Difference between filers and non-filers specified

The Federal Board of Revenue (FBR) has specified difference between filers and non-filers of income tax returns to double rates of withholding taxes for non-filers under Income Tax Ordinance 2001 through Finance Bill (2014-15). Explaining the Finance Bill (2014-15), Syed Naveed Andrabi, Advocate Supreme Court explained that a definition in Section 2 of the Ordinance is being inserted to create and identify the difference between a filer and a non-filer.
The person whose name is appearing in the list as an "Active Tax Payer" issued by the Federal Board of Revenue shall b considered as a filer; also a person holding a "Taxpayers' Card". This definition is being added with the intention to treat and differentiate between the said two categories so that the tax withholding may be done at different rates that may be prescribed under the Ordinance through this Finance Bill or later on from time to time. As was being discussed earlier the rates for compliant taxpayers may be the same but for those who are termed, as "Non-Filers" are likely to be at an enhanced rate. Sub-Section 23A & 35C are being inserted in this regard.
The definition of Income as give in Section 2 (29) of the Ordinance is being amended to include the term "Bonus Shares" as income; which earlier was excluded and were not liable to tax. It means that the Bonus Shares shall now be taxable. A new Section 236M is being proposed to be added which would mean that the person issuing "Bonus Shares" to a share holder of a company shall withhold tax @ 5% of the value of bonus shares determined on the basis of day end price on the first day of the closure of books. The company issuing shares shall ensure collection of tax from the person to who such bonus shares are issued or else the same shall be collected from the company by initiating proceedings u/s 161 of the Ordinance.
The definition of Stock Fund is also being inserted by inserting Sub-Section 61A into Section 2 of the Ordinance to identify a collective investment scheme or a mutual fund where the investible funds are invested by way of equity shares in the companies to the extent of more than 70% of the investment, he said.
In Section 37 of the Ordinance the words "held for a period up to two years" is being deleted. This however, would not change the conditions that gain on immovable property held for more than two years shall not be taxable under the Ordinance. The Division VIII of Part I of the First Schedule is being amended to clarify that the 0% tax will be charged if the immovable property is held for more than two years, he said.
The first proviso to Section 37A of the Ordinance is being omitted which means that securities held for more than one year or twelve months shall now be taxable for the Tax Year 2015 for which rates are also given as 12.5% for less than a year and 10% for a security held more than twelve months but less than twenty four months. This means that the securities held for less than two years or 24 months shall now be taxable starting Tax Year 2015. The definition of Securities is also being amended to include "debt securities" which means TFC'S; SAKUK; PTC'S FIB'S T'BILLS & Currency Bonds, etc.
Pakistan Telecommunication Authority (Authority) is a taxable entity under the provisions of Ordinance. The income of the Authority from auction of 3g and 4G licenses was thus liable to tax. A proviso is added in Section 49 of the Ordinance to hold that the income from auction of licenses of 3G and 4G is an income of Federal Government hence shall not be taxed in the hands of the Authority.
A proviso is being added to Section 92 of the Ordinance; whereby the share of a company as a member of Association of Persons (AOP) shall be excluded from the income of the AOP and taxed accordingly in the hands of the company at the normal rates applicable to the company. This means that the minor reduction available to a company by way of taxed income from AOP has been withdrawn, Andrabi said.
The Clause (d) of Section 100B (2) which read as a "foreign institutional investor" being a person registered with NCCPL as a foreign institutional investor; is being substituted by a "Company in respect of Debt Securities only. This means that the provisions of Section 100B shall not apply to a company to the extent of Debt securities; whereas the elimination of "foreign Investor" may cause concerns.
A new Section 100C is being inserted whereby the Trusts; non-profit Organisations and Universities etc, shall be allowed tax credit equal to 100% of the tax under any head except u/s 161; 162 of the Ordinance; provided they file their tax returns; have withheld the tax from the payments made and have filed their withholding statements. The respective exemptions available to such person in Part I of the Second Schedule to the Ordinance have been deleted.
