BUSINESS RECORDER
SOHAIL SARFRAZ
ISLAMABAD (January 20 2008): The Federal Board of Revenue (FBR) has detected serious flaws in the exemptions granted for foreign remittances under section 111 of the Income Tax Ordinance 2001, analysing measures to control revenue loss and loophole in the tax collection system.
Sources told Business Recorder on Saturday that the income tax department had conducted a study on the "section-111 unexplained income/assets" to propose amendments to the Income Tax Ordinance, 2001.
The department has found that the anti-tax avoidance measure under section 111 is almost a replica of section 13 of the repealed Income Tax Ordinance, 1979, which is reproduction of the old law. All the sub-sections of the section 111 have some loopholes, which needs amendment to the Ordinance, 2001.
It is an important provision dealing with the unexplained assets and income tax to check black economy in Pakistan. Under the said section, the income tax department is not empowered to demand the source of the foreign investment.
The study has pointed out that the concept of unexplained income or assets defined in Section 111 cannot be said to be a new provision. The identical provisions were available in Section 4 of the Income Tax Act 1922 and Section 13 of the repealed Ordinance, 1979.
A comparison of Income Tax Ordinance, 1979, and new Ordinance, 2001 confirmed that all new provisions of the Ordinance, 2001 already existed in the old law. The identical provisions relating to unexplained investment/expenditure, valuation of assets, valuation of open plots, discovery of unexplained amount of investment, valuable articles or expenditure, etc were available in both the repealed and existing Ordinances without change.
According to the report, a departure from Section 13 of the repealed Ordinance, has been made for any amount being foreign exchange, brought into Pakistan through normal banking channels, encashed in rupees from a scheduled bank and a certificate was also obtained from that bank. This amount will not be subject to addition under this section of the Ordinance.
As a result of this, a free-hand is being given to anyone, who is in a position to transmit untaxed earnings (through Hawala) abroad, bring it in Pakistan through the said process and enjoy its benefits without paying a single rupee as tax or penalty.
Explaining Section 111, the analysis said that the concept behind such provisions are to bring into account under the chargeability of such incomes, that either have no source or a taxpayer fails to explain its sources or the assets are recorded below transactional value actually transacted. In this way, it is the taxation of income, which is either consciously or by fiction concealed/avoided from the tax authorities. The section 111 has been drafted to cater to this situation.
Under clause (a) (b) (c) of sub section (1), the legislature intends to check the source of any amount credited in the person's books of accounts, any investment made by persons being owner of the money or valuable article or a person's expenditure.
The main emphasis is on the source of the amounts referred above and in case the person offers no explanation or a satisfactory explanation about the nature and source, such amount should be included in the person's income chargeable to tax under the head "income from other sources" to the extent it is not adequately explained, report said.
With the universal acceptance of all returns under section 120, the provisions of this section will be applicable at the time of audit of cases by the Commissioner or proceedings u/s 122(1) of the Income Tax Ordinance 2001, whereas in the repealed Ordinance, section 13 could be invoked during proceedings of cases under normal law.
This means that any addition under this section can take place subsequent to its discovery by the commissioner, who after giving the taxpayer an opportunity of being heard can proceed with the addition, if the explanation offered by the taxpayer is not, in his opinion, satisfactory, it said.
Under the repealed Ordinance, 1979, the concept of year of discovery was to make addition in the year preceding to the year of discovery. Prior to amendment by the Finance Act, 2004, in sub-section (2), in respect of any unexplained cash credit in books of accounts, investment or expenditure the relevant period for additions was in the tax year in which discovery is made by the commissioner.
So, if discovery was made in respect of unexplained investment in tax year 2005 relating to tax year 2004, addition could only be made in tax year 2005 when return would he received. This had created a difficult situation for the department.
The amendment has shifted the period for the purpose of addition to "tax year immediately preceding the financial year in which discovery is made by the commissioner". In other words, now addition will be made in tax year 2004, if such discovery is made in tax year 2005. Under this section addition can only be made for the last five completed years.
It would have been more logical to amend the law to provide that addition be made in tax year/assessment year to which such cash credit in books of accounts investment or expenditure, etc relates, as now action u/s 111(1) can only be taken for preceding five tax years or assessment years.
