A review of the provisions introduced reveals that after a long time concrete and positive steps have been undertaken for documentation of the economy and providing a level playing field to various persons in business.
All the steps are almost in the right direction that reflect the will of the government to document the economy and bring delinquents within the taxation system of Pakistan.
These amendments will assist in documentation of the economy, access and use of data otherwise available in the system (NADRA) for tax purposes, empowering the tax department to discontinue availability of utilities for delinquents. These steps lead to interlinking of tax data and information base with economic activity in the country.
Though almost all these measures are correct and have been rightly introduced it is to be monitored that such steps do not create any extra burden on comparatively more documented businesses (such as companies) as against non-company cases.
Furthermore, steps should be introduced to curtail the prevalence of the 'Cash Economy' in the country which include prohibition of instruments which facilitate cash transactions. If steps to reduce the size of the cash economy are not undertaken then keeping in view the past experience such steps may become counter-productive. Such steps include gradual withdrawal of high denominated currency notes and restrictions on easy availability of foreign currency in the country.
Compulsory Digitized Payment for Expenditure by Companies:
This is a highly controversial amendment made in the tax laws for the documentation of the economy.
Government should reconsider this provision as it effectively delegitimizes check payments beyond a certain amount.
It is a commonly known fact that there are a substantial number of undeclared bank accounts through which huge business transactions are undertaken without reflection in the taxation system. The amendment now proposed is the continuation of earlier one introduced by the Finance Act, 2021. In the earlier amendment all entities are required to declare the bank account that is used for business purposes.
Companies are now required to make all payments for expenditure over a certain limit (Rs. 250,000) only through 'digitized transactions' undertaken in a bank account notified to the tax department.
The conditions are:
• Transactions under a single head of account exceeding Rs. 250,000;
• Digital method of payment through declared Bank Account.
It would be advisable if companies are given the option to pay digitally or through crossed cheques instead of being coerced towards digitalization.
The phrase 'Digital transaction' has not been defined in the Income Tax Ordinance, however, a Digital Transaction generally means:
"A digital payment, sometimes called an electronic payment, is the transfer of value from one payment account to another using a digital device such as a mobile phone, POS (Point of Sales) or computer, a digital channel communications such as mobile wireless data or SWIFT (Society for the Worldwide Interbank Financial Telecommunication). This definition includes payments made with bank transfers, mobile money, and payment cards including credit, debit and prepaid cards."
It appears that banking transactions undertaken through cheques would not qualify under this section. Procedural aspects relating to the digital payment system need to be clarified as the proposed system envisages a complete replacement of the present manner of payment which is undertaken through cheques.
This is a step forward in modernisation of the financial system and its use for documentation of the economy. However, legal implications of this step need to be examined for that effect whether or not a payment system approved under the legally permissible manner of payment can be disregarded under the tax laws. Furthermore, this amendment may lead to promotion of non-corporate business entities.
It is reiterated that this amendment is a continuation of another important amendment made by the Finance Act, 2021 whereby declaration of Business Bank Accounts has been made mandatory.
Collaboration with NADRA & Indicative Income
National Database & Registration Authority (NADRA) is the national custodian of data and transactions undertaken by an individual. This data is maintained in NADRA for every citizen of Pakistan on the basis of Computerised National Identity Cards (CNICs).
A new system of collaboration and use of data between NADRA and that available with the Federal Board of Revenue (FBR) has been introduced in the tax laws.
Under a well-organized system substantial data relating to various transactions undertaken by an individual is available with NADRA. It is so as almost all the major economic transactions, such as registration of acquisition of property and assets, opening of bank account, booking and registration of motor vehicles, etc., require identification of CNICs under the respective laws. The resources available with NADRA would now be available to FBR under an organized system.
Under the newly-inserted section 175B certain role has been assigned to NADRA which inter alia include:
• Identification of income, receipts, assets, properties, liabilities, expenditure or transactions that have escaped assessment; and
• Identify the differences in valuation of underlying subject matter in the transaction.
A new concept of determination of "Indicative Income" has been introduced.
