Ali A' Rahim Director

1
BUDGET PROPOSAL 2009 ON INCOME TAX
The Income Tax Bar Association, In Collaboration
with Pakistan Tax Bar Association, Karachi April
25, 2009

• Presented by
• Ali A. RahimDirector

2
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
• Further, efforts must be made to bring
  more people into tax base.

• Establishment of Research and Development
  Department under the auspicious of Federal Board
  of Revenue (FBR) in corroboration with Business
  Community, Professionals, Tax Advisors and
  other Stake holders
• Area of studies-examples -
• Undocumented economy
• E-Commerce
• Economic and Tax Factors
• Contribution by different Sectors According to
  percentage of G. D. P.

3
TAX REFORMS
(Contd)

• Further, encouragement and Incentives be provided
  for Savings and Investment
• New provision to be introduced for Tax Credit for
  investments made in National Saving Schemes and
  quoted and unquoted mutual funds to give
  incentives for savings which will create
  investment and employment
• It is proposed that tax should be imposed on all
  segments of the society. Exemptions and
  concessions to certain classes of income or
  classes of persons be abolished.
• SME
• It is proposed that reduced rates be Extended
  for Small Company and Medium Enterprise (SME),
  and those companies incorporated before July 01,
  2005.

4
TAX REFORMS
(Contd)

• CAPITAL GAINS
• Capital gain on sale of properties should be
  reintroduced by the provincial governments and
  collection of this tax should be handled by the
  FBR and then transferred to the Provinces.
• Capital gain on sale of shares should only
  be exempted subject to certain conditions.
• Tax payers may be given incentive if they
  give
• documented bills for sales and supply,
  contracts or
• services.

5
TAX REFORMS
(Contd)

• For automation and facilitation Common Tax
  Identification (CTI) number to be introduced for
  Companies and Firms and CNIC for Individuals.
• Efforts to be made for effective legislation of
  Regulations which require mandatory incorporation
  of the above on all the documents executed in any
  form, at any stage e.g.
• (a) Transfer of Properties
• (b) Transfer of Shares
• (c) Transfer of Vehicles any model or cc
• (d) Bank Documents
• (e) Travel Documents
• (f) Large Expenditures

6
IRRITANTS

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

• E-filing of returns and statements should not be
  made mandatory.
• Jurisdiction for monitoring of tax on deductions
  be clearly made and these should be checked once
  in three (3) years.