The analysis further highlighted that under sub section (3), the commissioner has given powers to examine the declared cost of any investment, valuable article or declared amount of expenditure, which is less than reasonable cost, the difference is to be added in the income chargeable to tax under the head "income from other sources" in the tax year immediately preceding the financial year in which it was discovered. This is almost identical to Section 13 (1)(d) read with 13(2) of the repealed Income Tax Ordinance.
For valuation of assets for the purposes of this section, Rule 228 has been framed, however, in sub-section (4), the immunity in respect of foreign exchange remitted from outside Pakistan through normal banking channel has been reaffirmed.
It has been further provided that no addition can he made under sub-section (1) of Section 111 for a period beyond the preceding five tax years or assessment years.
Previously this was specified in Circular No 8 of 2003, which has now been made part of the statutory law to dispel any fear in the minds of the taxpayers regarding addition for unexplained sources being made in the year of discovery regardless of the limitation of time.
Sunday, January 20, 2008
Sunday, January 6, 2008
Burdening the poor only
THE NEWS
There is a lack of judicious balance between direct and indirect taxes in Pakistan
By Huzaima Bukhari and Dr Ikramul Haq
The financial managers and tax collectors have persistently failed to overcome fiscal deficit and remove fiscal imbalances, as their policies are based on collecting taxes at source and without bringing the mighty sections of society within the tax ambit. They are interested in number game and are bent upon collecting taxes where the are not due: there is a direct link between growing poverty in Pakistan and distortion in tax base since 1991, when major tax burden was shifted on consumers by introducing presumptive taxes in the income tax law.
The lack of judicious balance between direct and indirect taxes, levy of regressive taxes in the garb of income tax, petroleum development surcharge, etc, have pushed an overwhelming majority of Pakistanis below the poverty line. The sole stress on indirect taxation (even under the garb of income taxation through presumptive tax regime on number of transactions) without evaluating its impact on the economy and the life of poor masses is a serious cause for concern.
According to official figures, the contribution of income tax (though major portion of it is now composed of indirect levies or expenditure taxes) as a percentage of the gross domestic product (GDP) is continuously declining -- it was merely 2.8 per cent in 2006-07, 2.9 per cent in 2005-06, 3.0 per cent in 2004-05, 3.01 per cent in 2003-2004 and 3.15 in 2002-2003 (CBR Year Books 2003-04 to 2005-06 and Economic Survey 2006-07).
According to a budgetary document titled Explanatory Memorandum on Federal Receipts 2007-2008, of the collection of direct taxes of Rs 329.7 billion (as per the latest figures released by the Federal Board of Revenue -- FBR) in the fiscal year 2006-2007, the share of various taxes is as follows: Income Tax (312.0 billion), Workers' Welfare Fund (1.50 billion), Workers' Participation Fund (6.50 billion), Foreign Travel Tax (2.619 billion) and Capital Value Tax (5.0 billion). It is strange to note that Foreign Travel Tax has been shown as a direct tax.
In reality, only income tax of Rs 220.0 billion (not 312.0 million, as officially claimed) was the total share of direct taxes in the total tax collection of Rs 841.4 billion. Taxes collected at source on goods and services, contracts, supplies, rent, etc, which being full and final discharge are in substance indirect levies, if subtracted from income tax collection, the actual figure comes to Rs 220 billion. Thus the share of income tax as a percentage of the total revenue is not more than 26 per cent, whereas the same is claimed to be 31.7 per cent at page 68 of Economic Survey of Pakistan 2006-2007. This exposes the so-called authenticity and reliability of official figures.
The reliance on indirect taxes, which constitute about 70 per cent of the total tax collection, proves beyond any doubt that the tax system is directly contributing to rising poverty, as people who possess enormous income and wealth are not been subjected to income taxation in Pakistan (wealth tax was abolished as a condition for joining of a person as our finance minister!). Thus the very purpose of redistribution of wealth as the main object of taxation is being defeated. It is pertinent to mention that in 2006 Sweden collected taxes at 50 per cent of the GDP, a rate almost twice as high as that of the United States and Japan. In most countries of Europe, tax revenue, on an average, makes 40 per cent of the GDP. In comparison, Pakistan collected taxes at only 9.5 per cent of the GDP in 2006-07.
