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Simplification of Income Tax Law

Aims at creating tax payer friendly culture

July 16 - 22 , 2001

The taxpayers, belonging to various segments of life for which the new Income Tax law is being introduced, have expressed surprise over what they called undue haste for introduction of the new income tax law by the government.

They have pleaded that when the federal budget 2001-02, the most important factor for the fiscal discipline has already been presented why the government was in a great hurry to finalize the Income Tax Ordinance. The purpose of introducing the new law was to simplify the taxation system by removing the complications or such sections which are proving counter productive in creating a tax culture in the country.

Representatives from various segments of the economy including Chartered accountants, tax consultants and trade bodies have urged the government to extend deadline for introducing the amended law for which July 31, 2001 has been fixed.

Zammurad Hussain Jafery, President of the All Pakistan Tax Bar Association, has appreciated the efforts of the committee for simplification of the Income Tax law.

He said that most of the suggestions for easing and simplification of the law have been incorporated in the Ordinance, yet there is lot of room for improvement. For example, he said that condition to deposit of 15 per cent of the income tax order for going into appeal that is the most important issue of the system that has been ignored.

Under this system, an individual or the company has to pay 15 per cent of the income tax order decided by the income tax officer before going into appeal against that assessment order. He said compulsion for submitting 15 per cent before going into appeal is totally unjustified which should have been removed from the income tax law.

The objective behind making the taxation system as friendly to the taxpayers was aimed at creating tax culture in the country. Another objective was minimizing the dependence on withholding tax that has become the major source of revenue, bringing every individual and company into the ambit of the self-assessment scheme was also important step taken in the ordinance. He however said that the justice is the key for success of any system. Hence justice demands that every income generated should be taxed. The privileges given in any form always annoy rest of the segments of the society, he remarked.

The government while making amendments in the income tax law has accepted 79 out of 139 proposals moved by the committee to revise the Income Tax Ordinance.

The current system of making ex-post facto approval of parliament for grant of tax exemption has degenerated into a routine exercise which need to be rectified. The committee has recommended to do away with the government powers to add, omit, change any clause in the Second Schedule during the financial year, which can only be exercised through an ordinance or an Act of Parliament in order to, minimize tax exemptions.

Income tax law in Pakistan is generally called a law of exemptions. Income tax Ordinance has 167 sections for taxing the income and several hundreds of clauses for granting exemptions. The cost of tax exemptions estimated in the fiscal 2000-01 at about Rs22.77 billion aggregating at 5.5. per cent of the total tax revenue collected by the system during that period. The experts in financial management feel that income tax exemptions do not offer a significant incentive for attracting investment or promoting economic growth in the country. The breakdown of the cost of exemptions including Rs0.5 billion in central excise, Rs9.07 billion direct taxes, sales tax customs amounting to Rs6.25 billion and Rs6.95 billion respectively.

The current depreciation schedule is also complex and include multiple depreciation allowances including initial allowance, first year allowance, reinvestment allowance, industrial building allowance etc. the first year allowance ranging 40 per cent to 100 per cent available to the investment in industrial undertaking set up after November 21, 1997, re-investment allowance upto 40 per cent for Balancing, Modernization and Replacement is also available.

The government has declined to accept the proposal to change the depreciation schedule III to abolish multiple shift allowance, industrial allowance and first year allowance and re-investment allowance and allowed the initial depreciation at 25 per cent which expired on June 30, 2000.

The draft Income Tax Ordinance, placed on the Internet for seeking public opinion for simplification of the taxation system, is likely to be introduced on the last day of the current month.

The government has expressed its intention to incorporate the feedback from all the stakeholders especially those received after placing the draft on web site.