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WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi 29 – 30 August, 2005

WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi 29 – 30 August, 2005. In the name of Allah, the most gracious and most merciful. PAYMENT AND REFUND OF TAX By Abdul Qadir Memon Former President, Income Tax Bar Association Karachi. In this world nothing is certain, but death and taxes.

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WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi 29 – 30 August, 2005

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  1. WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi29 – 30 August,2005

  2. In the name of Allah, the most gracious and most merciful.

  3. PAYMENT AND REFUND OF TAX By Abdul Qadir Memon Former President, Income Tax Bar Association Karachi

  4. In this world nothing is certain, but death and taxes. --- Benjamin Franklin

  5. CONTENTS Payment and Refund of Tax • Advance Tax • Presumptive tax regime • Withholding tax • Withholding tax statements • Additional tax & Penalties • Collection & recovery of tax • Refunds

  6. ADVANCE TAX AND DEDUCTION OF TAX AT SOURCE Historical background & Concept of Advance Tax The concept of Advance Tax was introduced in the sub-continent as a war measure to combat inflation and to with draw a part of the unprecedented amount in circulation. However in the case Prushottamdas vs CIT 48 ITR (SC) 206, 211; the honorable superior court has observed that like many other innovations in taxation legislation, this innovation also has outlived its exigency which gave it birth. It was further observed that Government rest on the principle of pay as you earn i.e. paying tax by instalments in respect of the income of the very year in which the tax is paid.

  7. ADVANCE TAX AND DEDUCTION OF TAX AT SOURCE Historical background & Concept of Advance Tax • The Income Tax Ordinance, 2001 provides for following three modes of collecting taxes in advance , which we will discuss in detail :- • Advance Tax directly liable to be paid; • Deduction at source ; or • Collection at source

  8. ADVANCE TAX U/S. 147 (ADVANCE TAX DIRECTLY LIABLE TO BE PAID) Who is liable to pay advance tax? Every taxpayer, whose income was charged to tax for the latest tax/assessment year shall be liable to pay advance tax for the year other than the following: a) Income chargeable to tax under the head Capital Gains; b) Income chargeable to tax under the heads:- i) Dividend (under section 5) ii) Tax on Certain payments to Non Residents (under section 6); iii) Shipping and Air Transport (under section 7);

  9. ADVANCE TAX U/S. 147 (ADVANCE TAX DIRECTLY LIABLE TO BE PAID) c) Income chargeable to tax at source under the head Property Income; d) Income subject to deduction of tax at source under the head Salary; e) Income under the following heads of income on which tax has been collected as final tax liability and no tax credit is allowed as result of sub-section (3) of section 168. i) Imports[section 148 (7)]. ii) Payments for goods and services[section 153 (6) or (7)]. iii) Export[section 154 (4)]. iv) Prizes and Winnings[section 156 (3)]. v) Transport business[section 234 (5)].

  10. ADVANCE TAX U/S. 147 (ADVANCE TAX DIRECTLY LIABLE TO BE PAID) f) The provision of this section does not apply to an individual or association of persons (AOP) where the individual’s or AOP’s latest assessed taxable income excluding items mentioned above is less than Rs.200,000/-. In my humble view although the limit of Rs. 200,000/- has been fixed after exclusion of certain incomes; but no machinery has been provided to calculate the share of tax on such excluded incomes in order to arrive the figures of last assessed tax for the purpose of advance tax.

  11. ADVANCE TAX U/S. 147 (ADVANCE TAX DIRECTLY LIABLE TO BE PAID) When advance tax is payable?

  12. ADVANCE TAX U/S. 147 (ADVANCE TAX DIRECTLY LIABLE TO BE PAID) When advance tax is payable? In the case of Oswal Woolen Mills Ltd vs CIT (Central) Patiala 122 ITR 789 it was held that the date of payment of tax is the date when the cheque is presented and not the date, when it is encashed by the department. It was also held in the case of Life Bond Fabric vs CIT 216 ITR 529, that any advance tax paid after the due date but before the end of the relevant financial year should be treated as advance tax. However, payment of tax after the end of financial year can not be regarded as advance tax and an erroneous credit can be with drawn in rectification proceedings.

  13. ADVANCE TAX U/S. 147 (ADVANCE TAX DIRECTLY LIABLE TO BE PAID) What is the method of payment of advance tax? Company The tax assessed to the taxpayer for the latest tax/assessment year to be paid in four quarterly instalments. The taxpayer shall be allowed to deduct the tax paid in the quarter for which tax credit is allowed under section 168, other than tax deduced on Income from Salary and Property.

  14. ADVANCE TAX U/S. 147 (ADVANCE TAX DIRECTLY LIABLE TO BE PAID) Individuals and Association of Persons Where the tax payer having latest assessed income of two hundred thousand rupees or more (after exclusion of incomes mentioned above); the tax assessed to the taxpayers for the latest tax/assessment year to be paid in four quarterly instalments. However, any tax deducted in the quarter on Salary or Income from Property shall not be allowed as deduction while providing the credit of tax collected or deducted in such quarter.

