Taxation

Economists and tax experts have opposed the proposal by the Economic Advisory Council to transfer collection of agricultural income tax from provinces to the Federal Board of Revenue (FBR).

Strongly opposing the proposal of granting such powers to the FBR, former Finance Minister Dr Salman Shah told Business Recorder here on Monday that the federal government has no clue about agriculture land holdings and details at a local level. Local governments at provincial levels must be empowered to collect and recover agricultural income tax. Local governments are working at the grass root level and they have the best knowledge about the size of land holdings and income of the land owner. However, federal government does not have such kind of information about agriculture lands.

Salman Shah added that the work of recovery of agricultural income tax could be undertaken by allowing local governments to do so. Presently, provincial governments provide funds to local governments for undertaking different projects. Local governments can generate maximum revenue at its level by collecting agricultural income tax, which could be effectively utilized at the local level.

Dr Ashfaque Hassan Khan, Principal and Dean, School of Social Sciences & Humanities, National University of Sciences & Technology (NUST) and a member EAC said that globally income is a federal subject. Irrespective of source of income, agriculture income tax should be collected by the federation. The government can prescribe an exemption threshold for excluding small farmers from the ambit of agriculture income tax.

Shahid Jami, a tax consultant stated that instead of entrusting the levy and collection of agricultural income tax to FBR, it would be appropriate to keep the status quo whereby Provincial Boards of Revenue (PBRs) are authorized to collect the said tax. However they have neither the requisite infrastructure nor the skills to assess agricultural income, despite having record of land-holding.

As per Sr.No.47 of the Fourth Schedule of the Constitution, enumerating the Federal Legislative List, the levy of tax on income other than agricultural income is the mandate of the federal government. Thus, the levy of income tax on the agricultural income is only the right of provincial governments.

He said that as per Article 260 of the Constitution, agricultural income means “agricultural income” as defined for the purpose of law relating to income tax.

The said definition of “agricultural income” is presently contained in section 41 of the Income Tax Ordinance, 2001. He said that all provincial governments enacted provincial agricultural Income Tax Acts. For example the Punjab Agricultural Income Tax Act, 1997 was enacted and initially the agricultural income tax was levied on fixed basis on landholdings. Later, in 2001 the tax was levied on agricultural income above Rs 80,000. The levy and collection of this tax has been entrusted to the provincial revenue department which was maintaining record of land-holdings.

Since then, the legal framework and the administrative structure to levy and collect income-based agricultural income tax exists in all the four provinces but due to political reasons the enforcement is lacking and provincial revenue departments are not issuing notices to the cultivators and the landholders to file their income-tax returns, the format of which is on the pattern of Federal Income Tax Return, he said.

During 2000, all four provinces through Provincial Ordinances levied sales tax on services which under the Constitution is a provincial subject. However, the levy and collection of the same was entrusted to the federal government and it was enforced through the FBR’s field formations till creation of provincial revenue authorities in 2012 onwards.

At present, provincial revenue authorities are fully functional and collecting sales tax on services and have also established field offices. In the presence of provincial revenue authorities, proposal to levy and collect income tax on agricultural income to the federation would be a step backwards. This is also contrary to the Constitutional mandate as well as the concept of provincial autonomy protected in the Constitution and backed by the 18th amendment.

Therefore, provincial revenue authorities should levy and collect provincial agricultural income tax, Shahid Jami concluded.

Taxation

Bidders’ session for under Tax Accelerating Growth and Reform (TAGR) project of World Bank on strengthening FBR’s capacity in information technology and fiscal research & tax policy was held at FBR Auditorium. It was an open house session for all bidders. The agenda was to discuss general concepts, reasons of failure in previous bids, World Bank expectation and how to prepare bidding documents to avoid any consequences.

Some 25 participants attended the workshop from various organisations, innovative integration; ORBIN; Info Tech; Techaccess; Jaffer Brothers; Metis International; Arcana, Mega plus; IBL-Unisys; Premier systems; Astron Tech; Synergy com; Neva Telecom; Supernet; DWP technologies; PTCL; CMA; Arwen tech.Chief Procurement TAGR headed the session, technical and general queries were responded by the procurement committee and PRAL team.