Out of total collection of Rs 841.4 billion by the FBR in 2006-07, regressive taxes were to the tune of Rs 620 billion (after making adjustment of indirect taxes collected under the head of income tax!). This has distorted the economy, raised the cost of doing business, widened the gulf between the rich and the poor, and made the national industry non-competitive. The revenue deficit, despite this collection of Rs 841.4 billion, is monstrously high at Rs 200.5 billion and the fiscal deficit at Rs 373.5 billion.
Despite this, the chairperson of the Central Board of Revenue (now FBR) claimed that the share of direct taxes sharply increased to 39 percent in 2006-07 against 30 percent in 2005-06. This is gross misrepresentation of data. If presumptive taxes on goods and services camouflaged as income tax are excluded from the collection of direct taxes, the share of indirect taxes touches 70 per cent. It is pertinent to mention that the average share of direct taxes for high-income countries is 46 per cent, while in the low-income countries it is 28 per cent. In 2006, Iran and India posted direct tax shares of 40 per cent and 29 per cent respectively, as compared with 31.7 per cent (in reality, 26 per cent) by Pakistan.
The present tax policies of the government are detrimental for economy, social justice, business and industry. Those who possess more economic power (income and wealth) should contribute more to the public exchequer. The ability-to-pay principle is regarded as the most equitable and just method of taxation. It is emphasised primarily for its re-distributive role. In Pakistan, the rulers have completely deviated from this principle, which is, in fact, their constitutional obligation. The existing tax system protects the establishment and exploitative elements that have monopoly over economic resources. There is apparently no political will to tax the privileged classes.
The common people are subjected to General Sales Tax (GST) of 15 per cent plus one per cent Federal Excise (tax incidence is 42 per cent on finished imported goods after applicable customs duty, sales tax, federal excise, mandatory value addition and income tax) on essential commodities (even salt sold under brand names is subjected to 15 per cent GST), but the mighty sections of society -- like big industrialists, feudal lords, generals and bureaucrats -- are paying no wealth tax / income tax on their colossal assets / incomes. It is tragic that in a country where billions of rupees are being made in speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low (just 9.5 per cent in 2006-07) and the government is least bothered to tax undocumented economy and benami (name-lender) transactions.
The mighty sections of society are engaged in these transactions and rulers of the day, being dependent on them, lack the will to tax them. Pakistan is quite capable of substantially reducing or even eliminating its fiscal deficit and improving tax-to-GDP ratio to 25 per cent within two-year time provided a comprehensive programme, well designed work plan, scientific approach and multi-dimensional strategy is adopted for tax reforms and resource mobilisation.
The FBR is directly responsible for present state of affairs, as its mafia-like operations have been helping people to avoid tax on income by paying bribes. Through the infamous system of Statutory Regulator Orders (SROs), the FBR's top officials provide 'legal' ways and means to the mighty sections of society to amass huge wealth, which is now threatening the state's very survival. It is worth mentioning that soon after the passing of Finance Act, 2007, the federal government reduced rate of collection of tax from purchasers of locally manufactured cars from five per cent to 2.5 per cent. This benefit to local the car manufacturer cartel and those who have the money to buy cars (but not paying any tax claiming that it is from exempt source -- agricultural income) was extended by using executive authority.
The sole stress on indirect taxation (especially under the garb of income taxation through presumptive tax regime on goods and services) without evaluating its impact on the economy and the life of poor masses is a serious cause for concern. The exorbitant rate of GST (on an imported article of public consumption, the effective rate of indirect tax before any further supply is 42 per cent and nowhere else in the world it is so high) is another problem. As a result, a large segment of the middle class is being pushed into lower middle class category, while the total number of people living below the poverty line is also increasing at an alarming pace.
The priority of our rulers is achieving revenue targets, fixed ambitiously every year in utter disregard of how various taxation measures will affect the economy and lives of the common people. Fixing revenue targets in isolation, and without making necessary efforts to improve productivity and economic growth, has forced Pakistan into a dilemma, where it can neither afford to give any meaningful tax relief package to the common people, trade and industry (due to the huge fiscal deficit) nor can it achieve a satisfactory level of economic growth (due to the retrogressive tax measures).
