Apr 14 - 20, 2003 

The taxpayers, tax professionals and representatives of the trade bodies on the eve of Federal Budget 2003-04 have expressed the single-line conclusion that lowering of tax rates and simplification of the procedure is the only way to broaden the tax base in Pakistan. Following are the pre-budget proposals from some of the leading figures of the economy.

Saqib Naseem, Chairman, taxation sub-committee-KCCI suggested following recommendations:

SIMPLIFICATION OF TAX LAWS: Generally these laws should be unambiguous, clear, easily comprehensible and free from intricate provisions which should not baffle the minds of the taxpayers. At present these laws are prone to abuse and misinterpretation, thereby leading to corruption, tax evasion and unnecessary disputes. The tax law should therefore, be just, fair and honourable piece of legislation that makes a taxpayer feel honoured, proud and inclined fearlessly and voluntarily to make his full contribution, which otherwise, he obviously will not do it when he is looked upon as a suspect straight away. It should be so simplified, classified and compiled that any particular class of taxpayer is able to find most of the basic provisions relating to his class, at one place.

BROADENING OF TAX BASE: The major weakness in the tax structure includes narrow and punctured tax base because of vide ranging exemptions and concessions and rampant tax evasion. The Chamber, for a long time, has been pleading that the tax net be broadened and income be taxed wherever it is generated, but all the government's efforts to broaden the tax net, are always confined to trade and industry and agriculture sector, which contributes about one-fourth in GDP enjoys exemption from income tax.

REDUCTION OF TAX RATES: As a result of narrow tax base, tax rates have been pitched at high levels which has created a vicious circle of tax base erosion and higher tax rates. The higher rates provide temptation of tax evasion and lead to corruption.

OVER DEPENDENCE ON INDIRECT TAXES: The indirect taxes which accounts for about 68 percent of tax revenues has also increased regressivity of tax system which imposed a higher burden of taxes on poor masses. Within indirect taxes, there has been over reliance on levies on international trade which had promoted inefficiencies, distorted the allocation of resources and encouraged smuggling.

SMUGGLING: The items prone to smuggling must be subjected to nil or negligible duty. To contain smuggling through Afghan Transit Trade our Government may collect import levies under prevalent tariff rates on behalf of Afghan Government which would subsequently be passed on to Afghan Government.

DUTY ON RAW MATERIALS AND CAPITAL GOODS: Duties and taxes on industrial machineries, not manufactured locally, be abolished and all primary raw materials not locally produced, be allowed to import at zero rate of duty to safeguard local industry.

DISCRIMINATION IN DUTIES: There should be no difference in rates of duties of raw materials, either imported by industry or commercial importers.

REFUNDS: A two-way traffic for discharging financial liabilities be adopted. As the government is keen and justified to recover its tax revenue from the people, justice and equity demands that in the same spirit, the various dues of the taxpayers in the form of refund, duty draw-back, rebates etc., be made to them well in time.

DISCRETIONARY POWERS: The discretionary powers of the tax collectors must be curtailed and ultimately be removed. The Federal Tax Ombudsman has mostly given verdicts against tax machinery which is evident of the excessive use of discretionary powers.

Farrukh V. Junaidy, FCA Partner Taseer Hadi Khalid & Co. has recommend that in a developing country where economy is not thoroughly documented and with an inflationary trend, 15% rate of tax is too high. It is therefore suggested that to broaden the tax base, rate of tax should be lowered to 10%.

RECTIFICATION OF RETURN: There is no provision in the Sales Tax Act, 1990, which allows a taxpayer to revise tax return in case an inadvertent omission is detected by him after filing the return. Provision should be inserted to enable a taxpayer to revise a return after giving proper reasons for such revision. In case where the return is revised malafidly the taxpayer may be subject to penalty.

MULTIPLICITY OF AUDIT: The Sales Tax General Order 9 of 1999 places restriction on multiple audits, however, further audit is warranted under exceptional circumstances. Besides audit by the Collectorate, a taxpayer is also subject to audit conducted by chartered accountants/cost and management accountants under section 32A of the Act and Department of Revenue Receipt Audit (DRRA). It is pertinent to note that the core thrust of audit carried out by DRRA is to examine and analysis the audit conducted by the department. Hence, the DRRA should aim to guide the sales tax department in performance of its audit obligations under the provisions of the Act rather than carrying out the audit themselves. Moreover, specific provisions should be introduced in the law to restrict multiplicity of audit.

REFUND PROCESSING: Various SROs from time to time were issued by the Board which provides a cumbersome process for issuing refunds and has remained main irritant between exporter and tax authorities. Although they provided adequate protection against leakages associated with refund process, which included practice of issuance of fake, flying and double invoice, the system has surely increased cost of refund to the tax payer.

The objective should be to enable the taxpayer to convert input tax into cash in the speediest time and at the same time protect revenue leakages.

