In the name of Allah,

1
In the name of Allah, the most gracious and most
merciful.
2
Pre Budget Seminar Organized by Income Tax Bar
Association Karachi
Presentation by Abdul Qadir Memon April 11, 2005
3
At the outset, I would like to take this
opportunity to express my gratitude to the ITBA
CPE Committee for extending me this invitation to
share my proposals for the forthcoming Budget
2005 with this august gathering. By the Grace of
Almighty Allah, the world at large is recognizing
the action and policies of the present
government. The economic managers and business
leaders all over the world are showing great
faith and confidence in the present team.
4
The macro indicators like arrest of investment
stagnation in Pakistan, effort to revive sick
industrial units, accumulation of foreign
exchange reserves, market driven policies,
privatization liberalization, stable foreign
exchange rates, formation of Task Force on
Corporate Tax Policy by SECP etc. are showing
accomplishment of many milestones.
5
The credibility of Government of Pakistan has
enhanced many folds globally. The honourable
Prime Minister, Ministry of Finance and the team
members of the Central Board of Revenue deserve
lot of appreciation on not only achieving the
above goals but striving hard to bring positive
Reforms, through Tax Administration Reform
Program (TARP), CARE, STREAM, establishment of
LTU, MTU etc. The introduction of Dispute
Resolution Committees, withdrawal of frivolous
appeals/review of applications and abolishment of
mandatory payment before filing of appeals are
all steps towards removal of irritants and
obstacles in the way of our journey to success.
6
Ladies and gentlemen it is my observation that in
past we did not witness any meeting with the
business and professional leaders in which the
government and its team members were not
criticized for their failure to remove irritants
and anomalies from the fiscal statutes, to create
conducive investment environment in the country
and to curtail discretionary powers of the
revenue officers from the taxation laws.
7
Now at least one cannot recall any meeting in
which the government and team members of CBR are
not praised. What a great change. I mean the
government is making headway towards removal of
such obstacles as pointed out by the honourable
Prime Minister time and again.
8
You and I would agree that despite all reforms
and achievement of macro economic targets, 1/3rd
of our population is still living below the
poverty line, although international assistance
is available. Our Tax - GDP ratio is still one of
the lowest in the world as majority of people in
Pakistan are not having proper drinkable water
and 59 of the total educated citizens of
Pakistan are unemployed.
9
According to UNDPs Human Development Report, we
rank a poor 135th on human development index. So
the problem of a common man is yet to be
resolved. This is the moment where we have to
think, what is wrong with the present system. Are
we contributing our due share for the betterment
of the society?
10
While some responsibility for our present
economic ills undoubtedly can be attributed to
the policies or lack of policies of the present
and past governments, yet it would be unfair to
place the whole of the blame on the government.
You and I know ladies and gentlemen that
government could and would have achieved very
much more if it had received the full cooperation
of the public in the past. It was rightly said by
an eminent political leader and I quote-
11
A nations strength ultimately consist in what
it can do on its own and not in what it can
borrow from others. My Budget proposals are
influenced by the views of Mr.Adam Smith, pointed
out in the eighteen centuries, in his classic The
Wealth of Nation that every state should bear in
mind the following four objectives while levying
taxes that-
12
1. The taxes must be equitable and fair as
between the different classes of society The
convenience of the taxpayer 2. The Government
must economize and levy only the minimum tax,
which is necessary for the national good and 3.
The certainty and clarify.
13
For a successful journey towards lasting economic
growth and to make our country a better place to
live, it is incumbent upon the Government to
immediately provide due attention and take
appropriate steps for expansion of tax base,
reasonable reduction in the tax rates (according
to capacity to pay tax), creation of conducive
investment environment, curtailment of
undesirable discretionary powers from various tax
laws, simplification of rules regulations,
removal of irritants and impediments for seeking
justice are important steps for Government to
take for achieving the above four objectives.
14
I am hopeful that following recommendations, if
approved by this august gathering and implemented
sincerely by the government will help to enhance
economic activities, restore the confidence of
the taxpayers on the government, accelerate
foreign and local investment and establish
credibility of the taxation system of Pakistan.
15
Pakistan is undertaking a massive tax reform.
