Advance tax, refunds & compensation — III

The PTI Government without waiting for the next budget, through Presidential Order or Finance Supplementary Bill 2021, must make amendment in law requiring FBR to:

1- Account for advance tax under section 147 of Ordinance as collection of the year to which it actually relates. This procedural change will not have any adverse effect on revenue of FBR, except that the advance tax will be accounted for as collection at the time of assessment under section 120 of the Ordinance that is the tax year to which it actually pertains, rather than taking its credit during the ongoing tax year to which it does not pertain though collected in anticipation. Ideally, the government should abolish it once tax base is widened and people start paying taxes with returns. The money they have to part away in advance can be utilised for business growth and expansion that will ultimately yield more revenue for the State and creation of much-needed jobs.

2- The existing nearly 60 withholding tax provisions in Ordinance, except for salaried class, earners of interest income, dividend and rent, are destroying the already sluggish economy due to Covid-19 endemic as well as resulting into heavy refunds which FBR is incapable of paying as old stock is still as high as Rs. 650 billion. The number of withholding provisions should be drastically reduced and confined to salary, incomes taxed as separate blocks and on taxable payments to non-residents. Till the time, economy recovers from Covid-19 pandemic, rates of all withholding taxes should be reduced to 5% or even less. The minimum tax regime should be abolished as it is against the Constitution. The Supreme Court in the Elahi Cotton Mills & others v Federation of Pakistan & others [PLD 1997 Supreme Court 582] held that the National Assembly can impose taxes on income under Entry 47, Part I, Fourth Schedule to the Constitution or impose the same under Entry 52 on the basis of capacity to earn, but “it cannot adopt both the methods in respect of one particular tax”.

3- The withholding tax provisions in the Sales Tax Act, 1990 and all provincial sales tax on services should be suspended, rather withdrawn as nowhere in the world do these kinds of erratic withholding tax rules exist in value-added tax or simple general sales tax enactments.

The concept of advance tax clearly envisages a pre-assessment situation in the case of a taxpayer. Thus, if at the time of filing a return under section 120 of the Ordinance (resulting in automatic assessment under the universal self-assessment scheme if complete), the law specifically provides for taking credit for all taxes paid until the date of filing the return. This implies that if any outstanding balance of tax remains, it should be either refunded or adjusted in the subsequent installments of advance tax for the next tax year. However, FBR has always misinterpreted this law. Para 4 of Circular No. 2 of 2004 dated 25.5.2004 reads as under:

“4. It is also clarified that in case of taxpayers having special *income year, the credit for payment of advance tax, shall be allowed in respect of the quarters falling within such income year e.g. in case of a company closing its accounts on December 31, 2004, the credit for advance tax shall be allowed for tax year 2005 in respect of advance tax paid for the quarters, ending March 31, 2004, June 30, 2004, September 30, 2004 and December 31, 2004.”

• Should have been ‘tax year’

These instructions are issued in total disregard of the law. In the first place, concept of ‘income year’ no longer exists in the new law, and secondly, there is clear indication of straining the law to the extent of distorting the very basis of giving credit for advance tax payments. Why should a company allow credit to be taken (of the three quarters falling in any calendar year) for a tax year that is yet to come? This proves that:

• the term ‘tax year’ is a definition subject to the whims of FBR;

• in reality, the Department failed to grasp its meaning as laid down in the statute;

• the taxpayer will have to adjust his accounts according to the defective language of the FBR’s Circular No. 2 of 2004 and there will always be overlapping of two or more tax years; and

• there is no relevance of tax year as it will be the Department deciding for which tax year, credit may be taken.

If this has been the position since 2004, then what is the sanctity of allowing a taxpayer to maintain so-called special tax years ending on dates other than 30th June because according to his understanding, his accounting period, both for maintaining accounts and assessment of income, will remain a period of twelve months distinct from the financial year. And above all, why should he let the department exploit his advance tax paid on, say 15.03.2021 and 15.06.2021 for a period of 18 and 15 months respectively? It is quite surprising that FBR, in total contravention of existing law, has the audacity to suggest which quarters’ credit would be allowable despite the non-relativity of an advance payment with the tax year in question.

FBR’s interpretation is patently unlawful as it gives it an opportunity to retain the taxpayer’s money beyond twelve months’ period. The concept of advance tax in itself is tortuous as businessmen are out of money, hampering their cash flow and depriving them of circulating the amount to earn more profits. This has become even worse due to first and second waves of Covid-19. Adding insult to injury, FBR wants to utilise that money without paying any compensation. Before 1997, under the repealed Income Tax Ordinance, 197, FBR was bound to pay 6% compensation on deposit of advance tax. Not only has the 6% compensation been withdrawn but on top of that in case of a taxpayer maintaining calendar year as tax year, the last two installments of March and June would be retained for 18 and 15 months respectively till the return becomes due on 30 September next following. There cannot be a worst scenario than this that a person is deprived of his money in the name of advance tax for such long lengths of time and that too without any compensation. It is further burdensome for the banks as they are required to pay advance tax on monthly basis whereas others on quarterly basis! What would be the position of adjustment of tax liabilities against excessive payment of advance tax? Does it mean that there will be point-blank refusal to adjust such payments on the grounds that they are not related to the immediately succeeding year but a subsequent one? Suppose if a deduction of tax is made from payment of a future contract to be executed after two years, the taxpayer has no right to claim its credit after a lapse of two years and must take credit in the year in which the deduction is made? What would be the position if instead of income he incurs loss in a return filed two years later? How would he justify his entitlement to the refund?

FBR’s own (mis)understanding about the existing income tax law is complicating matters rather than simplifying them. There was nothing in the repealed Ordinance to give rise to such interpretation although even then, we had strongly agitated the amendment in law where credit for advance tax was taken by FBR in the year in which it was received rather than carrying it forward to the relevant assessment year. History is witness that a few high-ups in the bureaucracy serving their own self-interests have played havoc with the income tax law and procedure creating gaping lacunae and unleashing a reign of mismanagement just to show that they have proved ‘more than efficient’ in achieving given targets—or was it just to cover up their own incompetence?

Presently, FBR is depending heavily on indirect taxes, withholding taxes and advance tax. In the past, FBR used coercive measures forcing taxpayers to make payments of advance tax even when not due (for future years) and then withholding refunds. It was under the fugitive Ishaq Dar and his team to show “extraordinary” (sic) collection by FBR and the IMF was looking the other way by giving Ishaq Dar 13 waivers. According to a report: “Conceding a couple of slippages in the last quarter ending June 30, 2016, Dar termed as “highly satisfactory” the government performance throughout the programme that included a total of 13 waivers by the IMF since the programme was contracted in September 2013”. The $6.4 billion bailout programme ended in August 2016 with IMF failing or ignoring over-reporting of FBR’s collection by blocking bona fide refunds and taking advances of billions. It is heartening to know that the present team of FBR is not resorting to such tactics. However, it has no resources to pay past withheld refunds by Ishaq Dar et al. If pre-1996 position of advance tax is restored by the PTI Government, the taxpayers will be relieved of paying huge amounts under section 147 or taxes under harsh withholding provisions. Even otherwise such unjustified and anti-growth impositions should be suspended till the time businesses and individuals liable to pay these recover from the economic toll of coronavirus.

(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS))

Copyright Business Recorder, 2021