Transcript Slide 1

Pre Budget Proposal – Income Tax
Budget Proposals
on
INCOME TAX
at
Income Tax Bar Association – Karachi
April 21, 2006
Presented by : ARSHAD SIRAJ MEMON
Income Tax Bar Association Karachi
1
Pre Budget Proposal – Income Tax
TAX REFORMS
•
Bigger the Tax Base-Lesser the Rates –
It is now well settled through studies that bigger the tax base is,
the lesser the rates of tax can be.
•
Efforts to be made to bring more people in to tax base–
•
Efforts to be made to effective legislation of Regulations which
mandatorily require NTN Certificate in all the documents executed in
any form at any stage. E.g.
(a)
(b)
(c)
(d)
(e)
(f)
Transfer of Properties.
Transfer of Shares.
Transfer of Vehicles.
Bank Documents.
Credit/Debit/ATM Cards.
Travel Documents.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
TAX REFORMS
•
For automation and facilitation common identification number
to be introduced.
•
Establishment of Research and Development Department
under the auspicious of CBR with corroboration with
Business Community – Tax Advisor and other Stake
holders –

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Area of Studies-Examples
Undocumented economy.
Double Taxation Agreements
E-Commerce.
Economic and Tax Factors.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
TAX REFORMS
•
Encouragement and Incentives to be provided for Savings and
Investment.
•
It is proposed that tax should be imposed on all segments of the
society. Exemptions and concessions to certain classes of
income or classes of persons be abolished.
•
The frequent changes made in the return form are an irritant
which has caused hurdles in expansion of Tax base. The
return forms should be designed on permanent basis and
while designing such forms, the literacy rate, socio economic and
judicious norms should be considered rationally
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
TAX REFORMS
•
Islamic Banking Issues regarding withholding of Taxes and taxation to
examined to promote Islamic mode of Banking.
•
It is proposed that different reduced rates be introduced for
Small Company and Medium Enterprise (SME) .
•
Separate Schedule for financial services to be introduced for
Banking and Finance Business.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
TAX REFORMS
•
New provision to be introduced for Tax Credit for investments
made in National Saving Schemes to give incentives for savings
which will create investment and employment.
Income Tax Bar Association Karachi
6
Pre Budget Proposal – Income Tax
Assessment Year
Section 2(5a)
ISSUE
The definition of ‘assessment year’
PROPOSAL
It is suggested that the definition of term
“assessment year” be reproduced in Clause (5A) of
section 2.
RATIONALE Consolidation
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Permanent Establishment
Section 2(41)
ISSUE
The perusal of the definition shows that under Sub-Clause (c),
a building site, a construction, assembly or installation project
or supervisory activities connected with such sites or projects
have been included in the definition of term “permanent
establishment”. Similarly, under Sub-Clause (f) in substituting
equipment installed or other assets or property capable of
activities giving rise to income has been included.
PROPOSAL
Since, the industrial growth has been promised by the
government. It would be appreciated that a minimum period of
suitable time be included in Sub-Clauses (c) and (f)
accordingly. Minimum period, therefore, for such clauses is
suggested to be 6-months.
RATIONALE
To correspond the provisions with treaty provisions
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Royalty
Section 2(54)(g) & 37(5)
ISSUE :
The consideration for the disposal of any property or right
referred to in sub-clauses (a) through (e) are included
within the definition of term royalty. If the definition of the
capital assets as contained in sub-section (5) of section 37
is read the disposal of any property or right falls under the
purview of subsection (5) of section 37
PROPOSAL :
It is, therefore, suggested that clause (g) be deleted which
is overlapping section 37(5). Or in the alternate, Royalty be
excluded from the definition of “Capital Assets” in Section
37(5)
RATIONALE :
To avoid confusion and overlapping.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Ordinance to Override Other Laws
Section 3 & 54
ISSUE :
Ordinance to Override other laws.