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

7
PERMANENT ESTABLISHMENT
Section 2(41)
8
ROYALTY
Section 2(54) (g) 37(5)
ISSUE The consideration for the disposal of any
property or right referred to in Sub-clauses (a)
through (e) are included within the definition of
term royalty. If the definition of the capital
assets as contained in Sub-section (5) of
section 37 is read, the disposal of any property
or right falls under the purview of Sub-section
(5) of section 37 PROPOSAL It is, therefore,
suggested that clause (g) of section 2(54) be
deleted which is overlapping section
37(5). RATIONALE To avoid confusion and
overlapping
9
ROYALTY FEE FOR TECHNICAL SERVICES
Section 6 Rules 18 19 of the Income Tax
Rules, 1982
ISSUE Option under Rules 18 19 of the Income
Tax Rules, 2002 read with section 6 PROPOSAL
The said concession should either be brought in
through an amendment in section 6 or it may be
put in Second Schedule, which is part of the
statute itself RATIONALE The intention of the
lawmaker appears to be to allow the non-resident
persons having a permanent establishment in
Pakistan to avail final tax basis assessment as
provided under section 6 read with section 8.
According to the rules of interpretation, rule
cannot override the main statute, the concession
given to the non-residents in the said rules is
not legally proper, this is despite the fact of
usage of words Subject to the Ordinance
appearing in the beginning of section 6.
10
TAXABILITY OF EMPLOYEES CONTRIBUTE TO PROVIDENT
FUND
Section 12, Sixth Schedule Part I Rules 3.
ISSUE By virtue of an amendment made in Rule 3
of Part I of the Sixth Schedule to the Income Tax
Ordinance, 2001, any amount in excess of Rs.
100,000/- paid to an employee by a Provident Fund
is taxable in the hands of the employee. PROPOSAL
It is proposed that this additional burden on
the salaried class may be withdrawn. RATIONALE
Since the salaried class is the most tax
compliant class of people and paying their due
share of taxes as applicable, they should not be
further burdened.
11
INCOME FROM PROPERTY
Section 15(2)
ISSUE Under this section, a charge is created on
rent received or rent receivable by a person in a
tax year other then the rent exempt from tax
under this Ordinance. Sub section (2) defines the
term Rent which means any amount received or
receivable by the owner of land or a building as
consideration for the use or occupation of, or
the right to use or occupy, the land or building
and including forfeited deposit paid under a
contract for sale of land or a building PROPOSAL
It is suggested that in Sub-section (2),
where-ever the word Or has been used between
the expressions The Land Building said Or
be replaced by And
12
INCOME FROM PROPERTY
(Contd)
Section 15(2)
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.
13
ACCRUAL BASIS OF ACCOUNTING
Section 34(5)
ISSUE Where liabilities are not discharged
within three years. PROPOSAL It is, proposed
that words used in Sub-section (5) Expenditure
be replaced by word Trading Liability
14
STOCK IN TRADE
Section 35
ISSUE Under this section, the concept of
determination of the cost of Stock in trade
disposed of has been introduced. Generally in the
cases of companies, the valuation has to be
mandatorilly made on the basis of International
Accounting Standards. PROPOSAL It is,
therefore, proposed that in section 35,
where-ever word Person has been used, words
Other Than Companies may be inserted.
RATIONALE Conversance of Tax laws with
International Accounting Standards.
15
INCOME FROM OTHER SOURCES
Section 39(3)
ISSUE Loan, advances, deposit for issuance of
shares and gifts otherwise than by a crossed
cheque drawn on a bank or through normal banking
channel from person holding NTN Card. However
practical difficulties arise in respect of
payment received as loan or gift from
non-resident to family members. PROPOSAL It is
therefore, proposed that a proviso be added for
dispensing with the condition of NTN
(Certificate) for amounts received from abroad.
16
INCOME FROM OTHER SOURCES
(Contd)
Section 39(3)
ISSUE The world is moving very fast. The concept
of paper money is being replaced by plastic
money. The normal banking practices are now
absorbing concept of electronic banking. One may
receive loan, gift or advance through other mode
of transfers. PROPOSAL (a) It is, therefore,
suggested that the condition of holding an NTN
should be abolished. Since all bank accounts have
CNIC's. (b) Advance Rent received be included
Sub-section (4) subject to just and reasonable
restrictions.
17
GROUP TAXATION
Section 59(AA)
ISSUE This concepts were introduced in 2007, but
was subject to corporate governance requirements,
specified by Security Exchange Commissioner of
Pakistan (SECP) and rules to be framed by
FBR. PROPOSAL Two years have elapsed and yet
the corporate governance requirements and rules
of the FBR have not been enacted. A draft rule
has been now circulated vide SRO 301(I)/2009
dated April 07, 2009 along with 98 other changes.
We hope that this will finally be adopted soon.
18
GROUP RELIEF
Section 59(B)
ISSUE This concept was introduced in 2004 and was
amended in 2007, and was subject to such
corporate governance requirements specified by
SECP and designated as companies entitled to