The session ended with vote of thanks and audience were informed that Request For Bids session will be held on February 6, at same hall and all queries, concerns regarding RFB document will be addressed in the next session.-PR

Taxation

The Federal Board of Revenue (FBR) has suspended all notices issued to inquire source of investment from filers who availed amnesty scheme; it is learnt. According to sources, field formations across the country have started issuing notices to filers, asking the source of investment declared in the amnesty scheme. The said action taken by the field formation has not only shaken the confidence of taxpayers and tax practitioners but also raised disenchantment among filers, who availed tax amnesty scheme.

In order to mitigate the situation, the board has now expressed serious concerns against the notices being issued to the filers to inquire source of investment declared in tax amnesty scheme. Replying to a question, sources said that Member (IR-Operation) in his written communication with field formation declared such actions against the law and warned the field formation to deal strictly in case of violation.

“Such actions by the field formation are against the law and would be dealt with strictly by the FBR,” Member (IR-Operation) stated in the letter. Furthermore, sources said that chief commissioners of all regional tax offices and large taxpayers units were now directed to look into the matter personally. To another question, sources said that Member (IR-Operation) had also ordered all chief commissioners to refrain their field formation from such illegal actions and ensured that no further notices would be issued.

Taxation

Federal Board of Revenue (FBR) Wednesday informed Prime Minister Imran Khan that the government has chalked out a comprehensive plan for restructuring of FBR and this strategy would be implemented in a phase-wise manner. The FBR team headed by FBR Chairman Mohammad Jehanzeb Khan and Minister of State on Revenue Muhammad Hammad Azhar briefed the Prime Minister here at the PM House.

Tax authorities informed the Prime Minister that restructuring of the tax machinery would start in the next few weeks and in this regard, a comprehensive plan has been chalked out so that taxpayers are encouraged and economy of the country is promoted. They said that elimination of corruption from the tax machinery is among the top agenda of the restructuring of the FBR.

To facilitate public, new website and facilitation desk are going to be established. For improving performance and ensuring transparency in the FBR, the Department of Internal Audit is going to be separated from the Bureau, the Prime Minister was told. Under the plan, the FBR has devised a strategy to promote tax culture in the country. The Prime Minister was briefed about the steps planned to encourage voluntary compliance and increase in number of filers of income tax returns and broadening of the tax base.

The meeting was also briefed in detail about steps taken so far for bringing non-filers and tax-evaders under tax net, bringing improvements in FBR, meeting FBR’s human resource needs, eradication of corruption, increasing capabilities of tax authorities, bringing changes in tax system, monitoring of officials’ performance, feedback of taxpayers and simplifying taxpaying as well as bringing overall changes in the FBR’s culture.

While addressing the meeting, the Prime Minister said that bringing reforms in the FBR is a significant part of the government agenda, adding that unfortunately the previous governments ignored such reforms as they never tried to strengthen the tax base. He said that previous regimes didn’t behave well with the business community, adding they kept tax system so complicated that people left relying on the FBR and the system; therefore, there is need to restore their confidence in this regard. The Prime Minister directed the FBR to focus on big tax evaders and bring non-filers under the tax net. Regarding benammi properties, he said that process of completion of Benami rules be completed forthwith.

He said that in the past the people, especially the business community, were harassed by tax officials and money collected through taxes was spent on the luxurious life style of the rulers. Due to which the confidence of people from tax and FBR has shaken. “That confidence needs to be restored,” he maintained.

Tax authorities informed the Prime Minister that the FBR has already established Automatic Exchange of Information (AEOI) Data Centre for exchange of financial information under Multilateral Competent Authority Agreements with other tax jurisdictions under the Organization of Economic Cooperation and Development (OECD) model. The FBR has established six Automatic Exchange of Information Zones including Commissioner Inland Revenue, AEOI Zone, Peshawar; Commissioner Inland Revenue, AEOI Zone, Islamabad; Commissioner Inland Revenue, AEOI Zone, Lahore; Commissioner Inland Revenue, AEOI Zone, Multan; Commissioner Inland Revenue, AEOI Zone, Karachi; and Commissioner Inland Revenue, AEOI Zone, Quetta, sources added.

