It is true that many of the presumptive taxes are on transactions and they cannot qualify to be cut as income tax. The same view was expressed in the report on tax reforms which was made a basis for all subsequent changes in the tax administration in Pakistan.
However, writers of that report would be disappointed to see that the very principles of taxation they envisaged are being eroded gradually. The Finance Bill, 2006, provides many examples of this deviation. Policy and practice are not going hand in hand.
They want to increase the tax base and promote tax culture, but their policies are promoting tax evasion and tax vultures. In this article, on attempt has been made to highlight some of amendments proposed in the Income Tax Ordinance, 2001 which need re-consideration on the part of decision-makers.
TAXATION OF PROPERTY INCOME: Amendments relating to "income from property"
The bill envisages the following amendments in provisions relating to taxation of the income from property.
1. New subsection (6) is proposed to be inserted in Section 15 as under: "(6) Income under this section shall be liable to tax at the rate specified in Division VI of Part I of the First Schedule."
2. Section 17 is proposed to be omitted.
3.The following new Division is proposed in Part I of the First Schedule:
"DIVISION VI
INCOME FROM PROPERTY: The rate of tax to be paid under section 15 shall be 5% of the gross amount of rent received."
4. In section 115, in sub-section (4),- (a) after the comma, occurring for the third time,", " the figure and comma "15," is proposed to be inserted.
5. In section 155 it is proposed that-
(a) in sub-section (1), for the words, brackets, figure and comma "subject to sub-section (2), every" the word "Every" shall be substituted;
(b) for sub-section (2) the following sub-section shall be substituted, namely:-.
"(2) The tax deducted under sub-section (1) shall be a final tax on the income from property."
(c) for sub-section (3), the following shall be substituted, namely:-
"( 3) In this section, "prescribed person" means -
(i) the Federal government; (ii) a Provincial government;
(iii) local authority; (iv) a company; (v) a non-profit organisation; (vi) a diplomatic mission of a foreign state; or (vii) any other person notified by the Central Board of Revenue for the purpose of this section."
A combined reading of all these proposed amendments lead to the conclusion that taxation of property income has been brought on CBR's all time favourite presumptive tax regime. The prescribed persons (deducting agents) will deduct tax @ 5% of gross amount of rent irrespective of quantum of rent and shall be treated as final discharge of tax liability. Apart from the existing deducting agents, the CBR has been given the authority to notify any other person as prescribed person. No expense shall be allowable against income from property.
THE AMENDMENT RAISES THE FOLLOWING ISSUES:
1.The proposal unduly favours owners with high rental incomes and taxes harshly with low rental incomes. Thus a person who was having taxable rental income (after all deductions) of Rs 100,000 will now have to pay tax at Rs 5000/- against present nil tax and the one who has similar taxable rental income of Rs 500,000/- will pay tax at Rs 25000/- only against his present approximate liability of Rs 67,500/-
No one reading this will subscribe to pro-poor budget slogan of the government. There is already acute shortage of houses (5 lac units) and measures of this type will aggravate the situation.
2.Tax will be deducted on gross amount of tax, including that of furniture and fixtures and for services provided by a landlord to his tenant.
Now, whereas, income from provision of amenities, utilities and other services are chargeable to tax as "Income from Other Sources" (Section 15(3A)), total tax deducted under section 155 is to be treated as final discharge of liability for "income from property" only. Legislature should bring corrective amendments.
3.Where the tenant is not a prescribed person, what will be the treatment of rental income? In the absence of section 17, will it be taxed on gross basis with no available deduction? If so highly unjust. Further, persons deriving income from property under section 115 shall now file statement under section 115 and not return of total income. So will a person deriving income from property rented out to non-prescribed persons not be taxed on his income? Corrective legislation is required.
4.Why the CBR has been given powers to tax any person it wants by notifying his tenant as a prescribed person for section 155? It is the authority of the legislature to levy tax and not the CBR to indirectly tax any body under any guise. It is ultra-constitutional. Enhancing scope of Section 113B applicable to individuals and association of persons (AOP)-.
The bill proposes that in section 113B, the words and commas "of textile fabrics and articles of apparel including ready-made garments or fashion wear, articles of leather including footwear, carpets, surgical goods and sports goods", shall be omitted;
At present retail traders of textile fabrics and articles of apparel including ready-made garments or fashion wear, articles of leather including footwear, carpets, surgical goods and sports goods having turnover above Rs 5 million are required to pay 3% tax on their turnover (as their income tax and sales tax liability). The scope has now been enlarged to all retail traders (individuals and AOP) having turnover above Rs 5 million. It is because of such thoughtless taxation measures that tax to GDP ratio of wholesale and trading business is around 1.5% only against 33 % of the manufacturers. Fear of "shutter power" and lethargic nature of tax machinery are possible reasons for not taxing their real income.
