Tax recovery notices: PBA seeks operating procedure, time-line for banks' compliance

Pakistan Banks Association (PBA) has proposed the Federal Board of Revenue (FBR) to introduce a standard operating procedure and time line for compliance by banks for notices of attachments and calling of information by making appropriate amendments to respective statutes through Finance Act 2015. Sources said on Wednesday that currently, banks are receiving tax recovery notices from the FBR. In certain cases one notice contains information about hundreds of tax defaulters.
The standard operating procedure and time line for compliance for tax recovery notice should be introduced and a reasonable time should be allowed to the banks for acting on such recovery notices. This will reduce the hardship between the banks, the FBR and accountholders / taxpayers. This will also save the banks from penalties, ligations and contempt of court proceedings from the FBR as well as client. The PBA has also proposed an amendment regarding profit on non-performing debts of a banking or development finance institution.
According to the proposal, a new subsection (3) is be added in section Ordinance as follows: "(3) Deduction shall not be allowed to the borrower for mark up/ Interest (profit on debt) incurred on non-performing debts, if profit on debt is not paid within stipulated time and becomes overdue and is credited to suspense account by the banking company or development finance institution or non-banking finance company or Modaraba as per Prudential Regulations of the State Bank of Pakistan. However, borrower shall be allowed deduction for the amount paid in the year in which payment is made."
The rationale of the proposal is that the proposed sub-section will specifically cover taxation of overdue profit on debt in the hands of the borrower who is presently enjoying tax benefit by way of taxable deduction of financial charges and the government remains deprived from tax revenue.
Any benefit availed by way of waiver of mark up/ profit/ interest on debts under any scheme issued by the State Bank of Pakistan is taxable in hands of borrower as "Income from Business" under section 18 of the Ordinance. However, there is no treatment available in the Income Tax Ordinance regarding overdue mark up /interest/ profit on debt which remains unpaid by the borrower, who also claims this amount as tax deductible expense. The amount of overdue mark up /interest/ profit on debt should be taxed in the hand of borrower. Under section 34, liabilities remaining unpaid for 3 years are required to be offered for tax, it proposed.
The PBA said that the budget is normally announced in mid-June each year and after it is passed by National Assembly, the amendments to law become effective from July 1 immediately. This does not provide adequate time to the taxpayers to amend its systems and operations to cater to the changes in withholding tax regime etc, which in most of the entities is automated and system based. In some cases, a foreign vendor has to be engaged for making changes in the technology system operating in the entity.
The taxpayer should be provided a reasonable time (at least 4 to 6 weeks) for implementing the budgetary changes after which the effective date should start. This will provide adequate time to the taxpayers to amend its systems and operations to cater to the changes in withholding tax regime etc. This hardship is not only faced by the taxpayers but also by FBR at PRAL where, to implement the budgetary changes, the FBR has to extend the date of filing of sales tax and income tax returns, the PBA added.