SUNDAY DECEMBER 16: Conflict-hit areas: exchequer incurred losses on FBR tax exemption

ISLAMABAD: The tax exemption granted by the Federal Board of Revenue (FBR) on profits and gains for conflict zones in Khyber Pakhtunkhwa for 2010, 2011 and 2012 has caused massive revenue loss to the national exchequer. Sources told Business Recorder here on Saturday that the Chief Commissioner Regional Tax Office (RTO) Peshawar has communicated to the FBR about huge revenue loss to the national kitty due to exemption granted to the war-affected areas of KPK and tribal belt under Second Schedule of the Income Tax Ordinance, 2001.
Chief Commissioner RTO Peshawar has also termed this exemption as one of the major policy measures responsible for revenue loss. According to the Chief Commissioner RTO Peshawar, the provisions of Clause (126F) of the Second Schedule to the Income Tax Ordinance, 2001 whereby profits and gains of most-affected and moderately-affected areas of the province have been exempted from tax for a period of three years ie, 2010, 2011 & 2012. Moreover, the said exemption was also available to the taxpayers falling under presumptive tax regime (PTR). These exemptions have adversely affected deductions and collections of taxes under all the three heads ie, Income Tax, Sales Tax and Federal Excise Duty, he added.
Chief Commissioner, RTO Peshawar said that similarly, grant of exemption from payment of Federal Excise Duty to cosmetic manufacturers of Mingora, Swat through relief package of the Prime Minister impacted FED collection. The tax deducted at source from the exempted taxpayers for tax years 2010, 2011 & 2012 is also being refunded which also hampers the achievement of budgetary target of this RTO, he said.
He said that cases of non-resident taxpayers were transferred by the Board from RTO, Peshawar to LTU, Islamabad, which badly affected major portion of RTO Peshawar collection, because in the revenue yielding cases approximately collection up to Rs 20000 million would have been made by the RTO.
He said that the cut-off date of Income Tax Exemption under clause (126F) of Part-I of the Second Schedule to the Income Tax Ordinance of 2001 for Khyber Pakhtunkhwa is June 30 this year but in parallel, there is no such cut-off date in SRO No180(1)/2011 dated 05.03.2011, regarding 50% exemption on supplies of goods, other than cement, sugar, beverages and cigarettes by the registered persons has been mentioned. The Board has repeatedly been requested to insert a cut-off date with retrospective effect vide letter No716 dated 03.09.2012 and No829 dated 11.09.2012, which is still awaited.
Under the Prime Minister Relief Package rate of Sales Tax has been reduced by 50% and said concession has not been withdrawn till now. The Board vide this office letter No878 dated September 13 this year was requested to clarify the issue, which is still awaited, he added.
A tax expert was of the view that wrong interpretation of the FBR letters and clarifications issued regarding Section 126F of the Income Tax Ordinance 2001 under which income tax exemption on profit and gain derived in conflict zones was misused. The Board had superseded all income tax clarifications issued in the context of income tax exemption on profits and gains derived in Khyber Pakhtunkhwa (KPK), Federally Administered Tribal Areas (Fata) and the Provincially Administered Tribal Areas (Pata). The rationale behind issuance of circular number 14 of 2011 was to plug the loopholes in the existing procedure for obtaining exemption on profits and gains available to the business and trade. Due to wrong interpretation of clarifications/letters of the FBR on Section 126F of the Ordinance 2001, unscrupulous elements misuse the facility.
For example, the fake or dummy units might have got themselves registered in the areas of Khyber Pakhtunkhwa, Fata and Pata and imported goods material and machinery/equipment with zero-rated facility and ultimately consumed the same in the taxable areas like Karachi, Lahore and Islamabad. These units obtained registration within the jurisdiction of Khyber Pakhtunkhwa, Fata and Pata merely to evade the authorities to obtain exemptions of fiscal relief package because of simplified procedure for genuine claimants. It is apprehended that the facility has been misused by certain unscrupulous elements who wrongly interpreted the relevant laws to obtain inadmissible exemptions.
In order to check such kind of misuse, the FBR has now empowered the Chief Commissioner Regional Tax Office (RTO) Peshawar to scrutinise each case on merit before granting such facility of income tax exemption on profits and gains derived in war-affected areas. Prior to issuance of circular 14 of 2011, there was no proper check on units availing exemption on profits and gains availed in the areas of KPK/Fata/Pata. Through Circular 14 of 2011, the RTO Peshawar would decide each case on merit in the light of the FBR instructions upon filing of a claim in this regard by the taxpayer.
There is a possibility of revenue loss on account of wrong interpretation of letters/clarifications issued regarding Section 126F of the Income Tax Ordinance 2001. However, it is premature to say unless or until the concerned RTO has ample evidence about the unit, which has wrongly interpreted the FBR clarifications/instructions in this regard.
The Income Tax Circular 14 of 2011 said that the clarifications, instructions, letters and notifications issued on Clause 126F of the Income Tax Ordinance 2001 has created confusion because of different interpretations on the exemptions granted under the fiscal relief package.