Approval/issuance of IT circular 6/09, exemption certificates: FTO directs FBR to take action against officials

The Federal Tax Ombudsman (FTO), Dr Muhammad Shoaib Suddle, has directed the Federal Board of Revenue (FBR) to initiate appropriate action against officials who approved/issued Income Tax Circular No 06 of 2009 (exclusion out of minimum tax on services rendered by corporate sector) and issued exemption certificates to give undue benefit to selected corporate entities.
The FTO on Monday issued these instructions to the FBR while deciding a complaint filed by Waheed Shahzad Butt Tax Resolution Services Company Lahore. According to the findings of the FTO, it was clear that FBR's Circular No 06 of 2009 dated August 18, 2009 was wrongly issued and some Commissioners Inland Revenue issued exemption certificates contrary to law and in departure from FBR's earlier clarifications, which is tantamount to maladministration as defined under Section 2(3) of the FTO, Ordinance, 2000.
The FTO has recommended to the FBR to initiate appropriate action against officials who approved/issued Circular No 06 of 2009 dated August 18, 2009. The FBR should also initiate appropriate action against officials who issued exemption certificates to unduly benefit the corporate entities. The Board should ascertain the particulars and the amount of tax not withheld @ 6 percent from each service provider and take immediate measures to recover the revenue, as per law. The FBR should also direct the concerned officials to take suitable action to ensure that the taxpayers, including certain service providers, issue bills/invoices without reference to exemption from withholding tax and report compliance within 60 days, FTO recommendations added.
Details of the case showed that the issue involved in the complaint, taken up under "own motion" jurisdiction conferred under Section 9(1) of the FTO Ordinance, 2000, was illegal issuance of exemption certificates, particularly by RTO, Karachi, and LTU Islamabad. Under the Finance Act 2009, an amendment was made in Section 153 of the Income Tax Ordinance, 2001 (the Ordinance) rendering all service sector taxpayers subject to minimum withholding tax @ 6 percent of gross receipts. It meant that neither a refund could be allowed nor an exemption certificate issued to such taxpayers if their assessed income tax was less than the amount withheld @ 6 percent of gross receipts. After the amendment, the FBR issued letter C.No 1(6)WHT/2009 advising the Directors General, LTUs/RTOs, that the tax deducted under Section 153(1)(b) of the Ordinance would be the "minimum tax". The FBR also issued a Circular No 3 of 2009 dated 17th July, 2009, advising the field formations that tax deducted under Section 153(1)(b) would be considered "minimum tax" and all taxpayers falling in the ambit of this provision of law shall file returns under the normal tax regime instead of statement under final tax regime.
However, despite the imposition of minimum withholding tax @ 6 percent, the Commissioners, Inland Revenue issued exemption certificates to taxpayers providing services and falling under the ambit of Section 153(1)(b) of the Ordinance. In particular, the Commissioner, RTO, Karachi and Commissioner, LTU, Islamabad issued exemption certificates. When the Commissioners, Inland Revenue, RTO, Karachi, and LTU, Islamabad, were informed of the illegality in issuance of exemption certificates, they withdrew the certificates on 05-8-2009 and 12-8-2009 respectively.
The ubiquitous maladministration of the Department further came to light when FBR issued Circular No 6 of 2009, stating that the status of corporate sector companies rendering services remained unchanged even after the amendment in Section 153 of the Ordinance, and so the corporate sector companies would remain subject to minimum tax @ 0.5 percent as provided under Section 113 of the Ordinance. Thereafter, the LTUs and RTOs again started issuing the exemption certificates, reiterating that no tax would be deducted/withheld on payments made on account of providing/rendering services, FTO order said.
The FBR through e-mail dated October 20, 2010 was again informed of the inaccurate computation of tax on service sector leviable under section 153(1)(b) of the Ordinance, using the software available on FBR website for filing of income tax return for tax year 2010. Secretary (Withholding Tax), FBR, through letter C.No 1(10)WHT/2006-Part-III dated November 1, 2010 clarified that the law did not allow to club income on account of services rendered by professionals - on which minimum tax @ 6 percent had already been deducted - with other sources of income for further taxation under the normal tax regime.
