Budget Proposals on I NCOME T AX at Income Tax Bar Association – Karachi April 21, 2006

1. Budget Proposals on INCOME TAX at Income Tax Bar Association – Karachi April 21, 2006 Presented by : ARSHAD SIRAJ MEMON Income Tax Bar Association Karachi

2. TAX REFORMS • Bigger the Tax Base-Lesser the Rates – • It is now well settled through studies that bigger the tax base is, the lesser the rates of tax can be. • Efforts to be made to bring more people in to tax base– • Efforts to be made to effective legislation of Regulations which mandatorily require NTN Certificate in all the documents executed in any form at any stage. E.g. • Transfer of Properties. • Transfer of Shares. • Transfer of Vehicles. • Bank Documents. • Credit/Debit/ATM Cards. • Travel Documents. Income Tax Bar Association Karachi

3. TAX REFORMS • For automation and facilitation common identification number to be introduced. • Establishment of Research and Development Department under the auspicious of CBR with corroboration with Business Community – Tax Advisor and other Stake holders – • Area of Studies-Examples • Undocumented economy. • Double Taxation Agreements • E-Commerce. • Economic and Tax Factors. Income Tax Bar Association Karachi

4. TAX REFORMS • Encouragement and Incentives to be provided for Savings and Investment. • It is proposed that tax should be imposed on all segments of the society. Exemptions and concessions to certain classes of income or classes of persons be abolished. • The frequent changes made in the return form are an irritant which has caused hurdles in expansion of Tax base. The return forms should be designed on permanent basis and while designing such forms, the literacy rate, socio economic and judicious norms should be considered rationally Income Tax Bar Association Karachi

5. TAX REFORMS • Islamic Banking - • Issues regarding withholding of Taxes and taxation to examined to promote Islamic mode of Banking. • It is proposed that different reduced rates be introduced for Small Company and Medium Enterprise (SME) . • Separate Schedule for financial services to be introduced for Banking and Finance Business. Income Tax Bar Association Karachi

6. TAX REFORMS • New provision to be introduced for Tax Credit for investments made in National Saving Schemes to give incentives for savings which will create investment and employment. Income Tax Bar Association Karachi

7. Assessment Year Section 2(5a) Income Tax Bar Association Karachi

8. Permanent Establishment Section 2(41) Income Tax Bar Association Karachi

9. Royalty Section 2(54)(g) & 37(5) ISSUE :The consideration for the disposal of any property or right referred to in sub-clauses (a) through (e) are included within the definition of term royalty. If the definition of the capital assets as contained in sub-section (5) of section 37 is read the disposal of any property or right falls under the purview of subsection (5) of section 37 PROPOSAL : It is, therefore, suggested that clause (g) be deleted which is overlapping section 37(5). Or in the alternate, Royalty be excluded from the definition of “Capital Assets” in Section 37(5) RATIONALE : To avoid confusion and overlapping. Income Tax Bar Association Karachi

10. Ordinance to Override Other Laws Section 3 & 54 ISSUE :Ordinance to Override other laws. PROPOSAL : Words “Subject to this Ordinance” be inserted at the start of Section. I RATIONALE : Complementary Provision by inserting Proviso to Section 54 has been made. As such additions of words proposed are necessary to avoid doubt and confusion. In our opinion Section 3 and amendment made through proviso to Section 54 are complementary to each other. It is therefore, proposed that either Section 3 be deleted or in the alternate, the proviso inserted in Section 54 be shifted and annexed with Section3. Income Tax Bar Association Karachi

