The Federal Tax Ombudsman has ruled that the Federal Board of Revenue (FBR) acted beyond its jurisdiction in exempting corporate sector service providers from 'minimum tax'. The FBR act of issuing Circular No 06/2009, and then inserting Clause 79 in the Second Schedule without approval of the Parliament speaks of improper motive, as also inefficiency, incompetence and ineptitude.
Sources told Business Recorder on Wednesday that in a recent order passed by former FTO Dr Muhammad Shoaib Suddle, it has been declared that the FBR has no authority to issue SROs/Circulars which contradict the statutory provisions of tax laws, as held by the Supreme Court. As no amendment to Section 153 was approved by the Parliament, the insertion of Clause 79 in the Second Schedule, changing the whole spirit of taxation regime, was clearly an act without jurisdiction.
The FTO order clearly said that the FBR issued Circular No 6 of 2009 for which it had no mandate. The issuance of exemption certificates by certain Commissioners of Income Tax to corporate entities, especially cellular companies was clearly illegal as after were introduction of minimum taxation of all service providers through Finance Act 2009, the 6 percent tax withheld became the minimum tax below which there was no possible threshold.
Sources said that earlier in 2011 while deciding a complaint filed by a Lahore based tax lawyer Waheed Shahzad Butt, FTO Dr Muhammad Shoaib Suddle, has directed the FBR to initiate appropriate action against officials who approved/issued Circular No 06 of 2009. Now while rejecting the review petition filed by FBR it has been observed by Dr Shoaib Suddle that the bumpy and conflicting sequence of Circulars and SROs leading to insertion of Clause 79 through SRO 1003 dated 31.10.2011, being wilful and mala fide comes under the definition of maladministration in terms of Section 2(3) of the FTO Ordinance 2000.
The FTO order states the applicant has filed a Petition seeking review of the Findings/Recommendations in complaint No 286/LHR/IT(240)/577/2011 disposed of vide order dated 16.12.2011. The following officials of the FBR submitted their viewpoint to ascertain the facts Taj Hamid, then Secretary IR Judicial, FBR, and presently Secretary IR (Revenue Budget), Aftab Ahmad who issued FBR Circular No 6 on 18.8.2009, Khalid Aziz Banth, then Member DT, Asrar Rauf, Additional Secretary Revenue and Chief ITP.
As regards the preliminary objection, Butt the Complainant is not an aggrieved person and the FTO can only assume jurisdiction if there is an aggrieved party, this objection is misconceived. Butt levelled allegations of systemic maladministration against the FBR functionaries and the FTO took suo motu notice in public interest, under Section 9(1) of the FTO Ordinance. An investigation of this nature does not necessitate a complainant.
Aftab Ahmad, the then Chief ITP, stated that he signed the FBR Circular No 6 on 18.08.2009 under pressure from Member DT, Khalid Aziz Banth. He did not fully grasp the significance of the Circular but just signed it. He stated that Banth had made up his mind that companies deriving income from services ought not be subjected to minimum tax @ 6 percent under Section 153(1)(b) of the Ordinance. He remained upset by the act of signing the Circular and ultimately on 26.04.2011 withdrew the notification. Also, he was told by Banth that his predecessor had already approved the issuance of the Circular. This assertion however turned out to be false, the FTO order said.
Asrar Rauf, Addl. Secretary Revenue, said that the 6 percent minimum tax was never applicable to companies rendering services. He said that it would not be in the ultimate interest of revenue as taxing the mobile phone companies would lead to flight of capital from Pakistan. In his opinion an adjustable tax over the year would serve Pakistan better.
The then Member DT, made a written deposition dated 24.09.2012. He stated that 1st Proviso to Section 153(6) had excluded companies rendering services (other than listed companies) from FTR and had also placed them out of the Minimum Tax Regime. The 2nd proviso related to media services which were similarly excluded. The 3rd proviso related to part (iii) of Section 153(6) and covered the resident, non-corporate sector. The corporate sector was already subject to minimum tax @ 1 percent of receipts through Section 113 of the Ordinance when the third proviso was added through Finance Act 2009. Therefore a second minimum tax under Section 153(6)(iii) could not relate to the corporate sector.
