ISLAMABAD: The federal government imposed additional taxes subsequent to the passage of Finance Bill 2010, and these include 3.5 percent withholding tax on agri-trading, penalties on late filers/non-filers of returns, exclusion of non-compliant taxpayers from "List of Active Taxpayers" and collection of data from clubs, and private schools, colleges and universities.
According to sources, the 3.5 percent withholding tax would be charged on agri-traders (commission agents) who purchase agri-products from growers and later sell the same to ginners, etc. The withholding tax has been imposed without the approval of the Parliament, as sub-section 13 of section 239 of the Income Tax Ordinance 2001 empowers the FBR to issue a clarifying amendment.
As per sub-section 13 of section 239 of the Income Tax Ordinance 2001, 'the authority which issued any notification, notice, direction or instruction, or made any rule, agreement or appointment, or granted any approval or recognition, shall have the power to amend, modify, cancel or repeal any such notification, notice, direction, instruction, rule, agreement, appointment, approval or recognition'.
It is a clarifying amendment issued through a statutory regulatory order (SRO) which has included 'individuals' as a withholding tax deducting authority with an annual turnover above Rs 50 million. Therefore, the FBR is legally authorised to issue such clarification without going to Parliament. However, the law does not authorise FBR to change the tax rates without approval of the Parliament.
On the issue of 3.5 percent withholding tax, the FBR clarified that the exemption of withholding tax on sale and supply of agricultural produce by a grower or cultivator is still intact. SRO 1161(I)/2010 December 31, 2010 has aligned the whole situation in line with the exemption on agricultural income by a grower, as provided in section 41 of the Income Tax Ordinance 2001. The section 41 of the Income Tax Ordinance 2001 provides exemption to 'agricultural income' on sale/supply of agricultural produce by a cultivator/grower.
The Regional Tax Offices (RTOs) have issued letters to all leading schools in private sector to provide details of parents including their computerised national identity cad numbers (CNICs) and residential addresses. One of the notices issued to the Principal of a privately owned school by a Regional Tax Office seeks information about students under section 176 of the Income Tax Ordinance 2001. The information required is the name of student, class, name of father/mother, CNIC of farther/mother, residential address, phone number of father/mother, total tuition fee received during the financial year and other charges.
The tax department has also contacted exclusive clubs and motor vehicles registration departments to obtain data of members and newly registered vehicles respectively. The FBR has launched an enforcement drive against the owners of vehicles above 1000cc, who have booked two or more cars, but failed to file their income tax returns and disclose source of investment under provisions of the Income Tax Ordinance 2001.
Another key enforcement measure includes launching of the "List of Active Taxpayers" for the sales tax as well as income taxpayers. The Board will suspend income tax and sales tax registrations of the non-compliant companies, association of persons (AOPs) and other categories of taxpayers, whose names would be excluded from the "Active Taxpayer List" (ATL). The new law would enable the Board to treat the non-compliant persons as suspended till they become compliant in filing of returns and payment of taxes.
The FBR has repeatedly directed the Chief Commissioners of Large Taxpayer Units (LTUs) and Regional Tax Offices (RTOs) to scrutinize data of withholding agents to check whether the deducted amount has been deposited in the national kitty. The field formations invoke enforcement provisions of the Income Tax Ordinance 2001 to ensure filing of returns by withholding agents. Field formations have attempted to analyse public sector development projects to ensure collection of withholding tax, liable to be paid during the execution of government projects. Key areas included withholding tax on salary paid to government, semi-government and private sector; withholding tax on rental income; withholding tax on imports; deduction of tax from interest on bank deposits and deduction of taxes from payments to non-residents. The Board also directed the concerned officials to ensure recovery of arrears in different major sectors. The appeals pending at the level of commissioner appeals are to be expedited for clearance of backlog and recovery of amount involved in litigation.
The Board has made provisional assessment of registered non-filers under section 122C of the Income Tax Ordinance in cases where persons who failed to comply with the notices of the department. The FBR has also invoked provisions of section 40B of the Sales Tax Act 1990 to depute sales tax officers at the restaurants and hotels to check their actual turnover and sales tax for improving sales tax collection.
Pakistan Sugar Mills Association (PSMA) has asked the FBR to exempt sugarcane purchases from the provisions of section 21(1) of the Income Tax Ordinance (ITO) because most of the sugarcane growers are uneducated and unable to handle the procedure.
FBR is unable to take any major taxation measures after a budget is announced. Parliament has yet not passed the Finance (Amendment) Bill 2010 to amend the Income Tax Ordinance, 2001 and the Federal Excise Act, 2005. Through these amendments the government intends to levy 10 percent surcharge on income tax payable for the tax year 2011 and increase the rate of special excise duty from 1 percent to 2 percent. So far, the FBR has been unable to take any major taxation measure with the approval of the Parliament. Similarly, the FBR is helpless to introduce the reforms in the sales tax regime, as the 'General Sales Tax Bill 2010' is still pending with the National Assembly. The imposition of sales tax on services sectors particularly 100 major service providers could not be implemented due to delay in the finalisation of the modalities on collection of sales tax on key services among provinces.
Sources said that all major post-budget taxation measures could not be imposed through the Finance (Amendment) Bill 2010 as the tax authorities are not legally empowered to unilaterally change the tax rates. Even proposals like imposition of 'gross asset tax' on companies were not finalised at the level of the Board. Sources said that the FBR had also proposed import surcharge as a measure to generate additional revenue, but the proposal was not considered in view of possible violation of the World Trade Organisation (WTO).
Under the WTO regime, the imposition of surcharge has been discouraged at the import stage. The customs duty on the import of a specific item should not exceed the 'bound rate' which is maximum rate of import duty that could be imposed under the tariff lines of Customs Tariff. It has been internationally committed to not exceed tariff rates beyond a certain limit under the 'bound rate' to check extraordinary increase in the rate of customs duty on the import of a specific item.
The government intends to withdraw most of the sales tax exemptions, sales tax zero-rating facility on local supplies and other concessions with documentation of the entire supply chain through 'reformed general sales tax' (RGST) which is still pending.
The government had committed to reducing the rate of sales tax from 17 percent to 15 percent in the budget 2010-2011, but was unable to convince parliament to approve the RGST. On the other hand, tax relief measures have been announced after budget (2010-2011) to facilitate certain sectors. The FBR had notified reduction in turnover tax from one percent to 0.5 percent for refineries and oil marketing companies (OMCs). The Board has also reduced the turnover tax rate from one to 0.5 percent for the Sui Southern Gas Company. This is subject to the condition that the annual sales of said categories of taxpayers should be over Rs 1 billion.
Recently, the government had also allowed 80 percent reduction in the tax liability of the pharmaceutical distributors, distributors of fast moving consumer goods and distributors of fertilisers. The 80 percent tax rebate would be available only on payment of turnover tax. The distributors of the pharmaceutical products, distributors of fast moving consumer goods and distributors of fertilizers would be able to obtain rebate facility as available to distributors operating in the cigarette industry.
The Board has continued to grant sales tax zero-rating facility on power and natural gas consumption by units covered under the five leading export sectors. After announcement of budget 2010-2011, the Board had exempted withholding tax on electricity bills of commercial or industrial consumers in cases where they have paid the advance tax liability and obtained the exemption certificate from the concerned commissioner. The withholding tax exemption on power bills is available to only those commercial or industrial consumers, who have cleared the entire advance tax liability in a fiscal year.
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