The Prime Minister was informed the FBR is empowered to raise immediate demand and effect recovery on provisional basis in case of government confiscated local assets under Section 123 of the Income Tax Ordinance. The scope of this Section is proposed to be extended to discovery of undeclared offshore assets through the current Finance Bill. Now the demand and recovery of tax on such persons can be executed immediately after receipt of information in suitable cases.

The measure is necessary to enable FBR to recover tax provisionally before the money moves out of bank accounts and regular proceedings, which take a lot of time. The FBR has further said that it can also request assistance in recovery of such taxes from foreign jurisdictions wherever it has bilateral and multilateral agreements. This will ensure that FBR can request freeze of offshore accounts to other countries by conveying demand to such countries.

The FBR is already in possession of information of bank accounts of Pakistanis from 26 countries and this provision will enable FBR to move swiftly in the direction of taxing people holding offshore assets.

Taxation

The government is considering amending the Duty and Tax Remission for Exports rules to increase exports to Afghanistan taking into account proposals of multinational companies. In this regard, leading exporters have approached the Economic Advisory Council (EAC) with the aim to amending the DTRE scheme to facilitate exports to Afghanistan.

Tax experts told Business Recorder here on Tuesday that there is an option available under rule 298 of Custom Rules, 2001 that a direct exporter may obtain advance DTRE approval from concerned custom authorities for next 12 months based on his past export performance of 24 months. This incentive should also be provided under rule 307 of Custom rules, 2001 as well to benefit Afghanistan exporting companies, who have good track record of exports, to fully utilise this facility. The current restriction of approval on the basis of availability of advance payment or irrevocable LC in case of export to Afghanistan need to be eliminated for all export oriented sectors/FMCG sectors/well-reputed exporters to bring uniformity in DTRE rules. Realisation of export proceeds should become part of verification stage i.e. audit instead of pre-approvals stage, as it is time-consuming exercise to get approvals from customs authorities each time upon receipt of monthly advance. It is to be noted here that LC option is totally not workable due to weak foreclosure laws in Afghanistan, they suggested.

One of the leading exporters has given a proposal to increase the exports of Pakistan to Afghanistan. They have pointed out that DTRE facility which was introduced in 2001 vide SRO No. 450(1)2001 has been very helpful for different export oriented sectors; however, this has not been friendly for exports to Afghanistan.

To enhance the exports to Afghanistan a recommendation has been given for making amendment in DTRE scheme.

A top company informed the EAC that in the prevailing economic scenario lead by balance of payment crisis, it is utmost important for our country to enhance exports in order to curb declining foreign exchange reserves which is also the topmost agenda of the new Government. The company would like to highlight here that Government of Pakistan has been kind with local manufacturers by facilitating them to encourage exports through various incentives such as Duty draw back, Duty & Tax remission for exports (DTRE) and Export processing Zones.

Based on the data published by State Bank of Pakistan, Pakistan’s total exports to Afghanistan amount to US$ 1.1billion in FY 17 which has declined from US$ 1.7billion in FY 15. The decrease in bilateral trade is mainly attributable to disturbing political ties, imposition of customs duties, stringent controls over trade with Afghanistan and increasing cost of doing business in Pakistan.

DTRE facility was introduced vide SRO 450(I)/2001 dated 18 June 2001 by making addition of Chapter VIII in Custom Rules, 2001. This facility has been helpful for different export oriented sectors since its inception, however, it has not been friendly for exports to Afghanistan due to some stringent provisions.