The first point that needs to be resolved is the import of Section 153(6)(iii). The 3rd Proviso clearly states that sub clause (b) of sub section (1) of Section 153 shall be the minimum tax. Banth in his statement maintained that this did not relate to the corporate sector. This contention is not based on any valid argument except that Section 113 makes the services performed by the corporate sector subject to a minimum tax @ 1 percent of receipts. However Section 113 applies only under certain conditions when no tax is payable by an individual, an AOP or a company. If minimum tax above 1 percent is leviable, then Section 113 is not applicable. Banth has also sought the shelter of Circular No 3 of 2009 and the Finance Act of 2011. Both do not support the issuance of Circular No 6. The FTO Office is concerned with the motive of Banth in pressurising his subordinates to issue Circular No 6. The attendant circumstances tend to show that he was doing this for improper motives. The service providers were first issued certificates of exemption by Commissioners, which were withdrawn when the FBR realised that the law did not provide for such exemptions, after Waheed Shahzad Butt lodged a complaint before the concerned Commissioners alleging huge loss of revenue being allowed to certain corporate sector service providers. Mr Butt also lodged a complaint No 1258/2010 in the FTO Office.
The FTO decided to obtain the assistance of the following amicus curiae: Dr Ikram ul Haq Advocate Supreme Court and International Tax Consultant. Rana Munir Hussein, Advocate, General Secretary Pakistan Tax Bar Association, Habib Fakhruddin, FCA, Consultant (formerly Member Tax Policy, CBR) and Syed Pervaiz Amjad, Consultant (formerly Member Audit, CBR).
Rana Munir Hussein said that he was of the considered view that earlier Circulars (C.No 1(6)WHT/2009 dated 04.07.2009 & Circular No 3 of 2009 dated 17.07.2009) and SROs issued after Circular No 6 for corporate taxpayers' income tax returns (SRO 1158 (1)/2010 dated 30.12.2010 and SRO 850(I)/2011 dated 17.09.2011 to notify electronic returns for Tax Years 2010 and 2011) were illegal because they did not support the law pertaining to levy of minimum tax as enacted by the Parliament.
Habib Fakhruddin, FCA, Consultant, formerly, Member Tax Policy, CBR, said that he wanted to draw attention to the concluding paragraph of the Departmental Review Application. In that paragraph, which was akin to a prayer, the Dept asserted that the issuance of Circular No 6 was valid and FBR had done nothing wrong in the matter. However, it was interesting that FBR had considered it fit to file a Review Application after it recognised that the issuance of Circular No 6 had been a mistake. He further pointed out that as against the single Circular No 6 that asserted there was to be no 6 percent minimum tax on companies rendering services, there were a host of other Circulars and Clarifications that affirmed quite the opposite. He said that it was important to find out why this was so. He pointed out that initially, after changes were made in Section 153 through Finance Act 2009, a Commissioner issued exemption certificates to some corporate service providers. The certificates were withdrawn after the Commissioner was told that the law with regard to taxation of services sector income having been changed through Finance Act 2009, no exemption from tax was available for such taxpayers. Within a few days, however, Circular No 6 was issued by FBR. This again made it possible for corporate taxpayers rendering services to obtain exemption certificates. It was thus obvious that certain taxpayers with influence in the corridors of power were behind the move to get Circular No 6 issued.
Habib Fakhruddin pointed out that notifications for corporate returns for Tax Year 2010 and Tax Year 2011 were in line with Circular No 3 that correctly explained the minimum tax levy and were against Circular No 6 and its distorted view of minimum tax. It was significant that the legislature totally disregarded Circular No 6 of 2009 while approving tax returns for Tax Years 2010 and 2011 for corporate taxpayers.
