Exemption certificate: FBR condition may create problems for exchange companies

Any move of the Federal Board of Revenue to make it mandatory for exchange companies to submit tax exemption certificates of the Commissioner Inland Revenue for non-payment of 0.3 percent withholding tax on cash withdrawal from banks would not help in exemption from section 231A of the Income Tax Ordinance 2001.
Sources told Business Recorder here on Tuesday that the FBR may link proposed exemption to exchange companies from 0.3 percent withholding tax on cash withdrawal from banks with the submission of tax exemption certificate from the Commissioner of Inland Revenue. However, any such condition to obtain tax exemption certificates would create problems for such companies. The rationale behind the proposed withdrawal of 0.3 percent withholding tax on cash withdrawal from banks is to avoid accumulation of refunds due to payment of tax on taking out cash from banks by the exchanges companies. Such companies have to apply for refunds due to payment of 0.3 percent withholding tax on cash withdrawal from banks. The abolition of the levy would end the cumbersome exercise conducted by such companies on regular basis to obtain refunds.
The exchanges companies can obtain tax exemption certificates under section 159 of the Income Tax Ordinance 2001. However, there is no justification to link the proposed exemption with the submission of tax exemption certificates from the concerned Commissioner of Inland Revenue.
One of the top tax consultants of Karachi has submitted a detailed presentation to the Board on the fiscal implications and rationale behind extending exemption to the exchange companies from payment of 0.3 percent withholding tax on cash withdrawal from banks.
According to the expert, the applicability of section 231A of the Ordinance 2001 is a foremost clog on the functioning and growth of exchange companies business based on some reasonable justifications. Firstly, the application of afore stated regulation result in piling of huge tax refunds and in most of the cases they are amassed in tens of millions, therefore, it ingests business funds gratuitously. Secondly, the withholding of tax is more than trade margin. The business of exchange companies attracts unique withholding taxation regime whereby generation of tax refund ab-initio is a known fact. It is an open secret that Profit Margin per US$ is approximately Rs 0.10 or 10 paisa, whereas withholding tax per US$ equivalent is Rs 0.18 or 18 Paisa. Hence, exchange companies business calculatingly but imprudently pays Rs 0.08 or 8 Paisa per US.
Thirdly, the exchange companies are subject to applicability of section 147 of the Ordinance 2001 wherein they pay regular instalments on stipulated dates. The withholding of tax under section 231A invariably exceeds the requisite payments, thereupon, resulting in accumulation of mammoth refunds after each instalment and each assessment year.
Fourthly, the applicability of 231A sop-up available cash for business activities, therefore, it contributes conversely towards augmentation of business. It is pertinent to mention that exchange companies business besides being appropriately regulated is very much documented, whereas the prime purpose of section 231A is to tap undocumented sector and transactions.
Fifthly, the stuck-up tax refunds raise borrowing level of exchange companies and increase their cost of doing business; as a result, it is causing a dead-weight loss to the economy as a whole. Sources said that the exemption of exchange companies from applicability of Section 231A of the Ordinance 2001 is justified. The reason for introduction of Section 231A of Ordinance 2001 was to encourage documentation of economy and taxing un-documented sector. Business of foreign exchange buying and selling is very much documented and regulated. It is, therefore, contrary to the spirit of law to apply this section on exchange companies.
According to sources, it is improvident to withhold tax more than the trade margin. In the case of exchange companies margin between buying and selling is almost Rs 0.10 or 10 Paisa per US $, whereas tax deducted under section 231A per US$ equivalent is almost Rs 0.18 or 18 Paisa (US $ Parity is taken at Rs 88, tax at 0.20%, therefore, 0.88 times 0.2% equals to Rs 0.18). Hence, applicability of Section 231A triggers tax refunds ab initio.
The section 231A may cause non-transparency in operations, as this inequity may compel exchange companies to pursue business in cash rather reporting actual transactions to SBP, which will not only thwart the policy of Government to document economy but will also dent revenue to exchequer. The application of Section 231A of Ordinance 2001 is causing piling of huge refunds. Furthermore, exchange companies are assessed as companies under normal tax regime and are subject to application of Section 147 of ITO, thus, recoverability of tax is not an issue.
Moreover, special exemptions and withholding rates have been extended to various businesses including steel smelters and transporters on certain expenses. Banks are also enjoying exemptions when dealing in cash as their raw material. It is imperative to reveal that cash is raw-material for ECs as well hence deserves same treatment especially when it involves disparity within similar business sector for same transaction, sources added.
Sources further said that the usage of cash by exchange companies is out of compulsion and not by choice because acquisition of foreign exchange through cross cheques is inefficacious, correspondingly, numberless bank deposits and withdrawals of cash are inescapable, accordingly, massive sum is withhold by banks under section 231A of Ordinance 2001. The premise of exchange companies business is laid on frequent withdrawals of cash, nonetheless, its handling is strictly distinguishable. The exchange companies are stipulated to maintain 25% of their Paid-up Capital of Rs 200 million as Statutory Liquid Ratio (SLR) with State Bank in the form of unencumbered approved government securities at the rate lower than the market rate. Hence, it is on one hand a source of liquidity for Government but on the other hand it creates liquidity crunch for itself.
The business of exchange companies is regulated by SBP besides registered as Companies under Companies Ordinance 1984, hence, also regulated by Securities and Exchange Commission of Pakistan (SECP) as well, therefore, they attract following stipulations: Filing of entire business transactions in the form of Returns to SBP on daily basis for their monitoring, obtaining of CNIC and specific reporting of all transactions of US $5,000 and above to SBP, filing of Various regulatory forms eg Form "A" and Form 29 etc, to SECP and any changes directorship is subject to approval of SBP. These companies are subjected to regular audit and surprise on-site inspections by the SBP. Statutory Audit under Companies Ordinance is also mandatory on exchange companies.
The exchange companies are also bound to obtain computerised national identity card numbers (CNICs) from customers who buy or sell foreign currency equivalent to US $5,000, therefore, transactions are traceable owing to highest documentation standard, sources added.