Recently the Chairman, Central Board of Revenue
while addressing the members of Pakistan Textile
Association on 21st March, 2005 stated and I
quote- All these reforms being implemented at a
cost of dollars 150 Million, were aimed at
transforming the CBR into an organization fully
equipped to take on the challenges of the New
World Trade Order. Unquote
16
The lesson taught by the experience of tax reform
in many developed countries is that tax changes
have very important economic effects. They affect
not only taxable income or tax revenues, but also
labor supply (especially, secondary earners),
savings, investments, and entrepreneur ship and
the willingness to take risks. Particularly, the
effect of a cut in marginal tax rate is
considerably big.
17
It is interesting to note that none of the reform
guidelines mentions any ideal level of
taxation. It is necessary to focus on three
important principles of tax reform, that is to
broaden the tax base while keeping the marginal
tax rate low, to promote economic growth, and to
simplify the system.
18
In my humble view the challenge the government
faces is not how to increase current tax
revenues, but how to widen the tax base to
prevent tax-revenue erosion in the future. On the
subject of revitalizing the Japanese economy and
put it on a new growth path Mr.Iwamoto said and I
quote-
19
It is necessary to conduct tax system reform,
including tax cut. Investment and consumption
should be stimulated. It is necessary to cut
corporate taxes at first, and after that to
broaden the tax base of income tax while reducing
the marginal tax rate. To broaden the tax base,
the argument should focus on the inequalities of
tax burden, such as Kuroyon, by keeping track
of income more clearly.
20
So my first and foremost budget proposal is
Reduction in Tax Rates. The old fashioned fiscal
theory that tax rates must be high to provide
larger revenue for State has long been discarded.
The modern fiscal policy pursued by the most
progressive countries is to make revenue grow,
not by increasing tax rates but by enlarging the
tax base. The major impediment in expansion of
tax base in the country is high rates of taxes
whether direct or indirect.
21
Out of 145 countries of the world, the corporate
rate of tax in 138 countries is lower than
Pakistan. In almost 83 countries rate of tax
ranges between _at_ 10 to 30 and 39 countries levy
corporate tax _at_ 31 to 35. On 28th April, 2003
the Saudi Shura Consultative Council slashed the
rate of tax from 45 percent to 25 on foreign
companies profit, to attract more foreign
investment. President George W.Bush is pressing
the Congress to approve new tax cuts.
22
The Finance Minister of France promised tax cuts
for corporate and individuals taxpayers. On the
other hand in Pakistan the rate of withholding
tax has been rising progressively. In 1995, the
rate of withholding of tax at the time of import
of goods was raised from 2 to 4 of import value
and currently it is 6 of the import value.
23
The Karachi Declaration of ICC Regional FDI
Conference held in Karachi in February 2002, in
fact, recommended the reduction of corporate
income tax to 16. As for other countries, it is
noteworthy that Singapore decided in 2002 to
bring corporate and income tax rates to 20
within three years from current 24.5 and 26
respectively. This will bring Singapores direct
taxes in line with arch rival Hong Kong, where
corporate tax rate is 16.
24
The Workers Welfare Fund and Workers Profit
Participation Fund are no longer providing any
benefit to the workers. On the contrary the
contributions to these funds have taken the shape
of unnecessary additional levy for the taxpayer
and requires to be withdrawn. The law abiding
citizens are paying greater cost than evaders.
Therefore, in the overall interest of the
country and to continue the journey of economic
progress, it is strongly recommended to reduce
the tax rates as follows
25
The rate of Income Tax for the corporate and
non-corporate sectors be reduced by 10 The
rate of withholding tax on supplies to be reduced
to 2 and the sub-section 2 of section 153 be
substituted in line with the recent judgement
reported as 2005 PTD 194 (SC) as follows- the
gross amount payable for sale of goods shall
exclude the sales tax if any payable in respect
of the sale.
26
The present statutory limit of exemption under
the Income Tax law be increased from
Rs.100,000/- to Rs.200,000/- and The Workers
Welfare Fund and Workers Profit Participation
Funds Laws be abolished.
27
The second important task is to broaden the tax
base. As per data available the tax payers are
less than 1 of the total population. The drive
that the Collectorate of Sales Tax (Enforcement)
launched last October to identify new taxpayers
is reported to have led to the detection of
18,224 cases which need to be registered as
taxpayers under the Sales Tax Act. These include
different categories of 14,933 distributors,
agents and dealers 2,681 wholesalers 23 car
dealers and 3,000 retailers is commendable.