It has been highlighted some barriers in exploiting the full potential of the scheme, which are applicable on exports to Afghanistan: As per rule 307 of Custom Rules, 2001, in case of exports to Afghanistan, benefit of DTRE facility is conditional on advance payment or irrevocable letter of credit (i.e). We would like to reproduce below the relevant extract of the said rule for your reference:

“In case of exports to Afghanistan and through Afghanistan to Central Asian Republics by land routes, the facility of this, sub-chapter shall be admissible only against established irrevocable letters of credit (LG) or receipt of advance payment in convertible foreign currency from the country of import.” Owing to the weak foreclosure laws in Afghanistan it is very expensive for importers in Afghanistan to provide irrevocable LC, as it requires 100 percent cash margin to be kept at the bank. Further, importers in Afghanistan are also reluctant to provide advance stretching over a month for their imports, which becomes a mandatory requirement because of the operational inefficiencies inherent in the DTRE scheme. Approvals from Customs authorities, which are required on monthly basis after receipt of advance/LC from Afghanistan takes almost 10-15 days due to lack of automation resulting in delay in production and timely exports, company added.

Taxation

On a writ petition filed by a taxpayer, the Lahore High Court has directed the Tax Department to decide the application of the taxpayer before the expiry of deadline of January 31, 2019 for filing of revised return under the section 214E for closure of audit.

When contacted, Shahid Jami, tax consultant, explained the background of the case. The return of total income filed by the petitioner company for the Tax Year 2016 was late and accordingly, audit proceedings under section 214D were initiated. These audit proceedings were pending when through Finance Supplementary (Amendment) Act, 2018 section 214E was inserted providing 25percent further tax over and above the tax chargeable as per return of total income filed for closure of audit.

Whereas, in the case of petitioner company, the tax chargeable as per original return was Rs50,326,584; however tax payment/deductions at source were of Rs94,838,673 and accordingly the refundable amount of income tax was Rs44,512,089. The taxpayer filed application for revision of return by stating that twenty-five percent additional amount of tax be adjusted out of refundable amount.

However, contrary to the provision of adjustment of tax, the in-built calculation on the e-portal does not allow said adjustment rather keeps the refund amount intact and requires separate payment of twenty-five percent tax. The petitioner company filed another application with the Commissioner pointing out the anomaly in the e-portal with the request to amend the software as per legal provision. However, there was no response and last date of filing of revised return was approaching and therefore the petitioner company filed a writ petition.

In the petition, it was explained that as per section 168(1)(b), the amount of tax collected or deducted shall be treated as tax paid by the person from whom the tax was collected or deducted. As per section 168(2), the person shall be allowed credit for the tax in computing the tax due by the person on the taxable income of the person for the tax year in which tax was collected or deducted. Whereas, as per section 168(4), a tax credit allowed under this section shall be applied in accordance with section 4(3).

As per section 168(5), a tax credit allowed under this section for the tax year that is not able to be credited under section 4(3) for the year shall be refunded to the taxpayer in accordance with section 170. Whereas, as per section 170(3) where the Commissioner is satisfied that the tax has been overpaid, the Commissioner shall apply the excess in reduction of any other tax due, from the taxpayer under this Ordinance.

The LHC has disposed of the writ petition with the direction to the department to decide the application of the petitioner regarding anomaly in the software, well within the deadline of filing of revised returns for closure of audit.

Jami pointed out that this issue is involved in hundreds of cases and FBR has deliberately not provided the adjustment in the revised return which is otherwise available for the original return and this is purely a revenue driven approach contrary to the expressed provisions of section 170(3) regarding adjustment of refund towards any tax due under the Ordinance. He urged that the FBR should amend the software at the earliest and also extend the last date of filing of revised returns so that the taxpayers across the country could benefit from the legislative intent of closure of audit.

Taxation

Pakistan Customs, being the member of World Customs Organisation (WCO), celebrated International Customs Day, on January 26. WCO slogan for the year is “Smart Border Swift and smooth Cross-Border movement of goods, People and means of Transport”. The celebrations of International Customs Day began at the Custom House Quetta with the hoisting of flag followed by parade, thereafter a function was held at the premises of the office. Wherein, speeches of the distinguished officers were held.