BRINGING TAX DEDUCTED ON PROFIT ON DEBT IN PTR SECTION 151 PROFIT ON DEBT:
In section 151, after sub-section (2), the following new sub-section is proposed to be added, namely,-
"(3) Tax deducted under this section shall be a final tax on the profit on debt arising from transactions referred to in clauses (a), (b) and (d) of sub-section (1)."
COMMENTS: This is another example of failure of the revenue collecting apparatus of the government to collect tax on real income of the people. Reverting to another regressive measure tax collected on profit on debt shall be treated as final discharge of liability except from profit on securities issued by a government or local authorities.
Suppose, there are two persons who are getting profit on their debts. One gets only Rs 50,000/- (income below taxable for normal tax purposes) and this is his only source of income. He will still have to pay Rs 5000/- as tax. On the other hand a person who gets Rs 1,000,000/- as profit, he will pay only Rs 100,000/- as tax whereas his tax liability would have been around Rs 1,75,000/- had his income been assessed under normal law. Our economic giants still claim it is "pro-poor budget". But in fact it is poor measure of taxation.
Meeting revenue targets by injudicious, harsh and "crush-poor" policies is failure and not success by any civil norms.
Amendments in Section 153. Payment for goods and services The bill proposes that in section 153,-
(a) after sub-section (1), the following new sub-section shall be inserted, namely:-
"(1A) Every exporter or an export house making a payment in full or part including a payment by way of advance to a resident person or permanent establishment in Pakistan of a non-resident person for the rendering of or providing of services of stitching, dying, printing, embroidery, washing, sizing and weaving, shall at the time of making the payment, deduct tax from the gross amount payable at the rate specified in Division IV of Part III of the First Schedule.";
(b) sub-section (3) shall be omitted;
(c) in sub-section (6)-
(i) the words and brackets "clause (a) or (c) of" shall be omitted;
(ii) after the brackets and figure "(1)", the word, figure, letter and brackets "and (1A)" shall be inserted;
(d) sub-section (7), shall be omitted;
(e) after sub-section (8), the following new sub-section shall be inserted, namely:-
"(8A) Every person from whom tax is being collected under this section shall disclose his National Tax Number to the withholding agent. In case of there being no National Tax Number (NTN), Computerised National Identity Card Number (CNIC) shall be provided. Where a person fails to disclose his NTN or CNIC number, as the case may be, at the time of collection or deduction of tax, the rate of withholding tax shall be two per cent over and above the rates specified in Division III of Part III of the First Schedule;"
(f) in sub-section (9),-
(a) in clause (d), the word "or" shall be omitted;
(b) in clause (e), after the semicolon, the word "or" shall be inserted; and
(c) after clause (e), amended as aforesaid, the following new clause shall be inserted, namely:-
"(f) an exporter or an export house for the purpose of sub- section (1A).";
(g) clauses (i) and (iv) of SRO. 600(I)/91 dated 2nd July, 1991 shall be omitted.
COMMENTS: It appears that CBR cannot live without PTR. It always tries to bring everything into PTR. Now services are also proposed to be taken into its fold with enhanced rate of 6%. Further major impact of the above proposed amendment is where the payee does not disclose NTN or Computerised National Identity Card Number, the rate of tax withholding from such persons under section 153 would further be enhanced by 2% in addition to normal rate. The reason is obvious. The CBR wants to broaden the tax base.
However, in the business climate promoted by CBR, it cannot bring the desired results and the payers will be burdened by grossing up tax payable in the bill and pay tax on their own. On one-side retail traders with turnover exceeding Rs 5 million are required to pay 3% single tax consisting of sales tax and income tax and on the other hand tax deduction on supplies made by them will be at 3.5% of the value of supplies.
This needs clarification. As regarding desire of building up data base from such statements, it is doubtful that CBR has will or capacity to do it. We are continuously hearing for last 3 years or so from high ups of the CBR that they are building a data base to broaden tax net but no improvement is on the board. If there were any such database, why it was not being used for broadening tax base instead of depending on unjust every expanding regime of PTR?