28
However, I feel complete details and data base of
all the owners/ holders of the property
(including residential, commercial, industrial),
cars, club membership, utilities (including
residential, commercial and industrial),
vehicles, buses, credit cards, international
passports, investment in fixed deposits, bank
accounts, national saving schemes and stocks be
prepared and on the basis of above information a
complete profile may be generated.
29
The taxes must be equitable and fair between
different classes of society. All the segments of
the society including agriculturists should be
brought in the tax net. The rule of law should be
for everybody and not for the weaker ones. A very
big segment of the high placed people is owning
enormous wealth, lucrative occupations and
enjoying highly luxurious living.
30
I believe that assessing the income from four
main crops cotton, rice, sugarcane and wheat
may not be difficult because these are generally
sold to registered dealers whether they are
ginners, millers, crushers or arthis. Their
receipts should be considered authentic documents
and taxpayers should be encouraged to obtain them
and submit them with their returns.
31
Since there is an enormous amount of money to be
made on sale/purchase of houses, it is only fair
that like any other commercial activity it should
bring the government its due share of revenue on
house sales in the form of capital gains tax.
All the more so because most of those earning fat
profits on property sales are not genuine
homeowners but speculators, who are there in the
market only to earn profits.
32
The government may consider to tax the windfall
on sale of immovable properties by amending the
Constitution of Islamic Republic of
Pakistan. Proposal It is proposed that effort
should be made to reduce the number of exemption
and incomes be brought within tax ambit.
33
Simplification of documents is third and very
important area for brining tax reforms. Mr.Musgrav
e, in his book on page 158 stated and I quote
that- One of the strong motivations behind the
recent reforms has been to bring about simplicity
in tax systems. In the context of tax reform
proposals in the United States of America, it has
been commented what reason is there to expect
that good taxation - taxation that is equitable
as well as efficient-should offer a haven of
simplicity in an increasingly complex world?
This is a non-trival question for developing
countries as well.
34
Day before yesterday Government has unveiled
simple and self compliant draft proposal of
Federal Excise Act, 2005 to replace sixty years
old complex and cumbersome Central Excise Act,
1944. Government is genuinely making effort to
simplify the documents. However I think that
taxation laws including forms, statements and
other necessary documents may be simplified and
must not be as complicated cumbersome as to
cause needless inconvenience and hardships to the
taxpayer.
35
This is also an impediment in expansion of tax
base in Pakistan. There are also a number of
short comings in the existing Return forms and
statements. I therefore desire that such forms,
statements, including acknowledgement receipts of
the return etc. be designed in consultation with
the mercantile, tax and accounting associations
etc.
36
At a workshop held in Islamabad on Saturday under
the joint sponsorship of the Ministry of
Industries, Production and Special Initiatives
and the World Bank, representatives from the
government and industry deliberated upon the
subject of improving investment environment in
Pakistan.
37
They identified poor law and order situation and
the high cost of doing business as the major
reasons why foreign investments are not coming in
at the desired level. It may be recalled that
according to the special task force that prepared
a draft industrial policy, made public in
January Pakistan will need nine percent increase
in investments in the next 20 years, 11.5
percent in ten years and 16 percent in five years
in order to catch up with other countries of the
region. It is therefore evident that there is a
lot of catching up to do.
38
Royalties
Royalty under clause (g) includes consideration
for the disposal of any property or right
refereed to in sub-clauses (a) through (e). The
gross consideration for royalty income of a
non-resident person is taxed at 15, which is the
final tax. To equate the consideration received
for disposal of the property or right generating
royalty income with the royalty income itself is
not equitable.
39
Royalties
The gross consideration received on disposal
would be taxed at 15 without taking into
consideration the cost of acquisition of the
property or rights. This is contrary to the
provisions relating to disposal of capital
assets. Any expenditure incurred to earn royalty
should be allowed as expenditure.
40
Enhancement in cost of private vehicle for tax
depreciation
Sub-section (13)(a) of section 22 of the Income
Tax Ordinance,2001 provides that for the purposes
of this section the cost of a depreciable asset
being a passenger transport vehicle not plying
for hire shall not exceed one million rupees.
41
Enhancement in cost of private vehicle for tax
depreciation
Enhancement in cost of private vehicle for tax
depreciation
Proposal Section 22(13)(a) of the ITO 2001
should be amended by increasing the cost
restriction on private vehicles from Rs.1 million
to Rs.1.5 million.