  15. ADVANCE TAX U/S. 147 (ADVANCE TAX DIRECTLY LIABLE TO BE PAID) Whether any taxpayer’s income which is likely to be reduced can file estimates of his income and pay advance tax accordingly ? Yes, the tax payer at any time before the last instalment is due, may furnish to the Commissioner an estimate of the amount of the tax payable by him, and there after pay balance estimated amount in equal instalments on such dates as have not expired.

  16. ADVANCE TAX U/S. 147 (ADVANCE TAX DIRECTLY LIABLE TO BE PAID) In which Order the credit shall be applied, in case there are more than one tax Credits? a) any foreign tax credit allowed under section 103; then b) any tax credit allowed under Part X of Chapter III (Charitable donations, Investment in shares, Retirement Scheme, Profit on Debt and etc.); and then c) any tax credit allowed under sections 147 (Advance Tax); and 168 (Credit for tax collected or deducted).

  17. WITHHOLDING AND PRESUMPTIVE TAX REGIME (PTR) HISTORICAL BACKGROUND AND OBJECTIVE OF PTR Tax administrators all over the world and particularly in the developing countries like Pakistan face major problems of non-reporting and under-reporting of income. The Withholding Tax and Presumptive Tax Regimes are not new concepts. The Presumptive Tax as initially introduced in the Indian Income Tax Act, 1922 under section 18(3BB) through which tax was imposed on Trading in Liquor, Timber and other Forest Produce in India.

  18. WITHHOLDING AND PRESUMPTIVE TAX REGIME (PTR) HISTORICAL BACKGROUND AND OBJECTIVE OF PTR The scope of these provisions was made applicable in Pakistan through various provisions of Income Tax Ordinance, 1979. In Pakistan Prior to July 1991, taxation on presumption was restricted only to the non-residents deriving receipts from shipping, air transport business and having fee from technical services.

  19. WITHHOLDING AND PRESUMPTIVE TAX REGIME (PTR) HISTORICAL BACKGROUND AND OBJECTIVE OF PTR The Presumptive Taxation approach although has been advocated by the Musgrave and well known French Forfeit System and such law also exist in countries like UK, New Zealand, Nepal, India, Philippines, Hong Kong, China, Indonesia, Mexico, Russia, Czechoslovakia, Channel Islands, Istle of Man and many other countries of the world.

  20. WITHHOLDING AND PRESUMPTIVE TAX REGIME (PTR) HISTORICAL BACKGROUND AND OBJECTIVE OF PTR However they are applicable to only those persons whose incomes are likely to be difficult to determine accurately, easier to evade, or more likely to cross national boundaries, but in Pakistan this law has been made applicable to almost all the categories of tax payers not only that but they are being heavily punished for their inadvertent mistakes.

  21. WITHHOLDING AND PRESUMPTIVE TAX REGIME (PTR) HISTORICAL BACKGROUND AND OBJECTIVE OF PTR Through Finance Act, 1991, provisions of Section 80 C, 80 CC and 80 D were introduced. The then Finance Minister while defending the introduction of such provisions stated that although the contractors, suppliers and importers are liable to with-holding tax, however they were subjected to inconvenience through cumbersome assessment procedures and delay in issuance of refunds.

  22. WITHHOLDING AND PRESUMPTIVE TAX REGIME (PTR) HISTORICAL BACKGROUND AND OBJECTIVE OF PTR It is to relieve them from the pain, the tax deducted at source is treated as full and final discharge of liability. The tax payer is not required to file any return and he doesn’t have to attend any proceedings in the tax offices.

  23. WITHHOLDING AND PRESUMPTIVE TAX REGIME (PTR) HISTORICAL BACKGROUND AND OBJECTIVE OF PTR It was further stated that the withholding tax has not only proved a very effective instrument for the recovery of direct taxes but a vast majority of tax payers have also expressed their confidence and satisfaction in this system. In view of these encouraging results, it was decided to extend the system.

  24. WITHHOLDING AND PRESUMPTIVE TAX REGIME (PTR) HISTORICAL BACKGROUND AND OBJECTIVE OF PTR The with holding and Presumptive Tax Regimes since July 1991 have come into full force. The law which weaved the indirect taxes into direct taxes texture resulted in thousands of Writ Petitions; virus of which were challenged by the tax payers in all round Pakistan on the ground of equity and also on the principles of real income and it’s taxability on the basis of liability to pay in a progressive manner.

  25. WITHHOLDING AND PRESUMPTIVE TAX REGIME (PTR) HISTORICAL BACKGROUND AND OBJECTIVE OF PTR But in the case of M/s. Elahi Cotton Mills and Others reported as 1997 PTD 1555, the honorable Supreme Court of Pakistan held that the Presumptive Tax imposed u/s. 80C, 80CC and 80D is in consonance with Entry 52 of the Federal Legislative List. The Indian High Courts also in the cases of P.Kunhammed Kutty Haji and Others reported as (1989) 176 ITR 481 and A.Samyasi Roa and Others reported as (1989) 178 ITR 31 have upheld the constitutional validity of the amendment in view of the clear objective of grabbling the evaders and inability of the Administrative machinery to reach them otherwise.