The chief guest of the celebrations was Dr Zulfiqar Ali Chudhry, Chief Collector (Enforcement) Quetta Customs, who distributed certificates of appreciation to the officers/officials. He also distributed shields and certificate among the top import and export and clearing agents.

Chief Collector during his speech well come both Quetta and Chaman chambers and the notable. He assured them to solve their issue on priority basis. He cleared them tat the government brought new changes in Quetta Collectorate and post chief collector post which once was posted at Karachi in order to meet and solve the issue of the Customs staff and business community on priority and urgent basis.

He stated that “Customs Day celebration give us message that economically zone or borders are the sole of economic stability.” He offered full support to solve the chronic of promotion of MCC Quetta Staff issue. Ashraf Ali Collector of Customs, in his opening remarks, welcomed the participants and briefly explained the concept of “SMART Borders for seamless trade travel and transport”.

He stated that MCC Quetta had taken many measures to work towards achieving SMART borders. Despite considerable emphasis by higher authorities, Customs could not launch the Web-Based One-Customs WeBOC System at Chaman. He stated that customs plays vital role in the economic development of the country.-PR

Taxation

The customs department will begin collecting at least 22 to 30 percent duty/taxes on the imports of mobile devices as the PTA plans only compliant mobile devices business in the country. Pakistan Telecommunication Authority (PTA) with the approval of the federal cabinet launched the Devices Identification, Registration and Blocking System (DIRBS) to ensure the sale, purchase and provision of mobile communication services to compliant mobile devices only.

Consequently, all type approval holders /authorized distributors/ original equipment manufacturer (OEM)/ original design manufacturer (ODM) and mobile network operators (MNOs) are required to ensure that non-compliant devices are not imported, sold, marketed or connected with the network of mobile operators. The devices with SIM/IMEI functionality which are type approved or having certification of compliance (CoC) to technical standards to IMEI devices issued by the PTA are the compliant mobile devices.

At present, mobile devices are brought into the country either through commercial imports and imported by individuals in accompanied baggage/ courier or brought in illegally by through smuggling. However, only the commercial imports of mobile devices are regulated.

The customs department has now formulated procedures and issued tariffs to allow import of mobile devices brought in by individuals for their personal use in accompanied baggage or through couriers or mobile devices brought in through informal channels and available in the local market.

According to Pakistan Customs Tariff (PCT) 8517.1219, which will be applicable by mid of February, the customs department will collect Rs 250 customs/regulatory duty (RD) per cell phones, having value up to US$ 60, which is 3 percent of the total value.

Similarly, 10 percent RD will be charged on the cell phones having value above US$60 up to US$130 and 20 percent duty on above US$130 value. The sales tax amounting Rs 650 will be collected for low and medium price cell phone and Rs 1500 on smart or satellite phones besides 3 percent advance sales tax.

The customs department will also charge 6 percent advance income tax from filers and 9 percent from non-filers against the mobile devices brought into the country either through commercial imports or imported by individuals. The mobile handset levy will also be collected under three different tariff slabs: Rs 1000 per set will be charged where value, including duty/taxes of cell phones is Rs 10000 to 40,000, Rs 3000/set for the cell phones valuing over Rs 40000 to Rs 80000, inclusive of all taxes. Rupees 5000/set will be paid on the import of cell phone having value, including duty/taxes exceeds Rs 80000.

Replying to a question, customs officials said that traveller is allowed to bring one mobile phone without payment of duty and taxes provided his/her stay abroad was more than seven days and this benefit would only be admissible once during the year. Duty and taxes would be charged in case of more than one mobile phone.

He further said that counter had been established at airport for registration of cell phones where customs department would also collect applicable duty and taxes. Traveller may also approach the nearest customs office for registration of mobile devices within 15 days of the arrival date.

Taxation

Finance Minister Asad Umer would inaugurate National Tax Conference in March 2019 for bringing federal and provincial tax authorities on one page and proposing tax measures in consultation with the tax experts and business community/investors.