11. Section 6 and Rule 8 & 9 of the Income Tax Rules, 1982 Royalty and Fee For Technical Services ISSUE : Option under Rule 8 & 9 of the Income Tax Rules 2002 read with Section 6. PROPOSAL :The said concession should either be brought in through an amendment in section 6 or it may be put in Second Schedule, which is part of the statute itself. RATIONALE : The intention of the lawmaker appears to be to allow the non-resident persons having a permanent establishment in Pakistan to avail final tax basis assessment as provided under section 6 read with section 8. According to the rules of interpretation, rule cannot override the main statute, the concession given to the non-residents in the said rules is not legally proper, this is despite the fact of usage of words ”Subject to the Ordinance” appearing in the beginning of Section 6. Income Tax Bar Association Karachi

12. Increase of Exemption for Conveyance Allowance Section 12 Read with Rule 6 ISSUE : Salary PROPOSAL :Conveyance Allowance be increased from Rs.3,600 to Rs.15,000 RATIONALE : Conveyance Allowance has remained static since ages Income Tax Bar Association Karachi

13. Income from Property Section 15(2) ISSUE :Under this section, charge is created on rent received or rent receivable by a person in a tax year other then the rent exempt from tax under this Ordinance. Sub-section (2) defines the term “Rent” which means any amount received or receivable by the owner of land or a building as consideration for the use or occupation of, or the right to use or occupy, the land or building and including forfeited deposit paid under a contract for sale of land or a building, PROPOSAL :It is suggested that in subsection (2), where-ever the word “or” has been used between “expressions the land” “building” said “or” be replaced by “and”. RATIONALE :Under the provisions of section 39 (1)(d), ground rent has been specially dealt with arising out of the land alone. Since the word “or” has been used in definition clause in between land and building, it is suggested that according to the rules of interpretation, it connotes disjunctive consideration. It seems the intention of legislature is that if an amount is received or receivable by the owner of land/building, such amount would be treated as rent. As such, rent of land is being specially and separately dealt with under Section 39.. Income Tax Bar Association Karachi

14. Income from Property Section 17 ISSUE :Deduction in Computing Income Chargeable under the Head “Income from Property”. PROPOSAL :It is proposed that deduction should be allowed to taxpayer/owner of the building if such commission on rent is paid through recognized normal banking channel to the estate agent. RATIONALE :This amendment will not only give benefit to the owner but will also be an instrument to bring such class of persons engaged in the business of estate agency into the tax net, which will facilitate the broadening of tax base.. Income Tax Bar Association Karachi

15. Income from business – Deductions not allowed Section 21(K) ISSUE : Taxability OF Excess Perquisites. PROPOSAL :It is, therefore, proposed that where taxable salary of a tax payer increase to such an extent where perquisites become taxable in the hands of an employee, the deduction may not be treated as inadmissible in the hands of the employer. Necessary amendment is proposed to be made accordingly. RATIONALE : Conceptually Clause (k) of Section 21 is analogous to the provisions of Clause (i) of Section 24 of the Repealed Ordinance. Under the repealed Income Tax Ordinance, excess perquisites were added in the income of the employer u/s 24(i). The philosophy behind such addition in the income of employer was that perquisites were exempt for considerable time in the hands of the employee. It was only in the final stages of the repealed Ordinance that perquisites were taxed. Since the perquisites are now taxable in the hands of employees whose taxable salary exceeds the threshold of Rs. 600,000, therefore, in our considered opinion, there is no rationale for making addition of excess perquisites in the hands of employers under the Clause (k) of section 21. . Income Tax Bar Association Karachi

16. Section 21(I) Income from business – Deductions not allowed ISSUE : Deduction not allowed PROPOSAL :Since the expenditure can be paid through and by different modes of baking channels, it is proposed that words “other than by a crossed bank cheque or crossed bank draft” be substituted by the words “otherwise than a recognized banking channel”. RATIONALE : To streamline the provisions with transactions of Banking. Income Tax Bar Association Karachi

17. Section 29(1)(b) Bad Debts ISSUE : Allowability of bad debts in a tax year. PROPOSAL :It is proposed that in order to undo hardship clause (b) of sub-section (1) of the section 29 may be rephrased as under: - “29(1)(b) the debt or the part of the debt is written-off in the accounts of the person in the year or in any previous tax year or assessment year; and”. RATIONALE : Facilitation Income Tax Bar Association Karachi