Under that process NADRA using artificial intelligence, mathematical or statistical modelling or any other modern device or calculation method can determine the indicative income of any individual on the basis of data available with NADRA. This is a unique strategy not tested in other jurisdictions.
Nevertheless in our particular environment such an action is essential.
This indicative income will be intimated to the person through FBR which in effect will be taken as a deemed amendment of return filed under the self-assessment system as laid down in Section 120 of the Income Tax Ordinance, 2001.
In case if the person has not filed a return such indicated income will effectively be deemed to be the tax liability of that person.
This is a very positive step as it is a common knowledge that there are numerous economic transactions which are not reflected in the tax system.
Furthermore, in various individuals the economic transactions reflected in NADRA records are not commensurate with the income declared.
In order to properly implement a much needed step it is recommended that adequate measures be undertaken to avoid unnecessary litigation which is expected to arise on this matter. It is expected that delinquent persons would place roadblocks in the implementation of this provision; challenging the validity of such indicative income. This requires very close coordination between NADRA and FBR and use of 'reasonableness' test whilst determining the indicative income as referred above. A prudent, constructive and transparent approach is suggested. It is to be established in all respects that the function of determining income solely rests with FBR. NADRA's data or basis is only an aid to FBR.
Disconnection of Utilities for Delinquent Persons
A new section has been added to the tax law through which FBR has been given powers which entail disconnection of utilities for the persons not filing income tax returns required under the tax laws. These utilities include mobile phones or mobile phone sims, electricity and gas connection. This section will have a very wide implication for the Pakistani society as the number of mobile phone users, electricity and gas connections (commercial and industrial) is absolutely not commensurate with the persons filing tax returns.
Adequate provisions will be required in the respective laws for the implementation of the aforesaid provisions. Furthermore, close, coordinated and integrated arrangement will be required between the entities provisioning these utilities (such as Discos, SNGPL & SSGC and mobile phone companies) for the implementation of this adequate and proper law.
It is important to note that there is provision by way of Section 181 AA of the Income Tax Ordinance, 2001 that requires new registrants of new commercial or industrial connection to be mandatorily registered with the tax department. This provision which was introduced in 2014 is not being implemented in a practical sense and there is no coordination between the electricity and gas suppliers and the tax department.
Now such a strong provision has been introduced that entails disconnection of the utility. It is suggested that proper preparation be made for the implementation of this much needed provision of law with the support of Discos and gas companies.
Foreign Remittances
Foreign remittance through banking channels up to 5 million are not subject to any tax enquiry. This facility was limited to remittances through banks only. Now remittances other than banks' such as Money Service Bureaus (MCBs), Exchange Companies (ECs) and Money Transfer Operators (MTOs) will also qualify for such a concession.
It is suggested that adequate procedures be introduced to ensure that there is no abuse of this concession and at the same time adequate documentation is available for availing this concession.
Discontinuance of Electricity & Gas Collection-Sales Tax Registration
Under the new provision introduced in the Sales Tax Act 1990 powers have been entailed to FBR for disconnection of electricity or gas connection if a person who is required to be registered under the Sales Tax Act, 1990 is not so registered.
This provision in practical sense is the most relevant amendment made in the Sales Tax law in Pakistan after 1996.
It is a known fact that there is a very large number of unregistered persons under the Sales Tax laws.
There are around over 400,000 industrial or commercial persons in the country whereas the number of persons registered under the sales tax laws is around one-fourth of this number.
This is a step in the right direction. In the past serious implementation issues in this regard were faced due to practical non-cooperation of Discos and gas companies. Repetition of this trend is to be avoided by good governance.
On the practical side the Government as a policy would have to consider the following steps for the adequate implementation of this provision:
• An adequate time period for integration of records and correction under the respective laws;
• A waiver of the liability for the transactions for the period when such persons were not registered who opt for voluntary registration.
This provision is also applicable for the Tier 1 retailers, though being registered do not integrate with the Board's Computerised System.
Copyright Business Recorder, 2021
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