42
Employee Training Facilities
Section 27 provides that a person shall be
allowed a deduction for any expenditure (other
than capital expenditure) incurred in tax year in
respect of a) any educational institution or
hospital in Pakistan established for the benefit
of the persons employees and their dependents
or
43
Employee Training Facilities
b) any institute in Pakistan established for the
training of industrial workers, recognized, aided
or run by the Federal Government or a provincial
Government or a local authority. c)
.. As the above two
objectives require expenditure of capital nature
the restriction on its allowability is against
the very purpose of this provision. No such
restriction was imposed in the sub-section
23(i)(xiii), (xiv) and (xv) Repealed Ordinance.
44
Employee Training Facilities
Proposal The section 27 be amended so as words
and brackets (other than capital expenditure) be
removed.
45
Admissibility of Bad Debts
Sub-section (1) of Section 29 provides that a
person shall be allowed a deduction for a bad
debt in a tax year, if the following conditions
are satisfied- (a) the amount of the debt was-
(i) previously included in the persons income
from business chargeable to tax or (ii) in
respect of money lent by a financial institution
in deriving income from business chargeable to
tax
46
Admissibility of Bad Debts
(b) the debt or part of the debt is written off
in the accounts of the person in the tax year
and (c) there are reasonable grounds for
believing that the debt is irrecoverable. In this
section a distinction has been made between bad
debts of money lending and non-money lending
business. Bad debts relating to principal amount
have been made admissible only if that bad debt
was earlier included in his income from business
chargeable to tax.
47
Admissibility of Bad Debts
Proposals i) Scheduled banks, approved leasing
companies and approved modarabas be added with
financial institution for admissibility of bad
debts. ii) Law should be amended to cover all
transactions undertaken under the Ordinary course
of business. iii) Clause (c) of sub-section 1 may
be deleted.
48
Long-Term Contracts
In the provision of sub-section (2) of Section
36, it is important to note that under
sub-section (2) of Section 36 for the purposes of
determining income on incomplete long-term
contracts, the percentage of completion shall be
determined by the ratio which the contract costs
incurred up to the end of the tax year has with
the estimated total cost as determined at the
commencement of the contract.
49
Long-Term Contracts
I feel that considering contract costs as a
variable at the commencement of the contract
for estimating the stage of completion is not
appropriate, given the practical considerations
whereby with the ongoing progress of the
contract, it is invariably desirable to
re-estimate the entire costs of the contract
until its completion.
50
Long-Term Contracts
Proposal That the word commencement of the
contract in sub-section (2) of the said section
of the Ordinance may be substituted with the
words commencement of the year.
51
Capital Gains
Under Section 37 long term gains derived on the
disposal of capital asset held for more than one
year are being taxed after 1/4th reduction in the
gains as per the Income Tax Ordinance, 2001,
unlike a reduction of 3/4th in the gains which
remained in operation under the Repealed
Ordinance.
52
Capital Gains
It is important to point out that the Capital
Gains derived on sale of shares of a listed
public company is fully exempt up to 30th June,
2007 whereas Capital Gains earned on sale of
shares of non-listed company or private limited
company are taxable as stated above.
53
Capital Gains
Proposal That the relief of 3/4th in the
income/gain be restored.
54
Taxability of Interest or Profit
Section 80B of the Repealed Ordinance provided
that when interest or profit earned on National
Savings scheme account or deposit maintained
with any banking company or any financial
institutions or Bonds, Certificates, Debentures,
Securities on instruments of any kind issued by
any banking company or any company, were subject
to tax _at_10 of such income and tax so deducted
was full and final consideration of such income.
55
Taxability of Interest or Profit
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 profit is clubbed with other income
and taxed at normal rates. This is a very harsh
section and effects widows, pensioners etc., who
had invested their saving in these schemes.
56
Taxability of Interest or Profit
Proposal That profit on debt should be brought
within the ambit of Presumptive Tax Regime to
bring in line with the provision of section 80B
of the Repealed Ordinance.
57
Holding Company
The concept of holding companies has helped many
economies of the world to grow. This concept is
available in Pakistan but has not grown as
required because of certain issues and anomalies
relating to holding company concept under the
existing laws and regulations in Pakistan. Few
of them are as follows-
58
Holding Company

• 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.

59
Holding Company
Proposal That the dividend paid to the holding
companies by its subsidiaries may please be
exempted.
60
Holding Company
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 favor of its holding
company provided such holding company owns
seventy-five percent or more of the share capital
of the subsidiary company.