PROPOSAL :
Words “Subject to this Ordinance” be inserted at the start
of Section. I
RATIONALE :
Complementary Provision by inserting Proviso to Section
54 has been made. As such additions of words proposed
are necessary to avoid doubt and confusion. In our opinion
Section 3 and amendment made through proviso to Section
54 are complementary to each other. It is therefore,
proposed that either Section 3 be deleted or in the
alternate, the proviso inserted in Section 54 be shifted and
annexed with Section3.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Royalty and Fee For Technical Services
Section 6 and Rule 8 & 9 of
the Income Tax Rules, 1982
ISSUE :
Option under Rule 8 & 9 of the Income Tax Rules 2002 read
with Section 6.
PROPOSAL :
The said concession should either be brought in through
an amendment in section 6 or it may be put in Second
Schedule, which is part of the statute itself.
RATIONALE :
The intention of the lawmaker appears to be to allow the
non-resident persons having a permanent establishment in
Pakistan to avail final tax basis assessment as provided
under section 6 read with section 8. According to the rules
of interpretation, rule cannot override the main statute, the
concession given to the non-residents in the said rules is
not legally proper, this is despite the fact of usage of words
”Subject to the Ordinance” appearing in the beginning of
Section 6.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Increase of Exemption for Conveyance
Allowance
Section 12
Read with Rule 6
ISSUE :
Salary
PROPOSAL :
Conveyance Allowance be increased from Rs.3,600 to
Rs.15,000
RATIONALE :
Conveyance Allowance has remained static since ages
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Income from Property
Section 15(2)
ISSUE :
Under this section, charge is created on rent received or rent receivable
by a person in a tax year other then the rent exempt from tax under this
Ordinance. Sub-section (2) defines the term “Rent” which means any
amount received or receivable by the owner of land or a building as
consideration for the use or occupation of, or the right to use or occupy,
the land or building and including forfeited deposit paid under a contract
for sale of land or a building,
PROPOSAL :
It is suggested that in subsection (2), where-ever the word “or” has been
used between “expressions the land” “building” said “or” be replaced
by “and”.
RATIONALE :
Under the provisions of section 39 (1)(d), ground rent has been specially
dealt with arising out of the land alone. Since the word “or” has been
used in definition clause in between land and building, it is suggested
that according to the rules of interpretation, it connotes disjunctive
consideration. It seems the intention of legislature is that if an amount is
received or receivable by the owner of land/building, such amount would
be treated as rent. As such, rent of land is being specially and separately
dealt with under Section 39. .
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Income from Property
ISSUE :
Section 17
Deduction in Computing Income Chargeable under the Head
“Income from Property”.
PROPOSAL :
It is proposed that deduction should be allowed to taxpayer/owner
of the building if such commission on rent is paid through
recognized normal banking channel to the estate agent.
RATIONALE :
This amendment will not only give benefit to the owner but will
also be an instrument to bring such class of persons engaged in
the business of estate agency into the tax net, which will facilitate
the broadening of tax base..
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Income from business – Deductions not allowed
Section 21(K)
ISSUE :
Taxability OF Excess Perquisites.
PROPOSAL :
It is, therefore, proposed that where taxable salary of a tax payer
increase to such an extent where perquisites become taxable in the
hands of an employee, the deduction may not be treated as
inadmissible in the hands of the employer. Necessary amendment
is proposed to be made accordingly.
RATIONALE :
Conceptually Clause (k) of Section 21 is analogous to the
provisions of Clause (i) of Section 24 of the Repealed Ordinance.
Under the repealed Income Tax Ordinance, excess perquisites were
added in the income of the employer u/s 24(i). The philosophy
behind such addition in the income of employer was that
perquisites were exempt for considerable time in the hands of the
employee. It was only in the final stages of the repealed Ordinance
that perquisites were taxed. Since the perquisites are now taxable
in the hands of employees whose taxable salary exceeds the
threshold of Rs. 600,000, therefore, in our considered opinion, there
is no rationale for making addition of excess perquisites in the
hands of employers under the Clause (k) of section 21. .
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Income from business – Deductions not allowed
ISSUE :
Section 21(I)
Deduction not allowed
PROPOSAL : Since the expenditure can be paid through and by
different modes of baking channels, it is proposed
that words “other than by a crossed bank cheque or
crossed bank draft” be substituted by the words
“otherwise than a recognized banking channel”.