Due to its role as the national leader of the accountancy profession, the Institute of Chartered Accountants of Pakistan (ICAP) has shared a close relationship with the government of Pakistan. The Institute with its commitment to serve public interest has always supported efforts to secure country’s prosperity by advising the government on public policy that simultaneously serves all the stakeholders.

The Institute’s Committee on Fiscal Laws, headed by Ashfaq Yousuf Tola, taking cognisance of various taxation issues hindering growth of the economy is organising a full day National Tax Conference in March 2019 in Islamabad.

The finance minister has accepted to be the chief guest. Other senior officials have also been invited from the Ministry of Finance, FBR, Ministry of Commerce, Ministry of Industries, Engineering Development Board and chiefs of respective provincial tax authorities. Stakeholders representing industry in Pakistan including, Pakistan Business Council (PBC), FPCCI, OICCI and Tax Bar Associations, have also been invited.

Taxation

The Competition Commission of Pakistan (CCP) has termed the Federal Board of Revenue’s tax policy for real estate sector as unfair and recommended formulation of tax policy in consultation with the stakeholders to maximise its effectiveness and assist in widening the tax net.

According to the CCP opinion on real estate sector issued Monday, the tax policies of the government are ‘unfair’. The stakeholders are willing to pay taxes, however, the tax policy should be formulated in collaboration with the important stakeholders to maximize its effectiveness and assist in widening of the tax net. It should be levied gradually and uniformly as millions of people are associated with it.

The CCP report said laws for individual business taxation of different lands many vary, for example; capital gains is levied under the Income Tax Ordinance, 2001, whilst the capital value tax on the immoveable property, subsequent to the 18th Amendment in the Constitution has been levied by the Provinces through separate provincial legislations and in the Islamabad Capital Territory by the Finance Act, 2012.

Securities and Exchange Commission of Pakistan (SECP) had introduced the Real Estate Investment Trusts Regulations (REITs), 2015 introduced the concept of real estate investment trusts. Any income from such trust is exempt from tax, subject to the condition that not less than 90 percent of its profits for the year is distributed amongst the unit holders. The REITs Regulations have been amended in December 2018 by the SECP. The amendments include the concept of private investors, details on eligibility criteria to invest in REIT scheme, introduction of grace period for mandatory listing, requirement of valuation from two separate property valuers at the time of transfer of real estate to REIT scheme, enhancing REIT Management Company’s (RMCs) capacity to borrow and issue right units. The amendments also include the requirement of unit holders’ approval in case of major decisions pertaining to REIT in order to protect their interest and enhance their role in the decision making process.

The real estate sector operators made their fortune owing to a regulatory vacuum and inefficient revenue machinery, as the federal and provincial governments looked the other way for political reasons. In the process, tens of thousands of gullible individuals lost their life time earnings amid scattered legislation and governing bylaws in municipalities and local governments. No wonder therefore, that the property industry suffered from serious credibility challenges – low public confidence, unfair business practices, weak transparency and limited financial inclusion. All provincial governments failed to effectively bring a booming sector into the real economy and pay even a fraction of what real estate agents earned.

An ambitious revenue measure launched last year by the federal government through capital value tax and revised valuation of properties finally ended in yet another tax amnesty. An overwhelming chunk of the housing schemes continue to be governed under the Cooperatives Societies Act of 1925, or specific acts of parliament for various development authorities, CCP said.

The key regulators – the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP) – have been advising the government to provide an overarching legal framework to bring these fly-by night investors into the formal economy. Taking a step forward, the government has now brought the property sector in the ambit of the Companies Act of 2017. Under the new law, companies would also not be eligible to accept a sum against purchase of the apartment, plot or building, as the case may be, as an advance payment from a person without first entering into a written agreement for sale with such person.

Another major concern pointed out by various participants is that accurate and systematic records related to various forms of property available for sale and purchase are not maintained. Consequently, various issues arise. Unreliable and insufficient data hinders the mutation or transfer of property, both commercial and residential. Other problems caused by such inadequacies include multiple sale of the same property, over-pricing of property, resultant unfair taxation and tax evasion, fraud, etc, the CCP report added.