61
Holding Company
Proposal That the same provision of law may
also be applicable in the case of non-listed
companies including private limited companies and
also not be restricted to companies engaged in
industrial undertaking only.
62
Change in Control of an Entity
In sub-section (1)(b) of section 98 provides that
when there is a change in fifty percent or more
of the underlying ownership of an entity, any
loss incurred for a tax year before the change
shall not be allowed as a deduction in a tax year
after the change unless the entity
63
Change in Control of an Entity
(a) continues to conduct the same business after
the change (b) does not, until the loss has been
fully set-off, engage in any new business or
investment after the change The second condition
practically restricts the new management of the
entity to make any further investment or enter
into new business to generate income from the
investment/ business.
64
Change in Control of an Entity
Proposal It is proposed that provisions of
Section 98(1)(b) be deleted or reconsidered.
65
Geographical Source of Income Gain on alienation
of any property or right
Sub-section 9 of section 101 provides that Rental
Income shall be Pakistan-source income if it is
derived from the lease of immovable property in
Pakistan whether immovable or not or From any
other interest in or over immovable property,
including a right to explore for, or exploit,
natural resources in Pakistan.
66
Geographical Source of Income Gain on alienation
of any property or right
Sub-section (10) of section 101 further states
that any gain from the alienation of any property
or right referred to in sub-section 9 or from
alienation of any share in a company the assets
of which consist wholly or principally, directly
or indirectly of property or rights referred to
in sub-section (9) shall be Pakistan-Source
income.
67
Geographical Source of Income Gain on alienation
of any property or right
It is my humble view that there can be no
jurisdiction for the taxability of gain on shares
of a foreign company located outside Pakistan on
the basis of the foreign companys assets in
Pakistan. This law would adversely affect foreign
companies operating in Pakistan.
68
Geographical Source of Income Gain on alienation
of any property or right
Proposal The words or from the alienation of
any share in a company the assets of which
consist wholly or principally, directly or
indirectly of property in sub-section (10) may
be deleted.
69
Commissioner Empowered to Re-characterize Income
Deductions
Under section 109 Commissioner has been empowered
to re-characterize a transaction or an element of
a transaction or disregard a transaction devoid
of economic substance or re-characterize a
transaction where form and substance are
incompatible. The aforesaid measures could be
invoked where the Commissioner may have reasons
to believe that such transaction was done in
pursuance of a tax avoidance scheme.
70
Commissioner Empowered to Re-characterize Income
Deductions
In sub-section (2) of section 109 the definition
of tax avoidance scheme caters such transaction
of which the main purpose is to avoid or reduce
tax. The courts have held that only such
transaction can be disregarded which have no
commercial purpose. Further, courts have also
held that circumventing provisions of law using
legal method is permissible and tax avoidance
carries different meaning in tax laws.
71
Commissioner Empowered to Re-characterize Income
Deductions
Therefore, a transaction, which has commercial
purposes beside any objective to avoid or reduce
tax, should not be treated as tax avoidance
scheme. Conceptually there is nothing wrong
with these provisions as the objective is to
forestall tax avoidance schemes. But tax
avoidance is ones legal right as held in a
number of cases. Tax avoidance through
legitimate means (tax planning) is different from
tax evasion.
72
Commissioner Empowered to Re-characterize Income
Deductions
This provision has even declared tax avoidance
as illegitimate and forbidden. Not only the
taxpayers have been deprived of a lawful right,
but the taxation officers have been given
unqualified powers to declare whatever they may
conceive and label it as a tax avoidance
scheme. Although this concept has recently been
introduced in the number of countries of the
world like UK in the year 2000 and is still in
its infancy. We feel that in Pakistan this
discretionary power may be misused.
73
Commissioner Empowered to Re-characterize Income
Deductions
Proposal The operation of this provision may be
suspended. Amendment is needed to attract
provisions to such transaction only, which has no
commercial purpose and value.
74
Un-explained Investment etc. deemed to be Income
Sub-section (2) of Section 13 of the Repealed
Ordinance provided that where the value of any
investment or article referred to in clause (aa),
(b), (c) or (d), or the amount of expenditure
referred to in clause (e) of sub-section (1) is,
in the opinion of the Deputy Commissioner, too
low, the DC after giving a reasonable opportunity
to the assesses of being heard may determine a
reasonable value or the amount thereof, as the
case may be, and all the provisions of
sub-section (1) shall have effect accordingly
75
Un-explained Investment etc. deemed to be Income
whereas sub-section (3) of section 111 which is
corresponding section of the Repealed Ordinance
authorizes the Commissioner to include the
difference in the persons income chargeable to
tax without providing him a reasonable
opportunity of being heard while making addition
of any amount thereof. We feel this is against
the all norms of natural justice.
