Finance bill takes away taxpayer''s right to appeal: top tax expert criticises budget provisions

The Finance Bill 2011-12 has amended the provisions of section 127 of the Income Tax Ordinance 2001 to take away the right of appeal from the taxpayer against whom provisional assessment under section 122 (c) of the Ordinance 2001 has been made by the tax department.
A leading tax expert, Naved Andrabi, on Saturday explained the key provisions of Finance Bill relating to provisional assessments. He said that it was held by appellate authorities that the provisions of section 127 had wide powers to accept appeal against an order u/s 122C of the Ordinance. This has been explicitly taken away through this amendment under Finance Bill. Now the only remedy is to file a return in response to a provisional assessment or a writ petition before the High Court under constitutional jurisdiction. It has been specifically mentioned in the amended section 127 that the order under section 122 (c) is not appealable.
He said that the power of the Appellate Tribunal to dismiss the appeal in default has been taken away as per amendments made to Section 132 (2) of the Ordinance. Now the Tribunal will have to proceed ex parte if the parties do not appear and that too on the basis of the record available. The financial limit of cases to be heard by the chairperson or any ember of the Appellate Tribunal has been curtailed to tax involved to a maximum of Pak Rs one million as against earlier of Rs 5 million only. This reduces the arbitrary powers.
The provisions of Section 156B (1) (b) of the Ordinance have been amended to increase the withdrawal limit in excess of 25 percent of the accumulated balance to 50 percent of the accumulated balance under a pension fund for the purposes of withholding of tax under the head salary.
About another major legal amendment in the Income Tax law, he said that currently the tax authorities are being forced to generate more and more revenue through indigenous sources and for this purposes the data of properties and assets has been collected from different sources, including banks, registrar of properties, car manufacturers, etc. The Inland Revenue officials are of the view that about 700,000 people can be brought into the net as according to them said persons are not borne on existing tax payers. The IRA would like to invoke provisions of Section 122C of the Ordinance. ie Provisional Assessment in all such cases. It has been proposed to amend Section 2 (5) of the Ordinance to insert the word provisional assessment into the definition of assessment. Although there was no need for such an insertion yet this may be termed as a curative amendment or rather protective amendment for the IRA, Naved Andrabi commented.
In the definition Section Sub-Section 11B has been inserted to include the definition of "Collective Incentive Scheme" shall have the same meanings as are assigned under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003.
An important amendment has been suggested in Section 18 of the Ordinance, which deals with the "Income from Business". This amendment has been made by way of adding the explanation to Section 18(1) (d) of the Ordinance which reads as; "For the purposes of this clause, it is declared that the word ''benefit'' includes any benefit derived by way of waiver of profit on debt or the debt itself under the State Bank of Pakistan, Banking Policy Department, Circular No 29 of 2002 or in any other scheme issued by the State Bank of Pakistan. This amendment seems to have been inserted under pressure as the much talked about BPD Circular 29 is under scrutiny before the Supreme Court of Pakistan. Insertion by way of explanation is a smart move by the FBR as this will be termed as having a retrospective effect.
All those persons or companies who have taken the benefit of this Circular will face problems and litigation, he explained. In Section 28(1)(g) of the Ordinance the words ''SME Bank'' have been inserted as against the words "Corporation"; thus, in this way of the manner the benefit under the said Section shall only be available to SME Bank.
Naved Andrabi stated that the section 62 of the Ordinance dealing with the tax credit on investment in new shares offered to the public by a public company listed on a stock exchange and those offered by Privatisation Commission has been substituted to extend the tax credit on investments in respect of life insurance premium paid on a policy to a life insurance company registered by the Securities and Exchange Commission of Pakistan under the Insurance Ordinance, 2000(XXXIX of 2000). This benefit is extended only to the resident person who is deriving income chargeable to tax under the head "salary" or "income from business. This will give incentive to the individual taxpayers to invest in life insurance policy.
Further, the limit of investment has also been enhanced from 10 percent of the taxable income to 15 percent of the taxable income subject to a maximum limit of Rs 500,000 as against the earlier of Rs 300,000. Similarly, the condition of keeping the investment in shares for a minimum period of twelve months has been enhanced to three years. This means if you have availed the tax credit by way of investment in share the individual person shall have to keep that investment for a minimum period of three years so as to not to have the said credit reversed.
He further explained that a new Section 65D to the Ordinance has been introduced to allow Tax Credit for equity investment. This credit is allowed only to a taxpayer being a company which establishes a new industrial undertaking for manufacturing in Pakistan; or invests any amount in the purchase and installation of plant and machinery, for the purposes of balancing, modernisation and replacement of the plant and machinery, already installed therein, in an industrial undertaking set up in Pakistan and owned by it, with hundred percent equity owned by it. The tax credit equal to 100 percent of the tax payable shall be allowed to such company on or after first day of July, 2011, for a period of five years or commencement of commercial production, whichever is later.
He highlighted that an inbuilt check has also been given and the Commissioner after allowing credit; subsequently discovers on the basis of documents or otherwise that any of the conditions specified in this section was not fulfilled, the credit originally allowed shall be deemed to have been wrongly allowed and the Commissioner Inland Revenue may, notwithstanding anything contained in this Ordinance, re-compute the tax payable by the taxpayer for the relevant year and the provisions of this Ordinance shall, so far as may be, apply accordingly.
