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Income tax ordinance 2001

Several changes needed to be made in the proposed draft law

Aug  06 - 12 , 2001

The draft Income Tax ordinance 2001, released to the Press last week to elicit public opinion before finally enforcing it, has evoked a mixed reaction. Most of the stakeholders have, however, strongly criticised it as being harsh and coercive while few have termed it simple and practicable. The most severe criticism has come from employees of the corporate and private sector for raising their tax slabs unreasonably. The tax practitioners have attacked it for its flawed assessment procedure and ignoring the self assessment scheme altogether.

In the assessment sections 205-213 there is no mention of self assessment scheme. This is most surprising, because it is the declared objective to move as quickly as possible to a point of universal self-assessment scheme in order to reduce the contact between the assessing officer and the taxpayer.

The draft Income Tax ordinance also tends to delete the existing section 12(9-A) giving powers to the companies to retain their profit by converting it into reserves and save tax. According to said section companies could convert their profits into reserves and thereby avail exemption from payment of tax only after paying 40% of their earned profits amongst the share holders as dividend.

Before discussing the Assessment Procedure sought to be introduced in the Draft Income Tax Ordinance 2001, it is appropriate to discuss briefly the existing system. There was time when only one kind of assessments made. Each year each taxpayer was required to submit his return, which was then processed under the normal provisions of the Income Tax Act. Because of widespread complaint of harassment by the assessing officers, it was felt necessary to reduce contact with them. This gave birth to the idea of self assessment scheme (SAS). Since the 1980s, first gradually then rapidly, the SAS began to take roots. The quintessence of the SAS, has been the acceptance of a declared version of the assessees and passing assessment orders under the scheme in which no increase is made in the income. Of course, the SAS has never been and can never be a carte-blanche for the taxpayers. Each year the SAS prescribes certain conditions and those who fulfil these enjoy the facility of no increase of income in their assessment orders. The current position is that the majority of the returns filed each year are accepted under the SAS.

In the assessment sections 205-213 of the Income Tax Ordinance there is no mention of self assessment scheme. If it were contended that section 205 is meant for SAS it would be unconvincing argument. To read such a long presumption in section 205 would be ridiculous. There is not even a hint of SAS in section 205. Therefore this section cannot be assumed to relate to SAS exclusively. In terms of clarity and specificity section 59(1) of the Ordinance is far superior. It is titled self-assessment and states that assessment under this section will be made only in the case of those returns, which fulfil the requirements of SAS. And the SAS of each year is different. If section 205 is not meant for SAS, which it cannot then it is a classic example of self-contradicting section. Section 205, is as under: "205. Assessment where a taxpayer has furnished a return of income (other than a revised return under subsection (8) of section 200 for a tax year. (a) the commissioner is taken to have made an assessment of the taxable income of the taxpayer for the year and the tax due thereon, equal to those respective amounts specified in the return. (b) the assessment is taken to have been made on the day on which the return was furnished." The acceptance of all taxable returns whether they qualify for the SAS or not is quite strange and illogical.

The Association of Tax Consultants and Chartered Accountants of Pakistan, while appreciating its clarity and simplicity, have opined that the ordinance is heavily dependent on presumptive tax regime for collecting revenues and also seeks to enhance discretionary powers of the assessing officers which is against the declared policy and public commitment of this government. It also aims at increasing taxes on the salaried class specially employed in the private sector by bringing all this perquisites, perks and benefits under taxation net. At a seminar held at Karachi by the Association to examine the draft ordinance there was a consensus that the proposed ordinance did not come up to the expectations of the people as well as it was in contradiction of the declared policy and repeated public commitments of the government. The mood and tone witnessed during the session indicated that the draft ordinance was not only harsh, it was incomplete and deficient in many respects.

While delivering his key not address. Mr. Farrukh V. Junaidi said though the IMF and other donor agencies are insisting that reliance on the presumptive tax should be minimised, it appears to be a difficult proposition for the government to shift to the net income basis of assessment. Even the new draft law continues to place emphasis on presumptive tax as it assures revenue collection, which otherwise may be difficult if presumptive tax is done away with.

Ever since the introduction of presumptive tax regime through Finance Act 1991, the scope of withholding tax was also widened. Presently, withholding taxes contributes around Rs. 74 billions to the income tax revenue. which constitutes around Rs. 74 billions to the income tax revenue, which constitutes around 70 per cent of the income tax revenue.

Mr. Junaid suggested several changes needed to be made in the proposed draft law so that irritants are removed for smooth implementation of the ordinance. Most of the irritant and changes recommended by him are related to fixed income group i.e., salaried class. He said that retirement benefits gratuity and pensions received by an employee on his retirement have been subjected to tax in the draft ordinance. He demanded that they should be kept from undue tax burden.

Similarly the existing exemption on allowances and benefits provided to persons having salary income up to Rs.300,000 should be reinstated in the new law. He further said that the draft ordinance seems to have withdrawn the provisions of Clause 167(c) of the second Schedule to the Income Tax Ordinance 1979, which should not be done.

He said that section 26(1) of the Draft Ordinance recommends to allow deduction for any expenditure incurred by a person in the year to the extent the expenditure is incurred in deriving income from business chargeable to tax. Whereas, the criteria for deduction should be based on the principle of expenditure incurred for the purpose of the business and not for deriving of income.

This would mean, he said that even medical expenditure incurred by an employer on medical facilities to his employees would be taxable. Furthermore, he said the effect of section 26(1) goes to such an extent that even expenditure on providing meal, refreshment and entertainment shall become inadmissible deduction against income. In other words, he said even the cost of providing a cup of tea would not be spared.

A leading tax consultant and chartered accountant Akbar Merchant was highly critical of the draft law, and said it has drastically increased the discretionary powers of assessing officer.

He said no doubt that the draft law is simple, straight but considering the implications, it is a nonstarter because it lacks objectivity as it has taken care of the interests of income tax department and not of an assessee.

Investors in the share markets are also critical of the ordinance as it would discourage the companies from paying dividend to their share holder as the ordinance 2001 tends to delete section 12(9-A). This section was inserted in the last government's period to push the companies for declaring profit to shareholders. Now the entire responsibility falls on Securities and Exchange Commission of Pakistan (SECP) to protect the rights of brokers and small investors.