This is a vicious circle in which our policy makers find themselves trapped. They will have to find ways and means to come out of this tangle to make Pakistan a competitive haven, where investors find satisfactory conditions to live and invest. In a country where there is no security of life or property, notwithstanding the availability of a host of tax benefits and other incentives, the investors will never venture to risk their capital.
There is a lack of judicious balance between direct and indirect taxes in Pakistan
By Huzaima Bukhari and Dr Ikramul Haq
The financial managers and tax collectors have persistently failed to overcome fiscal deficit and remove fiscal imbalances, as their policies are based on collecting taxes at source and without bringing the mighty sections of society within the tax ambit. They are interested in number game and are bent upon collecting taxes where the are not due: there is a direct link between growing poverty in Pakistan and distortion in tax base since 1991, when major tax burden was shifted on consumers by introducing presumptive taxes in the income tax law.
The lack of judicious balance between direct and indirect taxes, levy of regressive taxes in the garb of income tax, petroleum development surcharge, etc, have pushed an overwhelming majority of Pakistanis below the poverty line. The sole stress on indirect taxation (even under the garb of income taxation through presumptive tax regime on number of transactions) without evaluating its impact on the economy and the life of poor masses is a serious cause for concern.
According to official figures, the contribution of income tax (though major portion of it is now composed of indirect levies or expenditure taxes) as a percentage of the gross domestic product (GDP) is continuously declining -- it was merely 2.8 per cent in 2006-07, 2.9 per cent in 2005-06, 3.0 per cent in 2004-05, 3.01 per cent in 2003-2004 and 3.15 in 2002-2003 (CBR Year Books 2003-04 to 2005-06 and Economic Survey 2006-07).
According to a budgetary document titled Explanatory Memorandum on Federal Receipts 2007-2008, of the collection of direct taxes of Rs 329.7 billion (as per the latest figures released by the Federal Board of Revenue -- FBR) in the fiscal year 2006-2007, the share of various taxes is as follows: Income Tax (312.0 billion), Workers' Welfare Fund (1.50 billion), Workers' Participation Fund (6.50 billion), Foreign Travel Tax (2.619 billion) and Capital Value Tax (5.0 billion). It is strange to note that Foreign Travel Tax has been shown as a direct tax.
In reality, only income tax of Rs 220.0 billion (not 312.0 million, as officially claimed) was the total share of direct taxes in the total tax collection of Rs 841.4 billion. Taxes collected at source on goods and services, contracts, supplies, rent, etc, which being full and final discharge are in substance indirect levies, if subtracted from income tax collection, the actual figure comes to Rs 220 billion. Thus the share of income tax as a percentage of the total revenue is not more than 26 per cent, whereas the same is claimed to be 31.7 per cent at page 68 of Economic Survey of Pakistan 2006-2007. This exposes the so-called authenticity and reliability of official figures.
The reliance on indirect taxes, which constitute about 70 per cent of the total tax collection, proves beyond any doubt that the tax system is directly contributing to rising poverty, as people who possess enormous income and wealth are not been subjected to income taxation in Pakistan (wealth tax was abolished as a condition for joining of a person as our finance minister!). Thus the very purpose of redistribution of wealth as the main object of taxation is being defeated. It is pertinent to mention that in 2006 Sweden collected taxes at 50 per cent of the GDP, a rate almost twice as high as that of the United States and Japan. In most countries of Europe, tax revenue, on an average, makes 40 per cent of the GDP. In comparison, Pakistan collected taxes at only 9.5 per cent of the GDP in 2006-07.
Out of total collection of Rs 841.4 billion by the FBR in 2006-07, regressive taxes were to the tune of Rs 620 billion (after making adjustment of indirect taxes collected under the head of income tax!). This has distorted the economy, raised the cost of doing business, widened the gulf between the rich and the poor, and made the national industry non-competitive. The revenue deficit, despite this collection of Rs 841.4 billion, is monstrously high at Rs 200.5 billion and the fiscal deficit at Rs 373.5 billion.
