It has been rightly pointed out in the Economic Survey of Pakistan for 2005 that Pakistan's manufacturing sector holds the key to whether the country will succeed in regaining the lost ground in the extremely competitive race for development in emerging Asia.
If the country had continued to maintain the pace of manufacturing growth it started out within the first two decades of development when it averaged 12% per annum, it would easily have entered the ranks of East Asian economies league by now.
Pakistan's industrial sector remains a relatively small part of the total economy. The share of manufacturing in GDP has risen insignificantly, since 1968, while it has had a significant increase of 280 percent in the case of Malaysia, 170% in the case of Thailand and 120% in Korea. In recent years the share of manufacturing has, however, increased consistently. It was 14.80% in 1999-2000 but increased to 18% in 2004-05.
The Economic Survey then points out reasons for poor performance over the years in the following words:
"But the neglect of many structural factors, especially inconsistent policies, senseless taxation, depreciating exchange rate adding to production cost, relatively higher utility charges, insufficient infrastructure, poor law and order situation in the major growth poles of the country and lack of serious attention on education and vocational training, prevented it from maintaining the momentum of those early decades. Political stability also played an important part in stagnation in industrial sector."
An authoritative identification of the cause(s) of a problem is the first step towards its solution or control. It is satisfying that our government has become aware of the causes of this slow growth. So far so good.
The second step is redressal of the problem. Here actions of the government are not up to the mark. High utility charges are still higher as compared to other countries, especially India and China. Infrastructure is still in a shambles, except from telecommunication.
Law and order is also not enviable. Education and vocational training needs improvement in quality and not mere change of nomenclature of degrees and institutes. Political stability and consequent consistency in policy come through stability of democratic institutions and not through unscrupulous warnings like "you will not even know what hit you." Such warnings may bring calm but lava of instability keeps on simmering underneath.
Comparatively one major cause of the problem that can be removed easily by the government is what the official report itself calls "senseless taxation". But unfortunately, it seems that the Finance Minister did not study the Economic Survey of Pakistan otherwise he would not been a party to increase this "senseless taxation" and aggravate uncertainty through amendments in the tax law brought vide the Finance Act, 2005.
The issue relates to taxation of a manufacturer-cum-supplier of goods. The then government of Pakistan realising its shortcoming to recover due amount of tax through assessment of total income of taxable persons, succumbed to a shortcut of collecting a substantial part of tax revenue through Presumptive Tax Regime (PTR) with effect from assessment year 1991-92.
Under this regime of taxation, inter alia, advance tax deducted on supplies made was treated as final discharge of tax liability irrespective of real quantum of income of the taxpayer. The same regime continues rather proliferates to-date. However, keeping in view their problems, the manufacturers were given an option to either get their assessment under normal law or under PTR in respect of supplies made of goods manufactured by them. This obviously was a beneficial option as explained by the CBR in the following words:
"Manufacturers of goods, not being goods for which special rates of tax deduction have been specified under clause (c) of subsection (4) of section 50, have been given option under Part-IV of the Second Schedule to the Income Tax Ordinance, 1979 to opt out of the presumptive tax regime as provided in Section 80C.
For the manufacturers exercising this option, normal provisions of section 50(4) shall apply and tax shall continue to be deducted at the prescribed rates from the payments relating to the supplies made by them. However, measures shall be taken so that the refund, if any determined in consequence of this assessment, is paid to them expeditiously." (Circular No 26 of 1991 dated 24-08-1991).
Subsequently while keeping the spirit of option alive, a change was brought about in law and manufacturers-cum-suppliers of goods were brought under the normal tax regime but were allowed to opt for PTR.
The same provision was re-enacted in the Income Tax Ordinance, 2001 in the form of Clause (40) of Part IV of the Second Schedule to the Ordinance in the following words:
"the provisions of sub-section (6) of section 153 in so far as they relate to payments on account of supply of goods from which tax is deductible under the said section shall not apply in respect of any person being a manufacturer of such goods, unless he opts for the presumptive tax regime:
Provided that a declaration of option is furnished in writing within 3 months of the commencement of the tax year and such declaration shall be irrevocable and shall remain in force for 3 years:
Provided further nothing contained in this clause shall apply to any manufacturer of goods for which special rates of deduction of tax are specified under the repealed Ordinance."
Thus effectively for 14 years, manufacturers-cum-suppliers of goods were allowed to opt for either assessment under normal law or under PTR. Then vide the Finance Act, 2005, all done was undone. Clause (40) giving option was deleted and that too retrospectively as under:
"Clause (40) shall be omitted and, notwithstanding any judgement, order or decision of any Court, Tribunal or Authority, including Income Tax Authority, shall be deemed always to have been so omitted and shall have effect accordingly."
Before offering my comments on this change, let me quote the explanation offered by the CBR in this regard. Circular No 1 of 2005 explains it in the following words:
"Under clause (40) of Part IV of the Second Schedule, manufacturers of goods (other than those for whom special rates of deduction have been specified) could exercise the choice to opt for PTR in respect of payments on account of supply of goods manufactured by them from which tax was deductible under section l 53.
