Suggestions for 2010-11 budget: FCCI wants interest waiver on sick units' loans

The Faisalabad Chamber of Commerce and Industry (FCCI) has strongly demanded that the profit making bankers should waived interest/mark-up to make the sick industrial units to make them viable in the best interests of the country.
Talking to newsmen, Abdul Qayyum, President of FCCI, stated that in view of the current economic crisis, generated by prolonged load shedding of electricity, absence of gas, and price hike, especially the gradual increase in petroleum prices, labour unrest due to unemployment, upward trend of crime, particularly abduction of industrialists/traders for ransom, etc, there are a number of medium and small size business concerns facing so many problems. Most of the industrial and production units could not pay interest on loans due to increasing cost of doing business.
The FCCI President said that a restriction has been imposed on the private limited companies under Section 208 of the Companies Ordinance, 1984 that the loans and advances to associated companies can only be granted at the prevailing bank rate. Interest received by the lender companies are subject to tax at normal rate, even if the company has carried forward business losses.
He suggested that in order to overcome the current liquidity problems of the business community, appropriate amendments be made in Section 208 of the Companies Ordinance, 1984 to exclude the private limited companies from the ambit of Section 208. Moreover, the interest income on loans arranged for associated undertakings may be allowed to be offset against carried forward losses and the borrowing cost of the current year if the loan is granted out of the borrowed fund.
The FCCI President emphasised the need to waive off interest/mark-up to make the units viable. The waiver of profit on debt, if allowed by the bankers, is currently taxable. He demanded that waiver of profit on debt to the sick units be either exempt from tax or allowed to be recognised as income in subsequent five years. The FCCI President has observed that the present different thresholds of basic exemption are provided for different heads of income, which is against justice and equity.
He demanded that to bring the basic exemption from business and rental income at par with the salary income the limit of basic exemption under the head business and income from property be enhanced to Rs 180,000, whereby keeping in view the high inflation rate and increase in salaries and wages the basic limit of tax for salaried individuals should be increased from Rs 180,000 to Rs 250,000. He said that presently tax at the rate of 0.3 percent is being deducted on cash withdrawals exceeding Rs 25,000 per day.
He suggested that the rate of deduction of tax be reduced to 0.2 percent and the threshold of withdrawals be raised to Rs .50,000 per day. He also suggested that tax should not be deducted from the account holder having NTN and is an existing taxpayer. In addition, the specific exemption may be allowed to the NGOs, NPOs and companies which are not required to pay any tax.
Highlighting the FCCI Budget Proposals for 2010-11, Qayyum said that Section 57A was inserted by Finance Ordinance 2002 to provide incentive for merger of sick companies. Originally, accumulated loss under the head 'income from business' of the amalgamating company or companies was allowed to be set off or carried forward against the business profits and gains of the amalgamated company and vice versa up to a period of six tax years immediately succeeding the tax year in which the loss was first computed in case of amalgamating company or amalgamated company or companies, he added.
He said that this section was substituted by Finance Act, 2007 and the incentive was restricted to set off loss for the year of amalgamation. The brought forward losses of amalgamating companies were excluded from the scope of this section. In view of current business crisis, Qayyum emphasised the need to enlarge the scope of this section to give incentive for merger of companies running sick units with the companies having adequate financial resources to revive these sick units.
The FCCI President proposed that the incentive for merger provided at the time of insertion of section 57A be restored and definition of 'amalgamation' under Section 2(1A) be enlarged to include all companies incorporated under the Companies Ordinance, 1984.
Qayyum said that FCCI, Faisalabad Dry Port Trust and other trade associations/organisations used to enjoy income tax exemptions since inception of Pakistan because of their nature of non-profit operations. A cumbersome procedure is being followed by income tax officials, such as formation of committees for approval of trade organisation under Section 2(36) and clause 58 to the 2nd Schedule of the Income Tax Ordinance, 2001 which is resulting in delay and hardship.
He suggested that trade organisations and dry ports approved by the Directorate of Trade Organisation (DTO) and competent authorities should be granted automatic approval under Section 2(36) of the Income Tax Ordinance, 2001.