18. Accrual Basis of Accounting Section 34 ISSUE : Where liabilities are not discharged within three years. PROPOSAL :It is, proposed that words used in sub-section (5) “Expenditure” be replaced by word “Trading liability” Income Tax Bar Association Karachi

19. Stock in Trade Section 35 ISSUE : Under this section, concept of determination of the cost of Stock is trade disposed of has been introduced. Generally in the cases of companies, the valuation has to be mandatorilly made on the basis of International Accounting Standards. PROPOSAL :It is, therefore, proposed that in Section 35, where-ever word “person” has been used, words “other than companies” may be inserted. RATIONALE : Convergence of Tax laws with International Accounting Standards. Income Tax Bar Association Karachi

20. Income from Other Sources Section 39 ISSUE : Loan, Advances, Deposit for issuance of shares and gifts otherwise than by a crossed cheque drawn on a bank or through Normal Banking channel from person holding NTN Card. PROPOSAL :The word “Card” used after National Tax Number be replaced by word “Certificate”, as through Finance Ordinance, 2002, word “Card” was replaced by word “Certificate” in Section 181 of the Income Tax Ordinance, 2001. ISSUE : There is no cavil to the purported purpose of Section 39 (3). However practical difficulties arise in respect of payment received as loan or gift from Non-Resident to family members. PROPOSAL :It is, therefore, proposed that a proviso be added for dispensing with the condition of NTN Card (Certificate) for amounts received from abroad. Income Tax Bar Association Karachi

21. Section 39 Income from Other Sources ISSUE:The world is moving very fast. The concept of paper money is being replaced by Plastic money. The normal banking practices are now absorbing concept of Electronic Banking. One may receive loan, gift or advance through other mode of transfers PROPOSAL: (a) It is, therefore, suggested that expression “otherwise than by a recognized banking channel” be substituted for words “otherwise than by cross cheque drawn on a bank” (b) Advance Rent received be included Sub-section (4) subject to just and reasonable restrictions Income Tax Bar Association Karachi

22. Set-off / Carry Forward of Losses Section 57A ISSUE : Set Off /Carry Forward of Loss PROPOSAL :Carry Forward to be restricted/reduced to five years prospectively RATIONALE : Increase in Tax Base and discouragement for frivolous claim of losses Income Tax Bar Association Karachi

23. Section 57(2) Set-off / Carry Forward of Losses ISSUE : Set Off /Carry Forward of Loss PROPOSAL :Carry Forward to be restricted/reduced to five years prospectively RATIONALE : Increase in Tax Base and discouragement for frivolous claim of losses Income Tax Bar Association Karachi

24. Fair Market Value Section 68 ISSUE : Discretion of the Commissioner. PROPOSAL : It is, proposed that suitable parameters for valuation may be prescribed by the Central Board of Revenue in the Income Tax Rules, 2002 and for the purposes of Immovable properties, parameters defined under Rule 228 of the income Tax Rules, 2002 be adopted and corresponding amendment be made in Rule 228 accordingly. Income Tax Bar Association Karachi

25. Section 79(1) Non-Recognition Rules ISSUE : Under Section 79(1) and under clause (d) no gain or loss shall be taken to arise where the asset is compulsorily acquired under any law and a condition has been put that such gain or loss will not be taken if consideration received is reinvested by the recipient in any asset of a like kind within one year of the disposal. PROPOSAL :It is, proposed that words “of a like kind” be deleted. The period for reinvestment i.e. one year is too short. This may be increased to at least by two years. Income Tax Bar Association Karachi

