Tax incentives for NRPs — II

• FBR keeps drafts of proposed laws/amendments “secret”, never making them public and commits blunders when the same are promulgated as Ordinances by President of Pakistan and even passed by National Assembly that passes Money Bills after comments from Senate!

• In the present case, blame is equally to be shared by SBP, Law Ministry and Cabinet as a whole. This shows either casual attitude or extreme incompetence, or both! In democracies such vital laws are debated in public, experts give their inputs and all stakeholders are consulted. However, it is shocking that institutions like FBR, SBP and Ministry of Law, even after Article 19A of the Constitution providing unfettered right to information assuring participatory democracy, think “secrecy” is their fundamental right and parliamentarians and others show apathy, rather than punishing offenders who do not share even draft laws meant for public. After this they complain about absence of rule of law in society.

• Another bigger gaffe is imposing 1% tax final tax on purchase of immovable property by NRPs in lieu of capital gain under section 37 of the ITO, 2001. It is adjustable for residents. Is it an incentive or punishment for investing in Pakistan? How purchase (investment) in immovable property can be considered as “gain”? The genius of FBR in drafting the Ordinance, endorsement by SBP, Law Ministry and signature by President have made us a laughing stock as many who wanted to invest ask: “What kind of law is this?” This is not a drafting error, it shows pathetic understanding of law by FBR, SBP and others, even lack of common sense that gain or loss always takes place in the hands of seller of immovable property and not purchasers.

• The NRPs will also pay 1% on gross value of sale/disposal of immovable property in lieu of “capital gains” [section 37 of ITO 2001] even in case of loss or where tax is less than 1% under the normal tax rates. They could have given them an option to claim it as adjustable or final, whichever is more beneficial. Filing of tax returns should also be optional as many from the USA, Canada, the EU and other countries where income taxation is to pay tax on even Pakistan-source income and take benefit of Avoidance of Double Taxation with Pakistan, wherever applicable.

• The amended clause (78), Part I, Second Schedule to ITO 2001 exempts from tax “any profit on debt derived from foreign currency accounts held with authorised banks in Pakistan, or certificate of investment issued by investment banks in accordance with Foreign Currency Accounts Scheme introduced by the State Bank of Pakistan, non-resident individuals, non-resident association of persons and non-resident companies [there is a typographical error in the version variable at the website of FBR as “non” appears as “no”. It may be corrected in gazette notification]. Same exemption under clause (79) Part I, Second Schedule to ITO 2001 is extended to “profit on debt derived from a rupee account held with a scheduled bank in Pakistan by a non-resident individual holding a Pakistan Origin Card (POC) or National ID Card for Overseas Pakistanis (NICOP) or Computerized National ID Card (CNIC)], where the deposits in the said account are made exclusively from foreign exchange remitted into the said account.

• The NRPs are given exemption from filing of tax returns and withholding tax in respect of section 231A [cash withdrawal from a bank], 231AA [Advance tax on transactions in bank] and 236P [Advance tax on banking transactions otherwise than through cash] of the ITO through clause (112A), Part IV of the Second Schedule to the ITO 2001 but in all these the fundamental condition is of being “non-resident”.

• The provision of zero rate of deduction is provided in clause (5A), Part II, Second Schedule to ITO 2001, but the issue is determination of “residential status”.

Who will determine the “residential status” of an individual in any tax year on the basis of section 82 of the ITO 2001? It reads as under:

“Resident individual.– An individual shall be a resident individual for a tax year if the individual–

(a) is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and eighty-three days or more in the tax year;

(ab) is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and twenty days or more in the tax year and, in the four years preceding the tax year, has been in Pakistan for a period of, or periods amounting in aggregate to, three hundred and sixty-five days or more; or

(c) is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year.

Any non-resident Pakistani may become resident as per above definition after opening the RDA.

The above fact finding can only be done by the concerned Commissioner of Inland Revenue having jurisdiction in the case. Section 159(2) of ITO 2001 says:

“A person required to collect advance tax under Division II of this Part or deduct tax from a payment under Division III of this Part or deduct or collect tax under Chapter XII] shall collect or deduct the full amount of tax specified in Division II or III or Chapter XII], as the case may be, unless there is in force a certificate issued under sub-section (1) relating to the collection or deduction of such tax, in which case the person shall comply with the certificate”.

The above cited clauses providing exemptions or reduced rate of tax in the hands of NRPs through RDAs where deposits are made exclusively from foreign exchange remitted into the said accounts must also be given waiver from obtaining exemption certificates. These exemptions are available subject to fulfillment of certain conditions, the most pivotal one in the case of individuals is “non-resident”. It is only the Commissioner who can ascertain whether this condition is fulfilled or not. The bank has no mechanism to check it. As withholding agent they are barred by law to allow waiver from withholding provisions unless an exemption certificate from Commissioner is produced.

If NRPs are from the USA, the UK, Canada and the EU and avail the above benefits, they will not be required to pay tax on sale of immovable assets, if Avoidance of Double Taxation Agreements [DTAs] with Pakistan apply. On many incomes, they will have to pay no tax as SBP and FBR have not taken into account the impact of Avoidance of Double Taxation Agreements and reporting requirements under Exchange of Information and Mutual Legal Assistance treaties under OECD. Therefore, it should have been optional for them to file returns or not. FBR and SBP must know about Foreign Account Tax Compliance Act (FATCA) by the USA but they have ignored the same in tax incentives.

Before the promulgation of Ordinance, FBR and SBP did offer the draft for input from experts and stakeholders to improve it and place it under an independent Chapter to mitigate local and international tax issues/conflicts highlighted above. Closed-door drafting of such laws and not seeking input from all who matter is the root cause of many typos, grammatical errors and conceptual blunders, etc.

It is hoped that when the Presidential Ordinance VI of 2021, Tax Laws (Amendment) Ordinance, 2021 will be considered by the National Assembly to make it an Act of Parliament, the above-cited lacunae, drafting blunders and conceptual inconsistencies will be removed and to improve it further the Standing Committees of Senate and National on Finance and Revenue will consult experts for their comments. Although Senate does not approve Money Bill, its comments under the Constitution are mandatory to be considered by the National Assembly, though not binding.

(Concluded)

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

Copyright Business Recorder, 2021