The rate of 1% as minimum tax given in Section 113 has been deleted and separate rates in Division IX of Part I to the First Schedule to the Ordinance have been given. The new rates shall be 0.5% for Oil Marketing Companies; Oil Refineries; Sui Northern & Southern Companies, if turnover is over 1 Billion; Pakistan International Airlines and Poultry Industry. The rate of 0.2% for Distributors of pharmaceuticals; fertilisers and Cigarettes; Petroleum Agents and Distributors if they are registered with Sales Tax; Rice Mills and dealers; Flour Mills. For Motor Cycle dealers registered with Sales tax 0.25% and to all other case to whom Section 113 applies it will be 1% of the turnover.
A new Section 113C is being introduced in the Ordinance, which suggest levy of Alternative Corporate Tax which will be applicable from the Tax Year 2014. This means that apart from minimum tax there is yet another comparison for corporate taxpayers. The tax on Corporate Rates or Alternative Tax @ 17% of the accounting profit before tax shall have to be paid. A complete mechanism is proposed along with powers vested in the Commissioner to play around with the adjustments. This will be another branch that may lead to new set of litigation; as the concept of Income under the Ordinance and Accounting parlance is being substituted.
The requirement of filing Wealth Statement is being restricted to a "Resident Person" only. Earlier on all taxpayers; irrespective of their status were required to file a wealth statement along with the return if beyond a certain threshold. The provisions of Section 130(4) of the Ordinance are being amended to include Cost & Management Account with 10 years standing in practice as eligible for appointment as an Accountant Member to the Appellate Tribunal Inland Revenue.
The provisions of Section 149 of the Ordinance are being amended to include the Directors Fee or Fee for attending Board meetings as a salary on which the rate of withholding is suggested @ 20% of the gross amount. The said tax shall be adjustable. This amendment resolves the controversy as to whether such fee paid by a company is a salary or payment for services that may be liable to tax @ 7% of the gross amount. The FBR had earlier clarified such fee to be a service and liable to tax @ 7% of the gross amount. The controversy shall hit the government nominated directors the most.
For Deduction of tax on dividends paid a new Division is being introduced which suggest withholding as 7.5% on power projects; from stock funds @ 12.5% for the Tax Year 2015 and onwards if the Dividends are less than capital gains; Dividends received by a company from stock fund; CIS and Mutual Funds shall be 25% for the tax year 2015 onwards. All others 10% if filers and in case of non-filers 15%.
Similarly, there are changes being brought into Section 151 of the Ordinance to suggest different rates of withholding for different person including filers @ 10% and non-filers @ 15%. The non-filers receiving yield or profit on debt less than Rs 500,000/- shall be subjected to 10% withholding. A proviso has also been added to Section 151 of the Ordinance whereby the tax deducted from the non-filer shall be final to the extent of 10% and the extra 5% shall be adjustable against other income, if he may file the return of income. The apparent reason is to protect small recipients; however, how will the payer identify that the non-filer has not crossed the maximum limit. Another Pandora's Box is being opened for banks whereby the harsh provisions of Section 161 of the Ordinance shall be used.
The contracts signed by sports person with sponsors and employers are now being subjected to withholding tax u/s 153 (1) (c) of the Ordinance. A new Section 181AA is being introduced which suggests that at the time of applying for a new industrial or commercial gas or electricity connection a pre-requisite of registration under the Income Tax Ordinance shall have to be obtained.
Section 231B is proposed to be substituted to suggest that not only at the time of registering the motor vehicle but also on transfer of the vehicle advance tax shall be collected. These rates are being revised for filers and enhanced rates for non-filers. Section 235A is being introduced to withhold tax on domestic consumers of electricity having monthly billing of Rs 100,000 or more.
Section 235B is also being introduced for collection of Income Tax equal to Re. 1 on each unit of electricity unit consumed by the steel melters, re-rollers registered under Sales Tax Special Procedures. Advance Tax @ 1% of the value of the property is also being proposed to be collected at the time of transfer of immovable property valued more than three million, which shall be adjustable. In case of non-filer it shall be 2% of the value.
In case of Foreign Air Travel in Business Class or First Class advance tax shall be collected from filers and non-filers @ 3% & 6% of the value respectively. These proposed changes shall bring in change or increase in taxation, which would then result into more refunds of the legitimate taxpayers and cost of non-filers; unless they are brought into tax net. The emphasis should be on broadening the tax base and not increase in withholding avenues, Andrabi added.