Tax Ordinance, 2001 provides that the Central Board of Revenue may lay down criteria for selection of cases for audit by the Commissioner and shall keep the criteria confidential.
Subsection (4) also authorizes Commissioner that he may also select cases of the persons income tax affairs, in addition to the selection made in accordance with the criteria laid down by the C.B.R., having regard to:--‑
(a) the person's history of compliance or non-compliance with this Ordinance;
(b) the amount of tax payable by the person;
(c) the class of business conducted by the person; and
(d) any other matter which in the opinion of Commissioner is material for determination of correct income.
Parameters and criteria for selection of audit should be System-based.
Advance Ruling under section 206-A
It is proposed that the concept of `advance ruling' under section 206A of the Ordinance be introduced in the Ordinance for the local investors as well and the taxpayer may be provided a remedy by way of an appeal to the Appellate Tribunal.
Delegation of Powers under section 210
To delegate the powers to amend an assessment under section 122 be excluded as the same Taxation Officer should not be authorized to complete assessment and again to amend the same assessment.
Tax on dividends
Section 5 read with Division III of Part I of the First Schedule that the tax shall be deducted on payment of dividend at the rate of 10% of the gross amount of the dividend.
Tax should be charged on the net amount of dividends after deduction of Zakat.