SECTION 231 A. ADVANCE TAX ON CASH WITHDRAWALS:
THE BILL PROPOSES THAT IN SECTION 231A, FOR SUB-SECTION (1), THE FOLLOWING SHALL BE SUBSTITUTED, NAMELY: "(1) Every banking company shall deduct tax at the rate specified in Division VI of Part IV of the First Schedule, if the payment for cash withdrawal, or the sum total of the payments for cash withdrawal in a day, exceeds twenty-five thousand rupees."
Last year tax was imposed on cash withdrawals in excess of amount of Rs 25,000/- in cash from a bank. Earlier similar provision was introduced by India. Our tax chief must have thanked head of Central Board of Direct Taxes, India to provide a precedent in the matter. It is not necessary to copy every bad move of neighbours.
However, who cares! This year rate is proposed to be doubled to 0.2 % of the amount exceeding Rs 25000/- withdrawn in cash in a day in aggregate. It is this type of taxation which renders organs of tax machinery vestigial.
It cares traders not the manufacturers, it cares speculators not the investors, it cares the wealthy and not educated. High tax rate, inflation and corruption in the system is driving educated people to modern civilised countries.
Salary taxation measures introduced this year is an apt example of the same. Whereas the bill envisages to reduce the tax rate, CBR issued SRO No 596(I)/2006 dated 5th June, 2006 in a bid to foil its beneficiary impact by including all allowances, benefits and other perquisites in taxable salary income.
When compared with existing salary taxation, based on exemption of certain allowances, the proposed salary taxation on gross basis would result in enhanced tax liability. For example on gross salary of Rs 720,000/- (having a basic salary Rs 464,516 , house rent Rs 209,033 and utilities allowance Rs 46,451 ) tax liability at present is Rs 43,629/- whereas under the " relief" rate, tax payable will be Rs 54,000/- which means 23.78 % increase in tax bill. On similar formula tax of a person getting Rs 155000/- gross salary will now be Rs 388/- against nil at present. I think CBR has not done its homework on this provision.
It is proposed that a percentage of gross salary be declared as exempt from tax to provide real relief or alternatively at least present rule of house rent allowance be kept in tact. Hope legislature takes this into account while it is discussed there.
CHANGES IN SECTION 147 AND SECTION 205 REGARDING ADVANCE TAX AND ADDITIONAL TAX FOR DEFAULT OF SECTION 147:
In section 147, the following amendments have been proposed.
"(a) in sub-section (1), after clause (c), the following new clause shall be inserted, namely:-
"(ca) income chargeable to tax under section 233 and clauses
(a) and (b) of sub-section (1) of section 233A;";
(b) sub-section (4A), shall be re-numbered as sub-section (4B) and before sub-section (4B), re-numbered as aforesaid, the following new sub-section shall be inserted, namely:-
"(4A) Any taxpayer who is required to make payment of advance tax in accordance with sub-section (4), shall estimate the tax payable by him for the relevant tax year, at any time before the last instalment is due. In case the tax payable is likely to be more than the amount he is required to pay under sub-section (4), the taxpayer shall furnish to the Commissioner an estimate of the amount of the tax payable by him and thereafter pay such amount after making adjustment for the amount (if any) already paid in terms of sub-section (4). "
IN SECTION 205, IN SUB-SECTION (1B)
(a) after the word "sub-section" the brackets, figure, letter and word "(4A) or" shall be inserted; and
(b) for the word "eighty", occurring twice, the word "ninety" shall be substituted; Income on brokerage and commission has now been shifted to PTR. So tax liability and income are proposed not be considered for calculation of advance tax liability.
Further CBR now expects that persons should calculate their tax liability in advance with 90% accuracy even if their accounts were not audited on the due date of last instalment of advance tax. Advance tax has to be deposited on this basis if it is more than the last year's liability. CBR does every thing on (some times wild) guesses and wants accuracy from taxpayer upto 90%. The measure is unwise, harsh, and against the generally accepted principles of accountancy. Suppose a person is maintaining his accounts on cash basis and he gets a large chunk of his income after due date of last instalment.
Will he be punished for his accurate reporting by levy of additional tax? There is nothing wrong with present way determining advance tax liability on the basis of latest assessment year. After all this is an advance tax and not final tax and if there is any increase in income, it is going to be reported and tax paid thereon just a few months later. Life of taxpayers should not be made miserable by such legislation.
To conclude, it seems that CBR feels under pressure from increased tax revenue target knowing its inability to collect real amount of tax. So every measure that has chance to increase tax revenue has been proposed in hurry without looking at their collateral damage to the economy in general and the low income group in particular. I wish they were able to negate my hypothesis that CBR is promoting income inequalities instead of reducing them.