76
Un-explained Investment etc. deemed to be Income
Proposal After the words the Commissioner may,
the words after giving to the taxpayer a
reasonable opportunity of being heard and may
be inserted.
77
Amendment of Assessment
Sub-section 5 of section 122 provides that an
assessment order in respect of a tax year, or an
assessment year, shall only be amended under
sub-section (1) and an amended assessment for
that year shall only be further amended under
sub-section (4) where, on the basis of definite
information acquired from an audit or otherwise.
78
Amendment of Assessment
Similarly sub-section (5A) of Section 122
provides that Commissioner may amend or further
amend, an assessment order, if he considers that
assessment order is erroneous in so far it is
prejudicial to the interest of revenue. This
power to the Commissioner is against the
principles of natural justice as if he is
examining the tax records to ascertain whether
the assessment order completed is prejudicial to
the interest of revenue or not, he should examine
all the areas once for all and amend the order
accordingly and should not be authorized to again
amend the same order.
79
Amendment of Assessment
The sub-section 4 also provides that Commissioner
may further amend the assessment order as many
times as may be necessary within six years of the
date of original assessment. This provision of
law is against all the norms of justice, equity
and fair play.
80
Amendment of Assessment
Proposals i) 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.
81
Amendment of Assessment
Proposals ii) That re-opening of the case should
be made only by the Regional Commissioner of IT
after giving proper opportunity to the taxpayer
of being heard by issuing specific show-cause
notice in this regard. It is against the tenets
of justice that the same IT Commissioner 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.
82
Amendment of Assessment
Proposals iii) Moreover where an assessment is
required to be amended under Section 122 (5A)
that can be amended only once and thereafter this
sub-section cannot be invoked.
83
Disposal of Appeals by the Appellate Tribunal
Section 132 provides that the Appellate Tribunal
shall afford an opportunity of being heard to the
parties to the appeal and in case of default by
any of the party on the date of hearing, the
Tribunal may if deem fit, dismiss the appeal in
default or may proceed ex-part to decide the
appeal on the basis of available record. This
provision of law is in contradiction of Rule 20
of the Income Tax Appellate Tribunal Rules, 1981,
which provides that in case of non-appearance of
appellant or respondent, the Tribunal may proceed
Ex-part and decide the appeal on merits.
84
Disposal of Appeals by the Appellate Tribunal
Proposal That said sub-section (2) may be
substituted with the following- The appellate
Tribunal shall afford on 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-part to
decide the appeal on the basis of the available
record.
85
Alternate Dispute Resolution
Section 134A introduced the above mechanism for
the first time through Finance Act, 2004. The
original idea of providing taxpayer a forum to
resolve tax related disputes and to liquidate
arrears of tax was provided in the Sales Tax Law
under section 47A through Finance Act, 2003.
86
Alternate Dispute Resolution
I feel due to poor drafting of sub-section (6), a
number of persons understand that in case the
aggrieved person is not satisfied with the orders
of the Central Board of Revenue, he may file an
appeal or reference against the CBRs order with
the appropriate authority, tribunal or court
under the relevant provisions of this Ordinance
within a period of sixty days of the order passed
by the Board under this section has been
communicated to the aggrieved person.
87
Alternate Dispute Resolution
In the clause 46 of the CBRs publication Salient
Features and Rationale of Proposals for Budget
2004-2005, it is stated that the taxpayers will
continue to have the right of appeal if they are
not satisfied with the findings of the committee
and limitation for appeal shall be extended for
the period consumed in alternate dispute
resolution process.
88
Alternate Dispute Resolution
Sub Section (4) of the Section 134 A provides
that the Central Board of Revenue may on the
recommendation of the committee, pass such order,
as it may deem appropriate. In my humble view the
recommendation made by the committee should be
accepted in a better spirit unless there is any
apparent mistake.
89
Alternate Dispute Resolution
It is provided in sub-section (5) that incase the
matter is already sub-judice before any authority
or tribunal or the court, on agreement made
between the aggrieved person and the Board in the
light of recommendations of the committee shall
be submitted before that authority, tribunal or
the court for consideration and orders as deemed
appropriate.