Commenting on the prevalent confusion on the issue, the applicant, Butt, felt that FBR functionaries were either not fully aware of the changes made in Section 153 of the Ordinance, 2001, through the Finance Act, 2009, or were wrongly interpreting the law with ulterior motive. He further alleged that the functionaries of FBR by not taking the applicability and enforcement of law seriously were guilty of negligence, inattention and arbitrariness in the discharge of their duties and responsibilities.
The applicant requested that FBR be directed to initiate disciplinary proceedings against its functionaries who had issued exemption certificates and Circular No 6 of 2009. He also requested that loss of revenue had to be recouped either by amending the tax return form for Tax Year 2010 or by asking the taxpayers providing services to file revised returns on the new return form prescribed for Tax Year 2011. The applicant also contended that many taxpayers, particularly some service provider companies, were still sending bills/invoices with a note that they were exempt from withholding tax deductible @ 6 percent on gross receipts. Resultantly, no tax was being withheld by many recipients of services causing a huge loss of revenue.
The DR, Asif Rasool, Secretary, FBR, raised legal objections by stating that the FTO was not competent to decide the cases on the basis of applications for suo motu investigations in the public interest. He, however, admitted that the applicant had raised valid objections and stated that the mistakes made by FBR were later rectified through clarificatory letters. He stated that the income tax return form for the year 2010 could not be legally amended/re-issued as the benefit once given could not be withdrawn with retrospective effect. The DR also claimed that the FBR was considering other alternatives to recoup the loss of revenue caused due to wrongly issued exemption certificates, Circular 06 of 2009 and faulty income tax return form for the year 2010.
Dr Muhammad Iqbal, Chief (ITP), FBR, who also appeared as departmental representative, admitted the maladministration by functionaries of FBR in issuing self-contradictory instructions and Circulars. The DR stated that many taxpayers had challenged the withdrawal of Circular No 06 of 2009 dated 18-8-2009 in the Lahore High Court, and the matter being sub judice was out of the jurisdiction of FTO in terms of Section 9(2) of the FTO Ordinance, 2000.
The FTO observed that the record produced has been examined. It is an admitted fact that the FBR through its letter C.No 1(6)WHT/2009 dated 4th July, 2009, had issued guidelines to all the Directors General of LTUs/RTOs in the country. The FBR also placed income tax return form (IT-2) with built-in tax computation facility for the year 2010 on its web portal which calculated the tax on service sector as "minimum tax". The income tax form prescribed by the FBR for tax year 2011 and placed currently on its web portal also calculates the withholding tax deducted from the service providers as a minimum tax.
The FTO said that the clarifications circulated by the FBR to its field formations are sufficient proof that the amendment made in section 153 of the Ordinance through the Finance Act, 2009 ousted all the NTN holders whether individuals, AOPs or Companies providing services from Normal Tax Regime (NTR)/Final Tax Regime (FTR) and brought them under the Minimum Tax Regime (MTR). The exemption certificates issued by the Commissioners on the request of some corporate taxpayers prior to issuance of Circular No 06 of 2009 dated 18-8-2009 were withdrawn when the legal position was explained to the concerned Commissioners by the Applicant. Prima facie, it seems that the corporate sector providing services thereafter approached the FBR and Circular No 06 of 2009 was then issued, ousting the corporate sector from Minimum Tax Regime of amended Section 153 of the Ordinance without withdrawing the Board's earlier clarifications issued through it letter dated 4th July 2009 and Circular No 03 of 2009 dated July 17, 2009.
The Exemption Certificates were wrongly issued in the month of July 2009, where changed position of applicability of Section 153(1)(b) was clear. Clarification issued vide FBR's circular/letter C.No 1(6)WHT/2009 dated 04-07-2009 and Circular No 03 of 2009 dated 17-07-2009 were not followed while issuing these Exemption Certificates. Moreover, an ambiguous clarification was issued through Circular No 06 of 2009 dated 18-08-2009 which was withdrawn on April 26, 2011.
The FTO order said that the departmental representatives have admitted that the public exchequer suffered losses because of issuance of Circular No 06 of 2009 and the Exemption Certificates issued by the Commissioners of Inland Revenue all over Pakistan. No measure was taken by FBR to recoup the losses which according to the Applicant were several billion rupees because the corporate taxpayers were still issuing bills to their customers with a printed note that they were exempt from the deduction of withholding tax and the same was not being deducted by many service recipients, FTO added.