The Finance Minister has introduced a very important and pertinent tax amendment bill in the National Assembly. This bill if enacted in the present form will have a very far-reaching effects on the tax culture of the country. We have a positive view on all the matters taken up in the bill; however, there has to be sufficient and constant will of the Executive to undertake what is proposed to be legislated.
The general theme of the bill is to make life difficult in the economic sense for the persons who do not pay taxes as are due or do not get registered with the tax authorities under the law. In general, restrictions have been placed on acquisition of movable and immovable assets by such persons who may be called ‘Ineligible persons’ or ‘unregistered persons’ for Income Tax and Sales Tax purposes.
Keeping in view the prevalent culture in the country these steps appear to be necessary however there are following fundamental questions which are necessarily required to be answered on this subject:
a. Whether or not such step will do a real service in increasing the tax base or add to the existing abuse of power;
b. Whether or not such steps, which make life difficult for the tax filers and registered persons, will effectively increase the portion of the economy which keeps itself outside the tax system from inception to start;
c. Whether the market and traders have been taken on board whilst making these aggressive provisions.
Last but not least, is the issue of whether or not such provisions will pass the test of constitutional validity as in many cases there appear to be situations where the lines have been crossed?
Income tax
Restriction on economic transaction
A new section (114C), which restricts the economic transactions for persons not being a public company or a non-resident in certain matters. The gist of the section is that only ‘eligible’ persons will be allowed to undertake the economic transactions as envisaged in that provision. For that purpose eligible and non-eligible persons have been identified.
An Ineligible person is:
a. a person, who has not filed a return of income for the tax year immediately preceding the year of transaction
b. has not sufficient resources in the wealth statement in case of an individual, or financial statement in case of a company or an association of persons, as the case may be, for such transaction:
The person shall include his immediate family members, which shall include his parents, spouse, son (below the age of twenty-five years), daughter (who is unmarried, or widowed, or divorced) or a special child who has a long-term physical, mental, intellectual or sensory impairment which in interaction with various barriers may hinder his full and effective participation in society on an equal basis with others;
In case if a person is ‘ineligible person’ then following transactions cannot be undertaken:
(a) booking, purchase or registration of a motor vehicle shall not be accepted or processed by any manufacturer of a motor vehicle or vehicle registering authority of Excise and Taxation Department, as the case may be;
(b) registering, recording or attesting transfer of any immovable property, more than such value in aggregate in a tax year as may be notified by the Board from time to time, shall not be accepted or processed by such authority:
(c) sell securities including debt securities or units of mutual funds, including a person authorized to open and maintain an account or clear such transactions, shall not sell, open an account or clear sale of securities, mutual funds, to an ineligible person being an individual or an association of persons;
(d) a banking company shall _
(i) not open or maintain an already open current or a saving bank or investor portfolio securities account, except Asaan account, in the name of such persons as may be notified by the Board;
(ii) not allow cash withdrawal from any of the bank accounts of any person, exceeding the amount as may be notified by the Board from time to time;
Practically, it means that a person will become eligible only when there are sufficient funds in the earlier wealth statement or the person has after firing his return of income for the latest completed tax year, has filed sources of investment and expenditure statement.
The “sources of investment and expenditure statement shall mean a declaration by a person filed on the Board’s web portal, specifying the sources of funds for making such transaction; and “sufficient resources” shall mean one hundred and thirty percent of the cash and equivalent assets, declared by a person in his wealth statement filed for the latest tax year or in the case of a company or association of persons cash and equivalent assets, declared in the financial statements attached with the income tax return for the latest tax year.”;
Transactions made by a non-resident person or a public company except cash withdrawal from any of the bank accounts of any person, exceeding the amount as may be notified by the Board from time to time;
Theoretically, the position appears to be a step in the right direction; however, keeping in view the competence and corruption in the system there can be severe bottlenecks in the system. Nevertheless, such steps are necessary to document the economy.
Exchange of banking and tax information related to high-risk persons
FBR may:
a. share information of turnover, income including taxable income, for one or more tax years, identification data including bank account numbers declared in the income tax return, wealth statement, financial statement or in any other document to the Board, in respect of persons or classes of persons, along with data-based algorithms, as may be prescribed, with scheduled banks in Pakistan; and
b. the Scheduled banks shall provide to the Board particulars, such as name, account numbers of such persons where the banking information is at variance with the data algorithms provided under clause (a) of this sub-section.
All information received under this section shall be used only for tax and related purposes and kept confidential.
This presupposes exchange of information with the banks and applying scientific methods to arrive at results for the use by the tax department. This appears to be theoretically correct; however, keeping in view the present status of the information base and level of competence of the department there is a wide gap to be covered.
Sales tax
Disallowance of input tax
FBR has been empowered to defer the input tax claim under the sales tax law on the basis of data based automated risk. management system. This action may be correct in certain cases however the inherent right to claim input tax on any arithmetical basis cannot be sustained under the law if such input has been used for the supply of taxable goods.
Consequences of non-registration
The bill proposes following action by the Commissioner of Inland Revenue against the person who is supposed to register but does not register:
a. to direct banking companies, scheduled banks and other financial institutions, to bar operation of the bank account;
b. to direct the property registering authority to bar transfer of immoveable property;
c. By way of a process laid down the law:
i. seal the business premises;
ii. seize moveable property; or
iii. appoint a receiver for the management of the taxable activity of a person.
A fundamental question that will arise for the operation of the proposed law is whether or not the authorities under the Sales Tax Act, 1990 can bar the fundamental right to open a bank account or register a property which is governed by separate law.
The process for (c) above includes interaction with the trade bodies and public disclosure before the action.
Appointment of experts
FBR has been empowered to appoint as many experts the Commissioner considers necessary for the purposes of this Act, including for the purposes of assistance in audit, investigation, litigation or valuation
Restriction on input tax
A registered person shall not be entitled to deduct input tax (credit adjustment or deduction of input tax), which is attributable to such taxable supplies exceeding, in a financial year or a tax period as are made to certain person who is not a registered person under this Act as may be specified by the Board through a sales tax general order. Previously there was a limit of Rs 100 million in a financial year or 10 million in a tax period.
Copyright Business Recorder, 2024
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