It was observed that the manufacturers were invariably opting for PTR only when the final tax liability under the PTR worked out to a lesser figure as compared to the tax liability which would be payable if they were taxed under the normal tax regime on their taxable profits.
This misuse of concession was considered undesirable especially in the case of some fully documented large corporates which were not paying taxes in accordance with their book profits. Accordingly clause (40) has been omitted with retrospective effect. At the same time a new sub-section (6A) has been inserted in section 153, also with retrospective effect, so that the option available to manufacturers-cum-suppliers stands withdrawn retrospectively. It has also been provided that any past decisions/judgements of a court or a tribunal or an income tax authority shall not have any effect whatsoever.
The intent is to forestall any future leakage of revenues and also to retrieve the revenue already lost. The option already filed by the taxpayers shall stand automatically rescinded."
It takes hundred right steps to inspire confidence but it takes just one wrong step to shatter it. This single amendment in taxation of manufacturing sector is one such step, which would breed uncertainty and mistrust among the taxpayers especially the manufacturers. It is a classical example of divorce between policy on paper and action on ground. Both inconsistency and senseless taxation have been promoted while the same were targeted to be removed.
Reasons given above for this 180-degree turn are not convincing. If you give a taxpayer an option to choose either of the two available modes of assessment, every sensible taxpayer will choose that mode which will bring on him less tax burden.
There is nothing wrong with it. How can sensible exercise of an option be termed as 'misuse of law'? It looks naive to expect a taxpayer to opt for a mode bringing higher burden of tax when law gives him option to pay less tax.
Another aspect. Method once opted for was not changeable for 3 years whether tax liability was higher or low under the chosen mode as compared to the other.
Hence observation of the CBR that 'manufacturers were invariably opting for PTR only when the final tax liability under the PTR worked out to a lesser figure as compared to the tax liability which would be applicable if they were taxed under normal tax regime on their taxable profits' is neither correct inference from law nor proper appreciation of law.
The CBR has further enlightened us with the revelation that "this misuse of concession was considered undesirable especially in the case of some fully documented large corporates, which were not paying taxes in accordance with their book profits." First of all the CBR should realise that taxes are paid not on 'book profits' but on 'taxable income' even under normal tax regime. Secondly, unfortunately, in its present form our tax law does not consider real income as basis for taxation.
Minimum tax demanded in loss cases, presumptive tax on imports and supplies without having regard to actual profit or loss are a few examples in this regard. I am confident that the day CBR is efficient enough to collect correct amount of tax on real income, the Legislature would abolish this rule of thumb method of taxation called presumptive tax regime. Has CBR the courage to take this challenge and propose the Federal Legislature to abolish PTR in the next Finance Act!
The manner in which option available to a manufacturer-cum-supplier of goods has been taken away retrospectively is not commendable due to the following reasons:
1. There was no loss of revenue; revenue which was due under the then law was paid by the taxpayers as per option offered to them.
2. Taking away option retrospectively which was prevalent for 14 years is going to create uncertainty. Can any one now be sure that other exemptions/beneficial options available today would remain valid in future and assessments completed on the basis of present day law would not be opened on the basis of future law acted retrospectively?
3. The corporate sector (so vehemently attacked above by the CBR) made provisions of tax on the basis of existing provisions of law at the material time, distributed dividend to their shareholders. To put extra burden now for previous years is not justified as it would reduce funds available for present day shareholders while benefit of low tax if any was taken by previous shareholders. It is simply unjust. If government cannot provide easy justice, it should at least not promote injustice in the society.
4. To re-open the already finalised assessments is not free from legal complications. Where a taxpayer opts for PTR, he files a statement under section 115. Can he be asked now to file returns under section 114 when he was not liable to file the same on the basis of then prevalent law? I am afraid section 114 in its present form does not support such asking by the department.
Alternatively, one might think of section 122. Again under this section there seems no scope to amend a statement filed under section 115. Any action by dismissive and strained interpretation these two sections would result in long-drawn fruitless litigation with is not desirable.
5. As pointed out above, options were required to be filed for 3 consecutive years irrespective of tax liability (being higher or lower) under the chosen mode of assessment. Will CBR be ready to amend those cases too where in a set of 3 years, one or more proposed assessments under normal tax regime result are likely to result in refund?
6. Though the legislature is competent to enact a provision retrospectively, it is not desirable to disturb settled issues. Even if for the sake of argument it is accepted that the provision was misused by 'some fully documented large corporates', it is not justified to put all manufacturers-cum-suppliers under the agony of re-assessment of completed assessments and burdening them with extra legal and professional costs.
In view of the above discussion it is imperative that the government reconsiders its decision to omit clause (40) of Part IV of the Second Schedule to the Income Tax Ordinance, 2001 retrospectively to curb down prevailing uncertainties.