claim relief. PROPOSAL Since a new draft rule
has now been circulated vide SRO 301(I)/2009
dated April 07, 2009 we are optimistic that this
will be enacted soon.
19
INVESTMENT IN SHARES
Section 62
ISSUE Increase in investment rebate. PROPOSAL
It is proposed that the limit of investment
should be increased to Rs. 500,000/- RATIONALE
To encourage investment for industrialization.
20
FAIR MARKET VALUE
Section 68
ISSUE Discretion of the Commissioner PROPOSAL
It is, proposed that suitable parameters for
valuation may be prescribed by the FBR in the
Income Tax Rules, 2002 and for the purposes of
Immovable properties, changes have been suggested
in SRO 301(I)/2009 dated April 07, 2009. However,
for the basis of valuation of constructed
properties the fair market value is to be
determined by the Commissioner of Income Tax. It
is suggested that the collector valuation should
be accepted on one side and the valuation table
of the collector should be substantially
increased to being it in close proximity to the
actual market price. RATIONALE To
eliminate the chance of encouraging corruption.
21
NON-RECOGNITION RULES
Section 79(1) (D)
ISSUE Under section 79(1) under clause (d) no
gain or loss shall be taken to arise where the
asset is compulsorily acquired under any law, but
a condition has been put that such gain or loss
will not be taken if consideration received is
reinvested by the recipient in any asset of a
like kind within one year of the
disposal. PROPOSAL It is, proposed that words
Of A Like Kind be deleted. The period for
reinvestment i.e. one year is too short. This may
be increased to atleast three years.
22
NON-RECOGNITION RULES
(Contd)
Section 79(2)
ISSUE Sub-section (2) of section 79 stipulates
that provisions of section (1) shall not apply
where person is a non-resident. This seems to be
discriminatory and could cause unnecessary
hardship in the case of gift and transmission of
the asset to an executor or beneficiary on the
death of a person and distribution of assets to
non-resident members of an AOP or non-resident
shareholder in the case of a company, in the
event of liquidation of the company or
dissolution of an AOP. PROPOSAL It is,
proposed that Sub-section (2) be
deleted. RATIONALE To eliminate
discrimination.
23
FURNISHING OF RETURN AS REPRESENTATIONS
Section 115(4)172(3)(C)
ISSUE Companies paying dividends to
non-residents may be treated as representative
and asked to file statements under section 115(4)
by the commissions. PROPOSAL It is proposed
that such companies may not be treated as
Representatives for the purposes of dividends
declared if they file the statement under section
165 (as is the case of salary income). RATIONALE
To reduce burden on companies for filing returns
as representatives.
24
EXTENSION OF TIME FOR FURNISHING RETURN OTHER
STATEMENTS
Section 119(2)
ISSUE Application to the Commissioner. PROPOSAL
It is proposed that right of representation
before the Director General may also be
introduced to redress the grievance of taxpayers,
if the said application is rejected by the
Commissioner of Income Tax. RATIONALE
Principles of natural justice.
25
EXTENSION OF TIME FOR FURNISHING RETURN OTHER
STATEMENTS
(Contd)
Section 119(6)
ISSUE According to Sub-section (6) extension of
time granted under Sub-section (3) shall not for
the purpose of charge of additional tax under
Sub-section (1) of section 205 change the due
date for payment of Income Tax under section 137.
The interpretation of this Sub-section (6)
plainly shows that addition tax imposition shall
not stop running. PROPOSAL It is, proposed that
Sub-section (6) may kindly be deleted. RATIONALE
It is submitted that once extension is granted
by the Commissioner, it cannot be said that
Taxpayer has failed. Even otherwise, once the
Commissioner grants time, it will be very harsh
in genuine cases.
26
DECESION IN APPEAL BY THE COMMINISSIONS
Section 129
ISSUE Upto the year 2005 the Commissioner of
Income Tax (Appeals) CIT(A) had the power to
set aside orders framed by the assessing
offices. PROPOSAL It is, proposed that this
power to set aside the appeal should be
re-incorporated in the law. RATIONALE It has
been noticed that to give relief, the CIT(A) is
required to examine evidences. However due to
paucity of time and with the staff that is posted
with the CIT(A) it is not possible for the
CIT(A), hence this power to set aside be
re-incorporated in the law.
27
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
28
DISPOSAL OF APPEALS BY APPELLATE TRIBUNAL
(Contd)
Section 132(2)
RATIONALE In fiscal laws, and more particularly
law governing Income tax, it has been the
practice to decide the matters on merits, as
Income Tax Appellate Tribunal (ITAT) is the last
fact finding authority and by virtue of
Sub-section (1) of section 132, the decision of
the Appellate Tribunal on an appeal shall be
final. In our considered opinion, the language
used in Sub-section (2) is defective and needs
suitable amendment as it cannot be presumed that
legislature intended to cause injustice.
29
ALTERNATE DISPUTE RESOLUTION
Section 134A Read with Rule 231(C)(6)
ISSUE Time limit of 30 days for
disposal PROPOSAL Period for disposal of
application by ADR Committee to be extended from
30 to 90 days RATIONALE Reasonable period for
effective decision making
30