26. Non-Recognition Rules Section 79(2) ISSUE : Sub Section (2) of Section 79 stipulates that provisions of Section (1) shall not apply where person is a non-resident. This seems to be discriminatory and could cause unnecessary hardship in the case of gift and transmission of the asset to an executor or beneficiary on the death of a person and distribution of assets to non-resident members of an AOP or non-resident shareholder in the case of a company, or the event of liquidation of the company or dissolution of an AOP. PROPOSAL :It is, proposed that Sub-Section (2) be deleted. RATIONALE : To eliminate discrimination. Income Tax Bar Association Karachi

27. Extension of time for furnishing return and other Statements Section 119(2) ISSUE : Application to the Commissioner PROPOSAL : It is proposed that right of representation before the Regional Commissioner, be introduced to redress the grievance of tax payers. RATIONALE : Principles of Natural Justice. Income Tax Bar Association Karachi

28. Extension of time for furnishing return and other Statements. Section 119(6) ISSUE : According to Sub-section (6) extension of time granted under sub-section (3) shall not for the purpose of charge of additional tax under sub section (1) of section 205 change the due date for payment of income tax under Section 137. The interpretation of this sub-section (6) plainly shows that addition tax imposition shall not stop running. PROPOSAL : It is, proposed that sub section (6) may kindly be deleted. RATIONALE : It is submitted that once extension is granted by the Commission, it cannot be said that Tax Payer has failed. Therefore, even otherwise, once the Commissioner grants time, it will be very harsh in genuine cases Income Tax Bar Association Karachi

29. Section 132(2) Disposal of Appeals by Appellate Tribunal ISSUE :Appeal can be dismissed in default. PROPOSAL :It is, proposed that said sub-section (2) may accordingly be amended in the following manner – “The Appellate Tribunal shall afford an opportunity of being heard to the parties and in case of failure to attend the appeal by the person filing the appeal, the Tribunal may proceed ex-parte to decide the appeal on the basis of the available record.” RATIONALE :In fiscal laws, and more particularly law governing Income tax, it has been the practice to decide the matters on merits, as ITAT is the last fact finding authority and by virtue of Sub-Section (1) of Section 132, the decision of the Appellate Tribunal on an appeal shall be final. In our considered opinion, the language used in Sub-Section (2) is defective and needs suitable amendment as it cannot be presumed that legislature intended to cause injustice. Income Tax Bar Association Karachi

30. Section 133 Read with Rule 78 Reference to the High Court PROPOSAL :Rule to be deleted. RATIONALE : High Courts regulate their own functions and procedures through their respective Rules. Income Tax Bar Association Karachi

31. Section 134A Read with Rule 231C(6) Alternate Dispute Resolution ISSUE : Time limit of 30 days for disposal. PROPOSAL :Period for disposal of application by ADR Committee to be extended from 30 to 60 days. RATIONALE : Broadening the time limit for effective decision making. Income Tax Bar Association Karachi

32. Section 134A Read with Rule 231(15) Alternate Dispute Resolution ISSUE : Time limit for decision by CBR. PROPOSAL : Appropriate time limit for decision by CBR preferably Six Months. RATIONALE : Effective decision making. Income Tax Bar Association Karachi

33. Advance Tax Section 147 Appropriate amendment be made to adjust – Unadjusted amount of one quarter to another within the same Tax year Income Tax Bar Association Karachi

34. Section 159 Exemption or Lower Rate Certificate ISSUE : Grant of an exemption or lower rate certificate. PROPOSAL :It is, proposed that words “within 15 days” may be inserted after the words “ the Commissioner shall” in sub Section (1). The right of appeal be provided to challenge the refusal of application before the Commissioner of Income Tax (Appeals). RATIONALE : No time frame prescribed. Income Tax Bar Association Karachi