RATIONALE : To streamline the provisions with
Banking.
Income Tax Bar Association Karachi
transactions of
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Pre Budget Proposal – Income Tax
Bad Debts
Section 29(1)(b)
ISSUE :
Allowability of bad debts in a tax year.
PROPOSAL :
It is proposed that in order to undo hardship clause (b) of
sub-section (1) of the section 29 may be rephrased as
under: “29(1)(b) the debt or the part of the debt is
written-off in the accounts of the person in the
year or in any previous tax year or assessment
year; and”.
RATIONALE :
Facilitation
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Accrual Basis of Accounting
ISSUE :
Section 34
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”
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Stock in Trade
ISSUE :
Section 35
Under this section, concept of determination of the
cost of Stock is trade disposed of has been
introduced. Generally in the cases of companies, the
valuation has to be mandatorilly made on the basis of
International Accounting Standards.
PROPOSAL : It is, therefore, proposed that in Section 35, whereever word “person” has been used, words “other
than companies” may be inserted.
RATIONALE : Convergence of Tax
Accounting Standards.
Income Tax Bar Association Karachi
laws
with
International
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Pre Budget Proposal – Income Tax
Income from Other Sources
Section 39
ISSUE :
Loan, Advances, Deposit for issuance of shares and gifts
otherwise than by a crossed cheque drawn on a bank or through
Normal Banking channel from person holding NTN Card.
PROPOSAL :
The word “Card” used after National Tax Number be replaced by
word “Certificate”, as through Finance Ordinance, 2002, word
“Card” was replaced by word “Certificate” in Section 181 of the
Income Tax Ordinance, 2001.
ISSUE :
There is no cavil to the purported purpose of Section 39 (3).
However practical difficulties arise in respect of payment received
as loan or gift from Non-Resident to family members.
PROPOSAL :
It is, therefore, proposed that a proviso be added for dispensing
with the condition of NTN Card (Certificate) for amounts received
from abroad.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Income from Other Sources
Section 39
ISSUE:
The world is moving very fast. The concept of paper
money is being replaced by Plastic money. The normal
banking practices are now absorbing concept of
Electronic Banking. One may receive loan, gift or
advance through other mode of transfers
PROPOSAL:
(a)
It is, therefore, suggested that expression
“otherwise than by a recognized banking channel”
be substituted for words “otherwise than by
cross cheque drawn on a bank”
(b) Advance Rent received be included Sub-section (4)
subject to just and reasonable restrictions
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Set-off / Carry Forward of Losses
ISSUE :
Section 57A
Set Off /Carry Forward of Loss
PROPOSAL : Carry Forward to be restricted/reduced to five years
prospectively
RATIONALE : Increase in Tax Base and discouragement for
frivolous claim of losses
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Set-off / Carry Forward of Losses
ISSUE :
Section 57(2)
Set Off /Carry Forward of Loss
PROPOSAL : Carry Forward to be restricted/reduced to five years
prospectively
RATIONALE : Increase in Tax Base and discouragement for
frivolous claim of losses
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Fair Market Value
ISSUE :
Section 68
Discretion of the Commissioner.
PROPOSAL : It is, proposed that suitable parameters for valuation
may be prescribed by the Central Board of Revenue
in the Income Tax Rules, 2002 and for the purposes of
Immovable properties, parameters defined under Rule
228 of the income Tax Rules, 2002 be adopted and
corresponding amendment be made in Rule 228
accordingly.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Non-Recognition Rules
ISSUE :
Section 79(1)
Under Section 79(1) and under clause (d) no gain or
loss shall be taken to arise where the asset is
compulsorily acquired under any law and a condition
has been put that such gain or loss will not be taken if
consideration received is reinvested by the recipient
in any asset of a like kind within one year of the
disposal.
PROPOSAL : It is, proposed that words “of a like kind” be deleted.
The period for reinvestment i.e. one year is too short.
