Representation filed with FTO: 'new IT return form on FBR web-portal understates tax liability'

The Income Tax Return form for Tax Year 2014 placed on the FBR web-portal with built-in tax computation formulas apparently having 'grossly understated taxpayer's due tax liability,' which may lead to significant loss of revenue, creating problems for both taxpayers and Federal Board of Revenue (FBR). In this regard a tax lawyer has filed a representation with the Federal Tax Ombudsman (FTO) Office here on Wednesday to take immediate notice of the situation.
A Lahore-based tax lawyer Waheed Shahzad Butt told Business Recorder that Income Tax Return form does suffer from a computational problem where the embedded code for computation of income tax liability for taxpayers placed in the Services Sector category having income/receipt liable to minimum tax under section 153(1)(b) of the Income Tax Ordinance, 2001 is defective and consequently their tax calculation is understated. Resultantly, this may lead to a significant loss of tax revenue because of universal self-assessment scheme the return will be accepted when filed. There is the added risk that such returns may be picked up for audit in case short payment of tax is criteria for selection of returns for audit.
Waheed further added that it is primarily the duty of the FBR functionaries to collect legitimate revenue from the taxpayers that is legally due. The existing flaws in tax return form appears to be in the formulas applied by the FBR functionaries in the return form. Apparently, it seems that FBR did not properly test the formulas by first releasing a wrong version on FBR web-portal. In case of taxpayers providing services, such as lawyers, architects, journalists, accountants, doctors, etc, the income tax Return IT-2 ie Return of Total Income/Statement of Final Taxation (IT-2) for Individual/AOP deriving Income under the head business & any other head provides misleading information.
In order to practically illustrate the working of the faulty income tax return that the tax return form does not report correct amount of tax payable, the following hypothetical scenario is examined by the tax lawyer:
PROPOSITION-1: Taxable income of Rs 1.8M with gross Revenue (including Fee for Services & excluding Sales Tax, Federal Excise) at Rs 4.8M and Management, Administrative, Selling & Financial Expenses [Sum of Serial No(s) 20 to 37] of Rs 3M. Receipts of Rs 4M out of Rs 4.8M from the source already suffered incidence of tax in shape of deduction at source u/s 153(1)(b) @ 7% by the clients/payers at Rs 280,000/-, while receipts of Rs 0.8M have not suffered any tax deduction at source (receipts from persons not defined as "Payer" u/s 153 for the purposes of tax deduction).
Computation as per FBR's Return and Resultant Loss to Exchequer:
As per computation of tax in the return a sum of Rs 141,666/- has been computed at Serial No 30 of the return as tax chargeable with tax refundable at Serial No 44 at (Rs 138,334) which is totally wrong. The actual tax payable with the above proposition shall be Rs 314,583 resultantly exchequer shall suffer a loss of Rs 172,917 against this declaration solely due to wrong computation formula devised by the FBR officials.
PROPOSITION-2: Taxable income of Rs 2.4M with same particulars as per proposition-1 except additional taxable income under the head Salary at Rs 600,000.
Computation as per FBR's Return and Resultant Loss to Exchequer: As per computation of tax in the return a sum of Rs 198,124/- has been computed at Serial No 30 of the return as tax chargeable with tax refundable at Serial No 44 at (Rs 81,876) which is totally wrong. The actual tax payable with the above proposition shall be Rs 402,813/- resultantly exchequer shall suffer a loss of Rs 204,689/- against this declaration solely due to wrong computation formula devised by the FBR officials.
PROPOSITION-3: Taxable income of Rs 1M with gross Revenue (including Fee for Services & excluding Sales Tax, Federal Excise) at Rs 3M and Management, Administrative, Selling & Financial Expenses [Sum of Serial No(s) 20 to 37] of Rs 2M. Receipts of Rs 2.5M out of Rs 3M from the source already suffered incidence of tax in shape of deduction at source u/s 153(1)(b) @ 7% by the clients/payers at Rs 175,000/-, while receipts of Rs 0.5M have not suffered any tax deduction at source (receipts from persons not defined as "Payer" u/s 153 for the purposes of tax deduction).
Computation as per FBR's Return and Resultant Loss to Exchequer: As per computation of tax in the return a sum of Rs 126,666/- has been computed at Serial No 30 of the return as tax chargeable with tax refundable at Serial No 44 at (Rs 48,334) which is totally wrong. The actual tax payable with the above proposition of Rs 1M income shall be Rs 187,083/- resultantly exchequer shall suffer a loss of Rs 60,417/- against this declaration solely due to wrong computation formula devised by the FBR officials.
PROPOSITION-4: Taxable income of Rs 1.6M with same particulars as per Proposition-3 except additional taxable income under the head Salary at Rs 600,000-.
Computation as per FBR's Return and Resultant Loss to Exchequer: As per computation of tax in the return a sum of Rs 168,020/- has been computed at Serial No 30 of the return as tax chargeable with tax refundable at Serial No 44 at (Rs 6,980) which is totally wrong. The actual tax payable with the above proposition shall be Rs 255,260/- resultantly exchequer shall suffer a loss of Rs 87,240/- against this declaration solely due to wrong computation formula devised by the FBR officials.
FBR's failure to design a return that reports tax payable correctly in the case of taxpayers deriving income from services rendered is indicative of its inefficiency and is tantamount to maladministration as defined under Section 2(3) of the Federal Tax Ombudsman Ordinance, 2000. It is suggested that FBR must take immediate steps to ensure that apparent defects in the income tax return placed on the FBR web portal are removed so that tax payable is correctly worked out, he explained.
Waheed added that on the same issue earlier former FTO Dr Muhammad Shoaib Suddle has also decided a complaint for service sector taxpayers for Tax Year 2010 vide C.No 719/LHR/IT(594)/1258/2010. The FTO decided the said complaint directing the FBR for removal of defects in the return form placed on web portal, besides retrieval of loss of revenue in service sector through appropriate measures.
Earlier, on the same pattern of minimum tax regimes, tax returns for Tax Year 2011, 2012 and 2013 were modified. Commenting on the prevalent issues in the return form, tax lawyer felt that the department seems not fully aware of the computation of tax where there is involvement of minimum tax receipts.