ALTERNATE DISPUTE RESOLUTION
(Contd)
Section 134A Read with Rule 231(C)(15)
ISSUE - Time limit for decision by Central Board
of Revenue (CBR) - Rejection of
recommendation by CBR PROPOSAL - Appropriate
time limit for decision by CBR preferably six
months be incorporated - Cogent reasons for
disagreement with
recommendation of the committee must be given
by FBR. RATIONALE Effective
decision making
31
STAY OF DEMAND
Section 137
ISSUE Unrealistic and frivolous demands are
created by the tax authorities due to pressure on
them. PROPOSAL Automatic stay of demand upto
85 for first stage of appeal and 50 till the
ITAT stage of appeal be provided (as was provided
in the Repealed Ordinance, 1979). RATIONALE
Principles of natural justice.
32
ADVANCE TAX
Section 147(4)(4B)
Appropriate amendment be made to adjust -
unadjusted amount of tax of one quarter to
another within the same tax year (refer to the
formula).
33
EXEMPTION CERTIFICATE
Section 153
ISSUE Group companies which share common expenses
reimburse the same to the company that actually
pays the expenditure, after deduction of the
relevant tax. PROPOSAL It is, proposed that
reimbursement of expenses, between group
companies should be exempted from the deduction
of tax. RATIONALE To reduce the cash flow
burden and also the process of refund.
34
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
CIT(A). RATIONALE No time frame prescribed.
35
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 this
provision be brought in under the Income Tax
Ordinance, 2001. RATIONALE In our opinion, such
statement is instrumental for broadening the tax
base.
36
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 a provisio be added after
Sub-section (4) as under -
37
REFUNDS
(Contd)
Section 170
Provided that if no order is passed within the
time specified in this Sub-section, the
application shall be deemed to have been accepted
and all the provision of this Ordinance shall
have effect accordingly Without prejudice to
above Sub-section (5) is not in conformity
with section 127, therefore, it is proposed that
necessary amendments be made. RATIONALE Good
governance and to fill up lacunas.
38
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. A person is
liable for penalty at various rates of penalties
ranging for 5 to 100 of such tax due. No time
frame is provided for imposition of penalties
between each default. PROPOSAL It is proposed
that a proviso be added to provide the time frame
between each event Proviso Provided that
no penalty shall be imposed in case of subsequent
failure unless the time between passing of each
order is not less than 30 days.
RATIONALE Curative amendment.
39
ADVANCE RULING
Section 206A
ISSUE Advance ruling provisions to
non-residents. PROPOSAL Appropriate amendment
is proposed to widened and extended the scope to
other resident taxpayers also.
40
INCOME TAX PRACTITIONER
Section 223(2)(F)
ISSUE Appearance before tax authorities. PROPOS
AL It is proposed that Income Tax Practitioner
(ITP) should be replaced with Federal Tax
Practitioners (FTP). RATIONALE Since one
window is being implemented for all Federal
Taxes, Inland Revenue so the person can also
represent in Sales Tax and Federal Excise
casesfacilitation.
41
TAX WITHHOLDING ON CASH WITHDRAWALINCREASE IN
THRESHOLD
Section 231A
ISSUE Cash Withdrawal from banks tax
withholding. PROPOSAL Threshold be increased
from Rs. 25,000/- to Rs.
50,000/- RATIONALE Relief for small
Withdrawals.
42
RATE OF TAX - NON SALARY
First Schedule Part-I Division 1
ISSUE Exemption limit. PROPOSAL Exemption
should be increased to Rs. 250,000/- RATIONALE
Relief to taxpayers.
43
RATE OF TAX - SALARY
First Schedule Part-I Division 1A
ISSUE Exemption limit Applicable rate of
tax PROPOSAL Exemption should be increased to
Rs. 300,000/- It is proposed that the slabs
should be readjusted to provide relief to
taxpayers. RATIONALE Relief to the salaried
class.
44
EXEMPTION FOR WIDOWS SENIOR CITIZENS
New Clause Part- I Second Schedule
ISSUE Behbood Certificates and Pensioners
Benefit Account can only be purchased by widows
and seniors citizens and are exempted for
deduction of tax but have to pay tax on filing of
the annual return. PROPOSAL They should be
given special relief, by exempting them from tax
on these certificates and accounts. RATIONALE
To give benefit to the senior citizens for
reduction of profit and effect of inflation.
45
RATE OF TAX QUOTED COMPANIES
First Schedule Part-I Division II
ISSUE Applicable rate of tax. PROPOSAL It is
proposed that the rate of tax for quoted public
companies be presently reduced to 30 from
35. RATIONALE To encourage companies to be
quoted on the stock exchanges.
46
EXEMPTION COMPUTER TRAINING INSTITUTES
Clause 93-Part-I Second Schedule
ISSUE Computer Training Institutions (expired
June 2005). PROPOSAL Period of Exemption be
extended upto June 2010. RATIONALE To promote
computer literacy.
47
MINOR CORRECTIVE AMENDMENTS

• Deduction of Tax at Source
• Clause (36A) of Part IV of Second Schedule to be
  made as Part of Clause (59) of Part IV of Second
  Schedule
• Charges Rule 230
• Due to availability of returns and statements
  through internet Rule 230 to be deleted.
• National Tax Number Section 181 read with Rule
  83
• Substitution of Word Card with Certificate.

48
Thank You