90
Alternate Dispute Resolution
I feel instead of communicating the agreement to
the appellate forum, the appeals filed by the
respective parties should be withdrawn.
91
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 (ITAT).
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 is
creating delay in finalization of pending issues
and causing additional cost to the taxpayer.
92
Direct Appeal to the High Court
Proposal 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.
93
Profit on Loan Agreements
Sub-section (1) of section 151 provides that
different classes of taxpayers paying profit on
debts shall deduct tax at the prescribed rates
except on profit on loan obtained under agreement
between borrower and a banking company or a
development finance institution. We all are fully
aware that, it is also a general norm that
companies grant loans to their sister concerns
and subsidiaries.
94
Profit on Loan Agreements
In past question of withholding of tax on such
loans was raised and it had already been settled
and appropriate amendment was also made in the
law to exclude such companies from preview of
withholding provisions. Proposal In clause (d) of
sub-section 1 of section 151 after the words or
a development finance institution the words or
Inter company loans be added.
95
Exemption from Withholding Tax On Payments
Covered Under The Presumptive Tax Regime
The Finance Act, 2004 has brought many services
under the Presumptive Tax Regime like Commission
earned by the Travel Agents etc. On the one hand
the taxes deducted on their incomes constitute
full and final tax liability and on the other
hand their clients while making payments to them
are also deducting tax under section 153, which
unnecessary creating hardship for them and refund
as well.
96
Power To Enter And Search Premises
Section 175 provides that in order to enforce any
provision of this Ordinance (including for the
purpose of making an audit of a taxpayer or a
survey of persons liable to tax), the
Commissioner or any officer authorised in writing
by the Commissioner for the purposes of this
section- (a) shall, at a times and without prior
notice, have full and free access to any
premises, place, accounts, documents or computer
97
Power To Enter And Search Premises
(b) may stamp, or make an extract or copy of any
accounts, documents or computer-stored
information to which access is obtained under
clause (a) (c) may impound any accounts or
documents and retain them for so long as maybe
necessary for examination or for the purposes of
prosecution
98
Power To Enter And Search Premises
(d) may, where a hard copy or computer disk of
information stored on a computer is not made
available, impound and retain the computer for as
long as is necessary to copy the information
required and (e) may make an inventory of any
articles found in any premises or place to which
access is obtained under clause (a).
99
Power To Enter And Search Premises
The provision is very harsh in nature. It also
provides for action to be initiated by the
Commissioner without prior notice, which does not
meet the principle of natural justice.
100
Power To Enter And Search Premises
Proposal Appropriate amendment be made in this
section as to ensure that before any action under
this section is taken by the Commissioner he
should issue a show cause or prior notice which
is properly and duly served on the taxpayer and
the access does not extend to entering
residential premises.
101
Notice To Obtain Information Or Evidence
Under section 176 the Commissioner can call for
any information from any person. By virtue of
this section, where a hard copy or computer disk
of information stored on a computer is not made
available to the Commissioner, he has the power
to require production of the computer on which
the information is stored and impound and retain
the computer for as long as is necessary to copy
the information required. We are afraid of misuse
of such powers in its application, in reality.
102
Notice To Obtain Information Or Evidence
Proposal This provision of law may be reviewed
for reduction of discretionary powers.
103
Audit
Section 177 of the Income Tax Ordinance, 2001
provides that the Central Board of Revenue may
lay down criteria for selection of any person for
an audit of persons income tax affairs, by the
Commissioner and shall keep the criteria
confidential.
104
Audit
Sub-section (4) also authorizes Commissioner that
he may also select for an audit of the persons
income tax affairs, in addition to the selection
made in accordance with the criteria laid down by
the CBR having regard to.
105
Audit
Proposals That parameters and criteria for
selection of audit should be System-based. That
Sub-section (4) may be deleted.
106
Penalty For Non-Payment of Tax
Section 183 provides a taxpayer who fails to pay
any tax (other than penalty imposed under this
section) due under this ordinance by the due date
shall be liable for a penalty equal to- (a) in
the case of the first default, 05 of the amount
of tax in default (b) in the case of a second
default, an additional penalty 20 . ( c) in the
case of a third default, an additional penalty of
25 . (d) in the case of a fourth and subsequent
default, an additional penalty of up to 50.
107
Penalty For Non-Payment of Tax
The above provision of law provides that the
Commissioner may impose penalty on the taxpayer
between five to hundred per cent in case of first
to fourth and subsequent default. However,
nothing has been mentioned that what would be the
period to justify the levy of additional tax
between each of the default.