This may be increased to at least by two years.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Non-Recognition Rules
ISSUE :
Section 79(2)
Sub Section (2) of Section 79 stipulates that
provisions of Section (1) shall not apply where
person is a non-resident. This seems to be
discriminatory and could cause unnecessary
hardship in the case of gift and transmission of the
asset to an executor or beneficiary on the death of a
person and distribution of assets to non-resident
members of an AOP or non-resident shareholder in
the case of a company, or the event of liquidation of
the company or dissolution of an AOP.
PROPOSAL : It is, proposed that Sub-Section (2) be deleted.
RATIONALE : To eliminate discrimination.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Extension of time for furnishing return
and other Statements
ISSUE :
Section 119(2)
Application to the Commissioner
PROPOSAL : It is proposed that right of representation before the
Regional Commissioner, be introduced to redress the
grievance of tax payers.
RATIONALE : Principles of Natural Justice.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Extension of time for furnishing return and
other Statements.
Section 119(6)
ISSUE :
According to Sub-section (6) extension of time granted
under sub-section (3) shall not for the purpose of charge of
additional tax under sub section (1) of section 205 change
the due date for payment of income tax under Section 137.
The interpretation of this sub-section (6) plainly shows that
addition tax imposition shall not stop running.
PROPOSAL :
It is, proposed that sub section (6) may kindly be deleted.
RATIONALE :
It is submitted that once extension is granted by the
Commission, it cannot be said that Tax Payer has failed.
Therefore, even otherwise, once the Commissioner grants
time, it will be very harsh in genuine cases
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Disposal of Appeals by Appellate Tribunal
Section 132(2)
ISSUE :
Appeal can be dismissed in default.
PROPOSAL :
It is, proposed that said sub-section (2) may accordingly be amended in
the following manner –
“The Appellate Tribunal shall afford an opportunity of being heard
to the parties and in case of failure to attend the appeal by the
person filing the appeal, the Tribunal may proceed ex-parte to
decide the appeal on the basis of the available record.”
RATIONALE :
In fiscal laws, and more particularly law governing Income tax, it has
been the practice to decide the matters on merits, as ITAT is the last
fact finding authority and by virtue of Sub-Section (1) of Section 132,
the decision of the Appellate Tribunal on an appeal shall be final.
In our considered opinion, the language used in Sub-Section (2) is
defective and needs suitable amendment as it cannot be presumed that
legislature intended to cause injustice.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Reference to the High Court
Section 133
Read with Rule 78
PROPOSAL : Rule to be deleted.
RATIONALE : High Courts regulate their own functions and
procedures through their respective Rules.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Alternate Dispute Resolution
ISSUE :
Section 134A Read
with Rule 231C(6)
Time limit of 30 days for disposal.
PROPOSAL : Period for disposal of application by ADR Committee
to be extended from 30 to 60 days.
RATIONALE : Broadening the time limit for effective decision
making.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Alternate Dispute Resolution
ISSUE :
Section 134A Read
with Rule 231(15)
Time limit for decision by CBR.
PROPOSAL : Appropriate time limit for decision by CBR preferably
Six Months.
RATIONALE : Effective decision making.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Advance Tax
Section 147
Appropriate amendment be made to adjust – Unadjusted amount of
one quarter to another within the same Tax year
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Exemption or Lower Rate Certificate
Section 159
ISSUE :
Grant of an exemption or lower rate certificate.
PROPOSAL :
It is, proposed that words “within 15 days” may be inserted
after the words “ the Commissioner shall” in sub Section
(1).
The right of appeal be provided to challenge the refusal of
application before the Commissioner of Income Tax
(Appeals).
RATIONALE :
No time frame prescribed.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Statement regarding immovable properties
Section 165
ISSUE :
In the Repealed Ordinances, under the provisions of
Section 143A every Registering officer, Revenue officer or
other officer appointed to register any documents relating
to property (other than agricultural land) under the
Registration Act, 1908 was required to furnish a statement
regarding the properties the value of which was not less
than Rs. 50,000/- registered with him during the preceding
financial year .
PROPOSAL :
It is recommended that provision be brought in under the
Income Tax Ordinance, 2001.
RATIONALE :
In our opinion, such statement is instrumental for
broadening the tax base.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Refunds
Section 170
ISSUE :
Refund Applications and Order thereon
PROPOSAL :
It is, proposed that following amendment be made.