In view of the provisions of SRO 575(7)/2002 dated 31 August 2002 should be followed in its real spirit. Taxpayers should be allowed refund without undue delay on the part of the tax authorities. Exporters are facing problems due to certain clause under SRO 575(I)/2002 regarding furnishing of stock position of goods in process, alongwith the refund claims. This condition may be dispensed with.

TRANSFER OF JURISDICTION (DE-REGISTRATION): Section 20 of the Act prescribes that where there is a change in the name, address or other particulars of a registered person, he should notify the change to the respective Collectorate. However, cases involving change of jurisdiction of Collectorate due to change in the registered office of the taxpayer are termed as case involving de-registration by the department. Due to the above ambiguity, we suggest that a specific provision should be introduced to allow transfer of jurisdiction without deregistered.

FURTHER TAX UNDER SECTION 3(1A): Further tax @3% is charged from all unregistered persons on the supply of taxable goods. Department treats all those persons, who are not required to be registered, as un-registered person such as banks and other financial institutions, although they do not require registration. A distinction should be provided in the law for un-registered person and those who are not required to be registered so those who are not required to be register may not be unnecessarily penalised.

REGISTRATION REQUIREMENT FOR IMPORTERS NOT INVOLVED IN TAXABLE SUPPLY: Registration requirement under section 14 enlists categories of persons liable for registration. These persons include importers also. The sales tax department insist for registration for all those importers who intend to import goods for their own use. We suggest that the requirement of registration under section 14 should be followed by the departments in its legal spirit and should not force the importers to get registration under Act, if they are not engaged in any kind of taxable activity. The law should be amended to require only those importers for registration who are engaged in the course or furtherance of taxable activity.

EXEMPTION SRO NO. 987(I)/99 DATED 30 AUGUST 1999: Plant and Machinery enjoys exemption from the levy of sales tax vide SRO No. 987 (1)/99 dated 30 August 1999 with certain conditions and limitations. The Board had rejected, various applications for claming exemption, through this SRO on the basis that the benefits available under this SRO are only applicable to the 'manufacturer'. Hence any person other than manufacturer, if engaged in taxable activity, is also not entitled for such exemption.

The notification should therefore, be amended to remove this discrimination.

INPUT TAX ADJUSTMENT ON SERVICES: With respect to adjustment of input tax on service availed by a registered person, the CBR issued a clarification on 15 January 2001 which clarified that a registered person holding a tax invoice issued by a registered custom clearing agent is entitled to adjust the amount of sales tax paid on services rendered or provided by such agent subject to the conditions prescribed under section 7 and 8 of the Act.

It should be noted that Provincial Sales Tax Ordinance does not make any distinction between the categories of services provider in respect of the applicability of the provisions of the Act. Therefore, we suggest that input tax adjustment should be allowed in respect of all those services which were brought into the sales tax net through Service Tax Ordinances.

REFUND OF AMOUNT IN APPEAL CASES: Sales Tax Collectorates collects the adjudged tax liability immediately after the decision from the taxpayer. If the taxpayer is successful in appeal the amount collected by the department remains recoverable for ages.

We suggest that amount recovered should be repaid to the taxpayer immediately after the decision is accorded in his favour by the appellate authorities.

ACCOUNTABILITY OF TAX COLLECTOR: The taxpayer is subject to all sorts of penal actions by the authorities even in case of inadvertent error on his part. However, the law does not provide for any penal action for the authorities when they resort to arbitrary manner of assessments/collection of tax.

In order to bridge the credibility gap between taxpayer and collector it is suggested that tax authorities should also be subject to accountability in case where the order passed by them fails the test of appeal and where the taxpayer is subjected to high handedness on the part of tax authorities.

TIME LIMIT BE FIXED FOR REFUND UNDER SECTION 66: At present there is not time limit for the sanction and payment of a refund claim which is filed under section 66 of the Sales Tax Act, 1990. Innumerable cases are pending under section 66 for refund. It is, therefore, proposed that law should be amended to release the payment of refund claims filed under section 66 in specified time.

SHORT PAID AMOUNT RECOVERABLE WITHOUT NOTICE UNDER SECTION 11A: Section 11 provides for recovery of arrears from a registered or enrolled person. It stipulates that, in case where registered or enrolled person does not pay his due tax in full as indicated in his return, the short payment shall be recovered without giving a notice to show cause. However, the recovery of additional tax or penalty would require a prior show cause notice to such person. It may be noted that the term "due tax" has not been defined under the Act.

This section has created problems for the taxpayer as mere calculation mistakes are now been subject to departmental inquiry. Further it provides unnecessary discretionary power to these assessing authorities. The situation may be further aggravated as no notice of recovery would be necessary under this Act.

It is therefore suggested no recovery should be allowed to be made without providing an opportunity of be heard to the taxpayer.