108
Penalty For Non-Payment of Tax
Proposals At least three months time must be
provided between each default. Quantum of penalty
may be reduced.
109
Advance Ruling
Advance rulings also share the burden of
judiciary and restrict revenue officials from
using discretionary and injudicious powers.
Government deserves lot of appreciation for
introduction of such provisions in the law, which
facilitate only to the foreign investors. In my
humble view this facility should be available to
the local investors as well. There is no
provisions in respect of appellate remedy in case
an adverse ruling issued by the CBR, which may
also be provided. I am also of the view that
Advance Ruling issued should be notified for
public interest.
110
Taxability of Murahaba Transactions
Pakistan is the one of the pioneer countries in
the Islamic world to successfully introduce
Islamic Banking phenomenon. In past number of
provisions have been introduced to provide level
playing field to the Islamic Bank/Financial
Institutions with Conventional Banks/ Financial
Institutions. Recently another mode of Islamic
Banking Instruments Murahaba has been introduced.
For the interest of reader of this document the
following comparison has been made between
Islamic and Conventional Banks/Financial
Institutions nature of transactions/mode of
operation.
111
Taxability of Murahaba Transactions
Conventional bank grant loans to their customers
for purchase of goods/machinery and are not
required to deduct withholding tax on
disbursement of such loans whereas in Murahaba
transaction the bank will first buy
goods/machinery for its customers and
subsequently sell the same goods to them at a
agreed price, which constitute cost plus profit.
In this way the Islamic Bank is liable to
withhold tax first at the time of purchase of
goods/machinery on behalf of its customer and
secondly while they sell the same goods/machinery
to their customers, who withhold tax, which
increase the overall cost of transaction.
112
Taxability of Murahaba Transactions
In Conventional banking the markup is charged or
accrued by the bank according to the time of loan
utilized by its customer and offered for taxation
purpose however, in the case of Murahaba the
goods is being sold and the receivables for
principals as well as profit is accounted for at
the time of sale of goods to its customer and as
such the entire profit which is recoverable in
the many years to come become subject to tax in
the year in which the sale of goods/machinery is
effected.
113
Taxability of Murahaba Transactions
In conventional banking the minimum tax u/s.113
is chargeable on the interest earned by the bank
on the loan given to the customer whereas in the
case of Murahaba transactions the minimum tax is
chargeable on the sale price of goods/machinery
sold to the customer.
114
Taxability of Murahaba Transactions
Proposal I therefore proposed that appropriate
amendments in section 113,148,169 and Part-IV of
the Second Schedule to the Income Tax Ordinance
be made to provide level playing field to the
Islamic Banks/Financial Institutions with
Conventional Banks/Financial Institution.
115
Reduced Rate of 1 on local purchase of Edible Oil
CBR has issued Circular No.14 of 2004 dated July
13, 2004, wherein it is stated that the
manufacturers of cooking oil or vegetable ghee or
both have been provided a reduced rate of 1 on
local purchase of edible oil which too shall
constitute final discharge of tax liability of
such local purchase. For this purpose a following
new clause (13C) has been inserted in Part II of
the Second Schedule to the Ordinance.
116
Reduced Rate of 1 on local purchase of Edible Oil
In respect of edible oil purchased locally by
manufacturers of cooking oil or vegetable ghee or
both, the rate of income tax shall be 1 of the
purchase price. On examination of above clause,
following questions have emerged- 1. Under which
provision of law the statement in lieu of Return
of Income under Section 114 would be filed? 2.
Under which provision of law the tax so paid on
purchase of edible oil would be considered as
final discharge of tax liability?
117
Reduced Rate of 1 on local purchase of Edible Oil
Proposal Appropriate amendments may be made in
sections 114 and 169.
118
Taxability of Capital Gains on sales of
Stocks/Shares earned by the Insurance Companies
As per Rule 5(b) of the Fourth Schedule to the
Income Tax Ordinance, 2001, the Capital Gains
earned by General Insurance Companies on sale of
stocks/shares and disposal of investments is
subjected to tax _at_ 35 whereas, it is exempted
from tax to all other taxpayers. It is proposed
that Insurance Companies may also be exempted
from levy of income tax on capital gains.
119
Thank you
Presentation by Abdul Qadir Memon
At Income Tax Bar Association Karachi
April 11, 2005