35. Statement regarding immovable properties Section 165 ISSUE : In the Repealed Ordinances, under the provisions of Section 143A every Registering officer, Revenue officer or other officer appointed to register any documents relating to property (other than agricultural land) under the Registration Act, 1908 was required to furnish a statement regarding the properties the value of which was not less than Rs. 50,000/- registered with him during the preceding financial year . PROPOSAL :It is recommended that provision be brought in under the Income Tax Ordinance, 2001. RATIONALE : In our opinion, such statement is instrumental for broadening the tax base. Income Tax Bar Association Karachi

36. Refunds Section 170 ISSUE :Refund Applications and Order thereon PROPOSAL :It is, proposed that following amendment be made. In clause (b) of sub section 2 word “and” be deleted and Clause (c) (prescribing time limit to file Refund Application) be deleted. Without Prejudice: In case no order is passed by the Commissioner on the said Application, It is, proposed that sub-section (4) be amended as under: - “Sub Section (4) Provided that if no order is passed within the time specified in this sub section, the application shall be deemed to have been accepted and all the provision of this Ordinance shall have effect accordingly. Without Prejudice to above. Sub Section (5) is not in conformity with Section 127, therefore, it is proposed that necessary amendments be made. RATIONALE :Good governance and to fill up lacuna. Income Tax Bar Association Karachi

37. Section 183 Penalty for Non-payment of Tax ISSUE : Penalty for non payment of tax (other then penalty) has been imposed on the failure of payment any tax due by the due date. Person is liable for penalty at various rates of penalties ranging for 5% to 100% of such tax due. No time frame is provided for imposition of penalties between each default. PROPOSAL :It is proposed that a proviso be added to provide the time frame between each event. “Proviso” Provided that no penalty shall be imposed in case of subsequent failure unless the time between passing of each order is not less than 15 days. RATIONALE : Curative amendment. Income Tax Bar Association Karachi

38. Advance Ruling Section 206A ISSUE : Advance Ruling provisions to Non Residents. PROPOSAL :Appropriate amendment is proposed to widened and extended the scope to other tax payers like tax payers resident companies having foreign share holders holding majority share, other Public Companies, Public Limited Banking and Insurance Companies. Income Tax Bar Association Karachi

39. Tax withholding on cash withdrawal – Increase in Threshold Section 231A ISSUE : Cash Withdrawal from Banks – Tax withholding PROPOSAL :Threshold be increased from Rs.25,000 to Rs.50,000 Exemption to be extended to Salaried Class. RATIONALE : Relief to Salaried Class Income Tax Bar Association Karachi

40. Section 236 Advance-tax on Recharging Accounts ISSUE : Advance Tax on Telephones. PROPOSAL :To be extended to Recharging accounts. RATIONALE : To increase Tax base. Income Tax Bar Association Karachi

41. Advance-tax on Telephone Section 236 ISSUE : Advance Tax on Telephones PROPOSAL :The Controversy of Pay Phone Companies be amicably resolved RATIONALE : Facilitation and resolving Disputes Income Tax Bar Association Karachi

42. Clause 93-Part I Second Schedule Exemption – Computer Training Institutes ISSUE : To Computer Training Institutions PROPOSAL :Period of Exemption be extended for three more years. RATIONALE : To promote Computer literacy. Income Tax Bar Association Karachi

43. Minor Corrective _??_ Reduction in Tax Liability – Income from Salary Part III Clause (2) of Second Schedule – Needs appropriate amendments Deduction of Tax at Source Clause (36A) to be made as Part of Clause (59) Income Tax Bar Association Karachi

44. Minor Corrective _??_ National Tax Number - Section 181 read with Rule 83 Substitution of word card with certificate Charges – Rule 230 Due to availability of returns and statements through internet Rule 230 to be deleted Income Tax Bar Association Karachi

45. Reduction in tax liability – Income from Salary Part III Clause (2) of Second Schedule ISSUE : Reduction in Tax Liability- Salary Reduction of Tax. PROPOSAL :Needs appropriate amendments. RATIONALE : Corrective. Income Tax Bar Association Karachi

46. Thank you Income Tax Bar Association Karachi