The definition of Section 111 of the Ordinance has been enhanced by way of insertion of Clause (d) to Section 111(1) of the Ordinance. The newly inserted clause suggests that any person who has concealed income or furnished inaccurate particulars of income including; the suppression of any production, sales or any amount chargeable to tax; or the suppression of any item of receipt liable to tax in whole or in part and the taxpayer offers no explanation the same shall be added into the income of the said person. This means that the ordinary addition in income will now entail penalty u/s 182 of the Ordinance. This seems to be a harsh amendment.
The provision of Section 113 of the Ordinance have been amended to allow the carryover of minimum tax for adjustment to five subsequent years, as was allowed for three years earlier on. Sharing other changes in the Income Tax Ordinance 2001, the top tax lawyer said that to make more and more persons statutorily liable for filing of tax returns the provisions of Section 114 of the Ordinance have been amended to insert Sub-Clause (viii) to Clause (b) of Sub-Section (1) of Section 114 of the Ordinance.
This insertion would now require the holder of commercial or industrial connection of electricity to file a return of income if the amount of annual bill exceeds Rs one million. Further, a new Sub-Section 1A has been inserted in Section 114 of the Ordinance so as to direct that every individual whose income under the head ''Income from business'' exceeds Rs three hundred thousand but does not exceed rupees three hundred and fifty thousand in a tax year is required to furnish return of income for the tax year. This means that a business individual will now be forced to file a return even if his income is less than the amount that is not chargeable to tax.
By insertion of Clauses (d) and (c) to Section 114 (2) of the Ordinance it is being ensured that the taxpayer makes the payment of tax along with the return and also files his wealth statement as required under Section 116 of the Ordinance. This means that the Tax Return shall not be considered complete unless the tax is paid and the Wealth Statement is not filed, he clarified.
The section 114 (6A) of the Ordinance allowed a taxpayer to revise his return of income; if he so desired, any time before receiving a notice u/s 177 or Section 122(9) of the Ordinance so as to avoid any penal action. A cosmetic change has been brought and words "wishes" has been omitted. Similarly, the word "wishes to deposit" & "wishes to revise" in first & second proviso, have been replaced by "deposits" and "revises" respectively.
The wealth statement u/s 116 of the Ordinance is now to be filed by individuals who declare income for the current tax year or have income for the last tax year more than rupees one million. Earlier, this limit was at rupees five hundred thousands only. Similar condition has also been made applicable to all Members of the Association of Person (AOP) where the Income of the AOP is rupees one million, before tax, for the year. The reconciliation shall also have to be filed with the wealth statement.
Naved Andrabi pinpointed that the sub-Section (2A) of Section 116 has been substituted to state that in response to a provisional assessment u/s 122C of the Ordinance only individuals and all the members of the AOP shall file their wealth statements along with reconciliation statements and evidence of source of investment or acquisition of the assets.
He stated that the advance tax payable u/s 147 (5B) of the Ordinance on the capital gain on sale of securities shall now be payable within 21 days from the end of the quarter for which it is being paid. Earlier this time limit was seven days only.
The tax deducted under all provisions of Section 151 of the Ordinance has been brought into the Final Tax Régime (FTR) for all taxpayers other than companies. Earlier, on the tax deducted on "Government Securities" as per Section 151 (1) (c) of the Ordinance was outside the ambit of FTR. This was forcing the individual investors to not to invest into Government Securities and only the banks would mop up the securities so offered. This amendment will give an individual investor to go for investment into Government Securities, like Treasury Bills, etc. A corresponding amendment in Section 115 & 169 of the Ordinance has also been made to allow such investors'' to file statement of income instead of Return of Income, he stated.
Section 165 of he Ordinance has been amended to state that the statements shall be filed on monthly basis. Along with the names now CNIC and NTN will also have to be given while filing the monthly statements. The statement shall now be e filed on every 15th of the month next following after the end of the month for which the statement is being filed.
Under the Finance Bill, he said, that it has been prescribed as per Section 165 (6) that in case of salary annual statement will also be filed which will include details of non-taxable limit salary between Rs 300,000 and Rs 350,000 No date has been prescribed for filing of the annual statement. Maybe the Rules will suggest the same or the earlier date of August 31, each year may prevail.
In Section 182 of the Ordinance an explanation has been added at Serial 1 to state that the expression "tax payable" means tax chargeable on the taxable income on the basis of assessment made or treated to have been made under sections 120, 121, 122 or 122C. This means now the penalty, if levied, will be calculated on the basis of tax paid or payable under these sections.
Through the Finance Bill, he said, the right of obtaining an Advance Ruling has been limited to a "Non-Resident" person only. The Permanent Establishment of a non-resident has been excluded from the purview. Auction by way of Tender has also been brought into the net of withholding of tax as earlier only auctions were covered u/s 236A of the Ordinance.
The tax collected u/s 236B of the Ordinance on domestic travel by air has been clearly stipulated in law to be adjustable. Further, insertions have been made to obtain exemption certificate for those whose income is exempt from tax under the Ordinance.
Exemptions u/c 61 (xi) & (xxv); 74A; 93 & 114A have been omitted. A proviso to Clause 5A of Part II of the Second Schedule to the Ordinance has been added to allow tax deducted on profit on debt from debt instruments, Government securities including treasury bills and Pakistan Investment Bonds shall be final tax on profit on debt payable to a non-resident person having no permanent establishment in Pakistan and the investments are exclusively made through a Special Rupee Convertible Account maintained with a Bank in Pakistan, Naved Andrabi added.