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Taxation
The Federal Board of Revenue (FBR) has clarified that the Commissioner has the power to conduct audit of banks under Section 177 of the Income Tax Ordinance 2001. According to the income tax circular 9 of 2019 issued by the FBR here on Tuesday, as per rule 9, the provisions of the Income Tax Ordinance not specifically dealt with in the rules in the Seventh Schedule shall apply, mutatis mutandis, to the banking company. As such, the Commissioner has the power to conduct audit of a banking company under Section 177.

However, for the removal of doubt, an explanation has been added after sub-rule (h) of rule 1 clarifying that nothing contained in the Seventh Schedule shall be so construed as to restrict power of Commissioner, while conducting audit of the income tax affairs under section 177, to call for record or such other information and documents as he may deem appropriate in order to examine accounts and records to conduct enquiry into expenditure, income, assets and liabilities of a banking company and all the provisions of the Ordinance shall be applicable accordingly.The FBR further clarified that the income, profits and gains and tax payable thereon of a banking company is computed as per rules in the Seventh Schedule. As per sub-rule (c) of rule 1, provisions for advances and off-balance sheet items shall be allowed up to a maximum of 1 percent of total advances and 5 percent of total advances for consumers and small and medium enterprises.

Through the Finance Act, 2019, the existing sub-rule (c) of rule 1 has been clarified for the removal of any doubt by adding an explanation that provision for advances and off balance sheet items at the rate of 1 percent or 5 percent, as the case may be, shall be exclusive of reversal of such provisions, and that reversal of bad debts classified as ‘doubtful’ or ‘loss’ are taxable as the respective provisions have been allowed.

Prior to the Finance Act, 2019, the amount of ‘bad debts’ classified as ‘doubtful’ or ‘loss’ were allowed as expense and ‘bad debts’ classified as ‘sub­ standard’ were not allowed as expense. Through the Finance Act, 2019, sub-rule (d) of rule 1 has been amended so that amount of ‘bad debt’ classified as ‘loss’ shall be allowed as expense and the amount of ‘bad debt’ classified as ‘sub-standard’ and ‘doubtful’ shall not be allowed as expense.The rate of tax on taxable income of a banking company is 35%. Through the Finance Act, 2019, a new rule 6C has been inserted in the Seventh Schedule which provides tax rate of 37.5 percent on taxable income from Federal Government Securities. As per this rule, the taxable income arising from additional income earned from additional investment in Federal Government securities for the tax year 2020 and onwards shall be taxed at the rate of 37.5%.

A banking company shall furnish a certificate from external auditor along with accounts while e-filing return of income certifying the amount of money invested in Federal Government securities in the preceding tax year, additional investments made for the tax year and mark-up income earned from the additional investments for the tax year. “Additional income earned” has been defined to mean mark-up income earned from additional investment in Federal Government securities by the bank for the tax year. The term,

“Additional Investments” has been defined to mean average investment made in the Federal Government securities by the bank during the tax year, in addition to average investments held during the tax year 2019. As per sub-rule (3) of rule 6C, the Commissioner may require the banking company to furnish details of the investments in the Federal Government securities so as to ascertain the applicability of enhanced rate of tax, the FBR added.
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Taxation
The Federal Board of Revenue (FBR) has said that persons whose names are not appearing in the Active Taxpayer List (ATL) will be subjected to 100 percent increased rate of tax. The FBR has explained the collection of tax, computation of income and tax payable of persons not appearing in the ATL [Section 100 BA, the Tenth Schedule] through an income tax circular issued here on Tuesday.

Prior to the Finance Act, 2019, a concept of non-filer existed in the Income Tax Ordinance whereby higher tax rates of withholding were prescribed for persons who were non­filers. Such non-filers could claim adjustment of the higher tax collected at the time of filing of income tax returns. The aim was to compel the non-filers to file their returns of income. However, it was observed that the non-filers, even though subjected to higher withholding rates, still had a propensity not to file their returns. This proved detrimental to the exercise of expansion or tax base. This was due to the absence of an explicit provision specifying a standard procedure for action against such persons.

Through the Finance Act, 2019, the concept of “non-filers” has been done away with and a new concept regarding persons not appearing in the active taxpayers’ list has been introduced. This concept is a major paradigm shift from the erstwhile non-filer higher tax regime is that it not only penalises those persons not appearing in the ATL but also introduces an effective mechanism for enforcing returns from such persons. In this regard, a new section 100BA has been introduced which provides that collection or deduction of advance income tax, computation of income and tax payable thereon shall be determined in accordance with the rules in the newly introduced “The Tenth Schedule” which envisages the entire path to be adopted by the Inland Revenue Department to enforce returns from persons who make financial transactions yet choose not to file their returns of income.The salient features of this scheme are as under:-

i. Persons whose names are not appearing in the ATL will be subjected to hundred percent increased rate of tax.

ii. Where a withholding agent is of the opinion that hundred percent increased tax is not required to be collected on the basis that the person was not required to file return, the withholding agent shall furnish a notice to the Commissioner having jurisdiction over withholding agent setting out the name, CNIC or NTN and address of the person not appearing in the ATL and the nature and amount of the transaction on which tax is required to be collected or deducted; and reason on the basis of which it is considered that the person was not required to file return or statement, as the case may be.

The Commissioner shall accept or reject the contention on the basis of existing law within thirty days. In case the Commissioner fails to respond within thirty days, permission shall be deemed to be granted not to deduct tax at hundred percent increased rates. Withholding agent shall however be responsible for any inaccurate furnishing of such information and penal action may be undertaken against diligent withholding agents.

Where the person’s tax has been deducted or collected at hundred percent increased rate and the person fails to file return of income for the year for which tax was deducted, the Commissioner shall make a Provisional Assessment within sixty days of the due date for filing of return by imputing income so that tax on imputed income is equal to the hundred percent increased tax deducted or collected from such person and the imputed income shall be treated as concealed income. However, the imputable income so calculated or concealed income so determined shall not absolve the person so assessed, from requirement of filing of wealth statement under sub­ section (1) of section 116, the nature and source of amounts subject to deduction or collection of tax under section 111, selection of audit under section 177 or 214C or subsequent amendment of assessment as provided in rule 8 and all the provisions of the Ordinance shall apply.The provisional assessment shall abate if the person files its return within forty five days of completion of provisional assessment. Where the return is not filed within forty five days of provisional assessment, it shall be treated as final assessment and the Commissioner shall initiate penalty proceedings for concealment of income, the FBR added.
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