Despite this, the chairperson of the Central Board of Revenue (now FBR) claimed that the share of direct taxes sharply increased to 39 percent in 2006-07 against 30 percent in 2005-06. This is gross misrepresentation of data. If presumptive taxes on goods and services camouflaged as income tax are excluded from the collection of direct taxes, the share of indirect taxes touches 70 per cent. It is pertinent to mention that the average share of direct taxes for high-income countries is 46 per cent, while in the low-income countries it is 28 per cent. In 2006, Iran and India posted direct tax shares of 40 per cent and 29 per cent respectively, as compared with 31.7 per cent (in reality, 26 per cent) by Pakistan.
The present tax policies of the government are detrimental for economy, social justice, business and industry. Those who possess more economic power (income and wealth) should contribute more to the public exchequer. The ability-to-pay principle is regarded as the most equitable and just method of taxation. It is emphasised primarily for its re-distributive role. In Pakistan, the rulers have completely deviated from this principle, which is, in fact, their constitutional obligation. The existing tax system protects the establishment and exploitative elements that have monopoly over economic resources. There is apparently no political will to tax the privileged classes.
The common people are subjected to General Sales Tax (GST) of 15 per cent plus one per cent Federal Excise (tax incidence is 42 per cent on finished imported goods after applicable customs duty, sales tax, federal excise, mandatory value addition and income tax) on essential commodities (even salt sold under brand names is subjected to 15 per cent GST), but the mighty sections of society -- like big industrialists, feudal lords, generals and bureaucrats -- are paying no wealth tax / income tax on their colossal assets / incomes. It is tragic that in a country where billions of rupees are being made in speculative transactions in real estate and shares, tax-to-GDP ratio is pathetically low (just 9.5 per cent in 2006-07) and the government is least bothered to tax undocumented economy and benami (name-lender) transactions.
The mighty sections of society are engaged in these transactions and rulers of the day, being dependent on them, lack the will to tax them. Pakistan is quite capable of substantially reducing or even eliminating its fiscal deficit and improving tax-to-GDP ratio to 25 per cent within two-year time provided a comprehensive programme, well designed work plan, scientific approach and multi-dimensional strategy is adopted for tax reforms and resource mobilisation.
The FBR is directly responsible for present state of affairs, as its mafia-like operations have been helping people to avoid tax on income by paying bribes. Through the infamous system of Statutory Regulator Orders (SROs), the FBR's top officials provide 'legal' ways and means to the mighty sections of society to amass huge wealth, which is now threatening the state's very survival. It is worth mentioning that soon after the passing of Finance Act, 2007, the federal government reduced rate of collection of tax from purchasers of locally manufactured cars from five per cent to 2.5 per cent. This benefit to local the car manufacturer cartel and those who have the money to buy cars (but not paying any tax claiming that it is from exempt source -- agricultural income) was extended by using executive authority.
The sole stress on indirect taxation (especially under the garb of income taxation through presumptive tax regime on goods and services) without evaluating its impact on the economy and the life of poor masses is a serious cause for concern. The exorbitant rate of GST (on an imported article of public consumption, the effective rate of indirect tax before any further supply is 42 per cent and nowhere else in the world it is so high) is another problem. As a result, a large segment of the middle class is being pushed into lower middle class category, while the total number of people living below the poverty line is also increasing at an alarming pace.
The priority of our rulers is achieving revenue targets, fixed ambitiously every year in utter disregard of how various taxation measures will affect the economy and lives of the common people. Fixing revenue targets in isolation, and without making necessary efforts to improve productivity and economic growth, has forced Pakistan into a dilemma, where it can neither afford to give any meaningful tax relief package to the common people, trade and industry (due to the huge fiscal deficit) nor can it achieve a satisfactory level of economic growth (due to the retrogressive tax measures).
This is a vicious circle in which our policy makers find themselves trapped. They will have to find ways and means to come out of this tangle to make Pakistan a competitive haven, where investors find satisfactory conditions to live and invest. In a country where there is no security of life or property, notwithstanding the availability of a host of tax benefits and other incentives, the investors will never venture to risk their capital.
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