Qayyum said that inter-corporate dividends were excluded from the purview of final tax by insertion of proviso in Section 8 through Finance Act, 2007. Consequent amendment has not been made in Section 5 to exclude the companies from the purview of Section 5. This has created an ambiguity regarding tax on dividend income. He proposed tax on inter-corporate dividends may be withdrawn as an investment incentive, or reduced rate of 5 percent be announced for inter-corporate dividend.
Commenting over the 'Income from Property', he said that the rent received or receivable by a person for a tax year is subjected to tax under this section under the head 'income from property'. Since the income from property, covered under section 155, is subject to final taxation, therefore, provisions of Section 15 should be appropriately amended to allow declaration of such income on receipt basis, he demanded.
Qayyum said that Section 21(l) provide that expenditure exceeding Rs 10,000, if not paid by a crossed cheque, shall not be allowed as deduction in computing the income from business. Applicability of section 21(l) was restricted to profit and loss expenses as explained by CBR vide Circular No 6 of 1990 dated July 15, 1990 and Circular No 11 of 1998 date July 25, 1998.
These circulars were superseded by issuing a fresh explanation vides Circular No 01 of 2006 dated July 01, 2006. The scope of this section was enlarged to include every expenditure debit-able to trading or manufacturing accounts or profit and loss account in the purview of this section, he said. He pointed out that the new circular created hardship for the taxpayers and also was in contradiction to Section 73 of the Sales Tax Act, 1990 wherein the limit for purchase through crossed cheque is Rs 50,000. He strongly demanded that appropriate steps should be taken to remove this anomaly.
Qayyum said that the concept of 'small company' was introduced through Finance Act, 2005. Such companies were given certain incentives to encourage the corporate sector. One of the incentives was that small company was not required to withhold tax on payment made for goods and services.
This incentive was suddenly withdrawn through Finance Act, 2008. This action of FBR has shattered the taxpayers' confidence. In order to restore the confidence of taxpayers the incentives provided to the small companies at the time of introduction of this concept are required to be restored, he suggested.
He said that the cases of taxpayers are being selected for monitoring of withholding tax under Section 161 simultaneously for month one year. In most of the notices figures are taken from the financial statements and assessees are requested to reconcile those figures with the payments. This lengthy exercise takes a lot of time and resources of the taxpayers. Since the taxpayers are filing monthly and annual withholding tax statements, the suggested that this data should be used from monitoring and only notices in case of any material difference should be issued. Moreover, monitoring of one year should be carried out at one time, he added.
Qayyum said that under section 170(4) of the Income Tax Ordinance, 2001, the Commissioner shall within 45 days of receipt of refund application serve on the person applying for the refund, an order in writing of the decision after providing the taxpayer an opportunity of being heard. Large number of refunds are pending due to pending verification of payments made by the taxpayers.
He suggested that a 30 days limit be fixed to complete the process of verification of tax payment challans by amending Section 170 of the Income Tax Ordinance, 2001. The cases of taxpayers are being selected for audit under Section 177 simultaneously for more than one tax year. Subsequent tax years are being selected without first finalising the earlier tax years already selected. This practice is creating hardship to the taxpayers and badly affecting the day to day business activities as the taxpayers are required to divert a lot of resources to comply with the audit proceedings, he added.
He suggested that audit proceedings for one tax year should be initiated at one time and should be finalised before selection of other tax year. The selection of subsequent tax year should be made, if necessitated by the audit findings of audit finalised.
He suggested that in order to restore the confidence of taxpayers, the selection of audit cases be made within one year from the filing of tax return. The time limitation should be provided in the law, as the selection of audit after expiry of 4 to 5 year is creating hardship to the taxpayers.
In order to broaden the tax based and encourage the new taxpayers, Qayyum suggested that an incentive scheme should be announced wherein the new business enterprises should be exempted from selection for audit for the first three years of operations. This will encourage the new taxpayers to enter into the tax net, he added.