Syed Pervaiz Amjad, FCA, Consultant, formerly, Member Audit, CBR, was of the view that new taxation measures were generally meant to seek increase in revenues. However, Circular No 6 went against this objective and was a strange 'Clarification' of the law after changes were made in Section 153 through the Finance Act 2009. In his view, Circular No 6 gave unwarranted relief from minimum tax to certain blue-eyed taxpayers. The withdrawal of Circular No 6 by Aftab Ahmed who also issued the earlier Circular was, in his view, proof of intentional wrong done by FBR functionaries that was directly linked to the resultant losses in revenue which ran into billions. In his view, mens rea of FBR functionaries was clearly established by the sequence of events following amendments made in Section 153 of the Ordinance through Finance Act 2009.
Dr Ikram ul Haq, Advocate Supreme Court, said that the statute was required to be read as a whole and not piecemeal. He said that the rationale for levy of alternate minimum tax was clear. So many inflated expenses are booked by taxpayers when filing returns that the tax base is drastically eroded and tax yield plummets to an intolerably low level. The only way out of this predicament is to resort to measures like enactment of alternate minimum tax. He further said that instead of creating consistency by issuing Circulars, FBR was actually creating inconsistency. He said that in the presence of back up material it was not possible to presume that FBR was unaware that minimum taxation applied to the corporate sector. The FBR made repeated mistakes in matters pertaining to levy of minimum tax and it was just not plausible that only one Circular was correct (ie Circular No 6) and all other Circulars/Clarifications (about 12 in number) were wrong.
All this suggests that with regard to charge of minimum tax on corporate service providers, there was something seriously amiss with FBR. It appeared to be adrift, without any clear long term policy or coherent plan for effective resource mobilisation. The net result of the repeated FBR somersaults and flip flops with regard to levy of minimum tax on companies left taxpayers more confused than ever and the situation has not been properly resolved to this day.
Summing up, three of the four amicus curiae unequivocally held that minimum tax under Section 153(1)(b)/153(6), and, after Finance Act 2011, Section 153(1)(b)/153(3)(b), was for all service sector taxpayers, corporate as well as non corporate. All three affirmed that Circular No 6 was based on a wrong and possibly motivated view of the law pertaining to minimum taxation under Section 153. It is evident that FBR issued Circular No 6 of 2009 for which it had no mandate. There could be no greater indictment of a government agency charged with the mobilization of revenue - revenues desperately needed by the State - than what it did by issuing Circular No 6, the FTO order added.
After withdrawal of Circular No 6 of 2009, further Clarifications/Statements/SROs were issued by the FBR on 26.04.2011, 28.04.2011, 17.06.2011, and 01.07.2011. On 06.09.2011, Secretary IR, confirmed in a hearing at the FTO Secretariat that Circular No 6 was wrongly issued. Aftab Ahmad, Chief Income Tax Policy, also stated (during the hearing of the Review Application) that Circular No 6 of 2009 was unlawful and he had signed that Circular under pressure. All these admissions and clarifications notwithstanding, on 31.10.2011, SRO No 1003 was issued to grant exemption to the corporate sector from minimum tax by inserting Clause 79 to the Second Schedule of the Income Tax Ordinance 2001.
It is quite intriguing that SRO No 1003 dated 31.10.2011 was issued inserting Clause 79 in the Second Schedule without getting retrospective approval of the amendment in Section 153 by the Parliament through Finance Act 2011. Only sub-sections of Section 153 were 'realigned to provide clarity without changing the taxation regime' through Finance Act 2011 as explained by FBR itself in para 19 of Circular 7 of 2011, dated 01.07.2011. Nor has the approval of the Parliament been sought through Finance Act 2012 or Finance Act 2013. The bumpy and conflicting sequence of Circulars and SROs leading to insertion of Clause 79 through SRO 1003 dated 31.10.2011 being wilful and mala fide comes under the definition of maladministration in terms of Section 2(3) of the FTO Ordinance 2000, the FTO order added.