In clause (b) of sub section 2 word “and” be deleted and Clause (c) (prescribing
time limit to file Refund Application) be deleted.
Without Prejudice:
In case no order is passed by the Commissioner on the said Application,
It is, proposed that sub-section (4) be amended as under: “Sub Section (4)
Provided that if no order is passed within the time specified in this sub section,
the application shall be deemed to have been accepted and all the provision of
this Ordinance shall have effect accordingly.
Without Prejudice to above.
Sub Section (5) is not in conformity with Section 127, therefore, it is proposed
that necessary amendments be made.
RATIONALE :
Good governance and to fill up lacuna.
Income Tax Bar Association Karachi
36
Pre Budget Proposal – Income Tax
Penalty for Non-payment of Tax
Section 183
ISSUE :
Penalty for non payment of tax (other then penalty) has been
imposed on the failure of payment any tax due by the due date.
Person is liable for penalty at various rates of penalties
ranging for 5% to 100% of such tax due. No time frame is
provided for imposition of penalties between each default.
PROPOSAL :
It is proposed that a proviso be added to provide the time
frame between each event.
“Proviso”
Provided that no penalty shall be imposed in case of
subsequent failure unless the time between passing of each
order is not less than 15 days.
RATIONALE :
Curative amendment.
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Advance Ruling
ISSUE :
Section 206A
Advance Ruling provisions to Non Residents.
PROPOSAL : Appropriate amendment is proposed to widened and
extended the scope to other tax payers like tax
payers resident companies having foreign share
holders holding majority share, other Public
Companies, Public Limited Banking and Insurance
Companies.
Income Tax Bar Association Karachi
38
Pre Budget Proposal – Income Tax
Tax withholding on cash withdrawal –
Increase in Threshold
ISSUE :
Section 231A
Cash Withdrawal from Banks – Tax withholding
PROPOSAL : Threshold be increased from Rs.25,000 to Rs.50,000
Exemption to be extended to Salaried Class.
RATIONALE : Relief to Salaried Class
Income Tax Bar Association Karachi
39
Pre Budget Proposal – Income Tax
Advance-tax on Recharging Accounts
ISSUE :
Section 236
Advance Tax on Telephones.
PROPOSAL : To be extended to Recharging accounts.
RATIONALE : To increase Tax base.
Income Tax Bar Association Karachi
40
Pre Budget Proposal – Income Tax
Advance-tax on Telephone
ISSUE :
Section 236
Advance Tax on Telephones
PROPOSAL : The Controversy of Pay Phone Companies be
amicably resolved
RATIONALE : Facilitation and resolving Disputes
Income Tax Bar Association Karachi
41
Pre Budget Proposal – Income Tax
Exemption – Computer Training Institutes
ISSUE :
Clause 93-Part I
Second Schedule
To Computer Training Institutions
PROPOSAL : Period of Exemption be extended for three more
years.
RATIONALE : To promote Computer literacy.
Income Tax Bar Association Karachi
42
Pre Budget Proposal – Income Tax
Minor Corrective _??_
Reduction in Tax Liability – Income from Salary
Part III Clause (2) of Second Schedule –
Needs appropriate amendments
Deduction of Tax at Source
Clause (36A) to be made as Part of Clause (59)
Income Tax Bar Association Karachi
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Pre Budget Proposal – Income Tax
Minor Corrective _??_
National Tax Number - Section 181 read with Rule 83
Substitution of word card with certificate
Charges – Rule 230
Due to availability of returns and statements through
internet Rule 230 to be deleted
Income Tax Bar Association Karachi
44
Pre Budget Proposal – Income Tax
Reduction in tax liability –
Income from Salary
ISSUE :
Part III Clause (2)
of Second Schedule
Reduction in Tax Liability- Salary Reduction of Tax.
PROPOSAL : Needs appropriate amendments.
RATIONALE : Corrective.
Income Tax Bar Association Karachi
45
Pre Budget Proposal – Income Tax
Thank you
Income Tax Bar Association Karachi
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