The Securities and Exchanges Commission of Pakistan (SECP) and Federal Board of Revenue (FBR) are still locked horns over the issue of income tax of about Rs one billion not paid by the former due to reasons which are in dispute, sources told Business Recorder.
Islamabad High court (IHC) had instructed the SECP on February 19, 2009 to file income tax returns for five years. The regulator implemented the decision but, as per the ruling, is expected to re-approach the court as it is not satisfied with the income tax officials decision, sources said.
They said that since its inception, the SECP was not subjected to income tax, though no specific exemption existed in the Income Tax Ordinance for the purpose. As such, it did not pay income tax, and the tax department also did not pursue for payment of taxes. Similarly, no withholding tax was deducted, even by banks, on profits on Commissions investments.
To clarify the matter, SECP approached the then FBR Chairman for clarifying the status of the Commission vis-a-vis income tax. After lengthy deliberations, it was agreed that the Commission should start paying tax in future. In accordance with this decision, it was brought under tax net, effective from July 1, 2007, by virtue of sub section (4) of section 49 which was added to Income Tax Ordinance through 2007 Finance Bill.
The sub section (4) of section 49 of Income Tax Ordinance, inserted through Finance Bill 2007 through which Commissions surplus of income over expenditure was specifically brought under tax net, reads:
"Exemption under this section shall not be available in the case of corporation, company, a regulatory authority, a development authority, other body or institution established by or under a Federal law or a Provincial law or an existing law or a corporation, company a regulatory authority, a development authority or other body or institution set up, owned and controlled, either directly or indirectly, by the Federal Government or a Provincial Government, regardless of the ultimate destination of such income as laid down in Article 165A of the Constitution of the Islamic Republic of Pakistan"
Subsequently, despite the understanding to the contrary, FBR issued circular No 01 of 2007 which stated that the regulatory authorities and development entities are liable to income tax and these authorities are covered by the definition of "company" given under the income tax ordinance.
Based on the above sub section and the FBR circular, the tax officials issued notices to SECP for not filing return of income tax from the year 2003 onwards and asked it to file the same. The Tax Department is of the view that the newly inserted sub section (4) of Section 49 is clarificatory and can be applied retrospectively.
However, this viewpoint of the department defies logic and is unprecedented, sources quoted SECP as saying in documents. As a general rule, no fiscal law which places financial liability on the payee can be applied retrospectively. All eminent tax practitioners and lawyers whom the Commission consulted are unanimous on the view that the section 49 (4) cannot be applied retrospectively.
Sources said that to devise a strategy on the matter, the Commission consulted a couple of eminent chartered accountants and tax practitioners of leading chartered accountant firms, namely Shabbar Zaidi, partner in A F Ferguson, Mustafa Khandwala and Nasim Hyder both partners of Ford Rhodes Sidat Hyder, in addition to SECPs tax advisor KPMG Taseer Hadi (Saqib Masood, partner and Faisal Banday, Sr Manager).
Additionally, prominent lawyer Makhdoom Ali Khan was also consulted. A meeting was also held in SECP Karachi office with the above named chartered accountants/tax practitioners. Opinions were received as requested. A separate meeting with Makhdoom Ali Khan was also held the same evening, along with Naeem of A F Ferguson, Mustafa Khandwala of Ford Rhodes Sidat Hyder, Saqib Masood, and Faisal Banday of KPMG.
In both meetings, there was unanimity of views among all those consulted that SECP is not liable to pay income tax for the years prior to insertion of section 49(4) of the income tax ordinance and that the notices served by the taxation officer are not valid and should be contested.
Shabbar Zaidi and Nasim Hyder were of the opinion that SECP is not liable to income tax even after insertion of-section 49(4) of the income tax ordinance as it is performing functions of the federal government, the sources maintained. The Commission contested the notices issued by the Tax Department and made written representation.
However, the department did not accept Commissions representation and expressed its intention of making ex parte assessment for the years from 2003 to 2007. The impact of this assessment of taxes for prior years is approximately Rs 900 million, plus additional tax.
Based on the opinion of eminent tax practitioners and lawyers, the Commission filed a writ petition in Islamabad High Court against the Tax Department and obtained a stay order against any adverse action by the Department. In the meantime, the Commission also approached the then Secretary Finance and Chairman of SECP Policy Board for intervention.
A meeting with FBR and SECP was called on February 3, 2009, in his office wherein the FBR was strongly advised by the then Secretary Finance to find a way out so that SECP is not burdened with payment of taxes of years prior to insertion of section 49(4) wherein it was brought under tax net, and so that the two government organisations do not go into litigation against each other and spend huge amounts in this exercise. In the meantime, Islamabad High Court took up the writ petition of SECP on February 19, 2009 and issued its verdict, which is summarised below:
(i) that SECP shall file the Tax Return to the Commissioner Income Tax within 15 days time;
(ii) (ii) if Commissioner Income Tax issue the assessment notice, it should be in detail and cover all the facts, particularly he will determine the question of exemption to SECP as Federal Govt. organisation;
(iii) (iii) SECP will be at liberty to contest and file appeal before the Commissioner Appeals and later on to the Income Tax Tribunal;
(iv) (iv) if will be appreciated that these appeals (if any) may be decided in 120 days;
(v) (v) if at any stage SECP is not satisfied with the Income Tax authorities decisions, it may refer back to this Court of Law.
Sources said that in pursuance of the Courts instructions, SECP filed returns for the years 2003 to 2007 showing NIL taxable income. Orders of the Commissioner Income Tax on these returns are awaited. "We have asked SECPs Policy Board to intervene in the matter urgently for avoiding litigation between the two government organisations with the same parent Ministry," sources added.
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