  26. WITHHOLDING AND PRESUMPTIVE TAX REGIME (PTR) HISTORICAL BACKGROUND AND OBJECTIVE OF PTR According to latest statistics available more than 54% of total indirect taxes was collected for the year ended 0n 30th June 2005 through withholding tax regime. The analysis of net collection of Indirect Taxes at 183.889 billion is as follows:-

  27. WITHHOLDING TAX REGIME

  28. IMPORTS SECTION 148 [(50(5)] read with Part II of 1st Schedule 1. In view of section 148 (2), this section shall not apply to – a) The re-importation of re-useable containers for re-export qualifying for Custom duty and Sales Tax exemption on temporary import under the Custom’s notification No. SRO 344(1)/95 dated 25.04.1995; or b) The importation of the following petroleum products:- “Motor Sprit (MS), Furnace Oil (FO), JP-1 and MTBE”

  29. IMPORTS SECTION 148 [(50(5)] read with Part II of 1st Schedule 2. The Commissioner may issue a reduced rate or exemption certificate to a manufacturer who imports raw-materials (other than edible oil) exclusively for its own use, provided – a) the aggregate of tax paid or collected in a tax year equals the amount of tax paid by the manufacturer in the immediately preceding year; or

  30. IMPORTS SECTION 148 [(50(5)] read with Part II of 1st Schedule b) a manufacturer is liable to pay advance tax u/s.147; however, he may cancel the exemption certificate issued if manufacturer fails to pay any instalments payable u/s.147; or c) the Commissioner is satisfied that the income of a person during the tax year is exempt from tax or such person is not likely to pay any tax (other than tax u/s.113) on account of depreciation or brought forward of losses.

  31. IMPORTS SECTION 148 [(50(5)] read with Part II of 1st Schedule 3. The tax collected under this section including tax collected on the import of edible oil shall be final tax on the income of importer arising from the imports except in the case of an industrial undertaking importing goods as raw-material, plant, machinery and equipment for its own use.

  32. IMPORTS SECTION 148 [(50(5)] read with Part II of 1st Schedule 4. The Central Board of Revenue vide SRO No.593(1)(91) dated 30.06.1991 specified various classes of persons to whom the above sub-section shall not apply and keeping in view the saving clause u/s.239(10) it will continue to be applicable unless the same has specifically been withdrawn. The CBR also confirmed this position vide Circular No.9 of 2002 dated 29.06.2002.

  33. IMPORTS SECTION 148 [(50(5)] read with Part II of 1st Schedule 6.The CBR vide circular letter No.1(38)WHT/91 dated 11.11.1993 in the case of manufacturers whose annual exports are not less than 80%, authorized the concerned Commissioner of Income Tax to issue exemption certificate u/s.50(5) of the I.T.Ord., 1979 in case they fulfill the conditions prescribed under Circular No.20 of 1992 for assessment u/s.80CC.

  34. IMPORTS SECTION 148 [(50(5)] read with Part II of 1st Schedule 7. Provision of this section shall not apply to the various items described in certain clauses of Part IV of 2nd Schedule. 8. As per Sub-Section 148(9) and also under section 50(5) of the Repealed Ordinance the tax is deductible on value goods and the same has been defined as under:-

  35. IMPORTS SECTION 148 [(50(5)] read with Part II of 1st Schedule "Value of goods" means the value of the goods as determined under section 25 of the Customs Act, 1969 (IV of 1969), as if the goods were subject to ad valorem duty increased by the customs-duty and sales tax, if any, payable in respect of the import of the goods."

  36. IMPORTS SECTION 148 [(50(5)] read with Part II of 1st Schedule A controversy arose when the honorable ITAT in its order reported as 2003 PTD (Trib)735, having relied upon the decision of Honorable Lahore High Court reported as 1994 PTD 848, decided that Sales Tax and Custom duty shall not be added in the value of imported goods for the purpose of assessing income of assesses u/s.80C of the Income Tax Ordinance, 1979. As a matter of facts the decision of Lahore High Court is distinguishable as it was related to deduction of tax on Supplies under section 50(4) and not on imports.

  37. IMPORTS SECTION 148 [(50(5)] read with Part II of 1st Schedule The Honorable Supreme Court of Pakistan in a case reported as 2005 PTD 194 decided that tax u/s.50(5) is leviable on the import value of goods excluding Sales Tax and Custom Duty. To the best of my knowledge an application filed by the tax department for reviewing the order is pending before the Honorable Supreme Court.

  38. IMPORTS SECTION 148 [(50(5)] read with Part II of 1st Schedule In the meantime the Honorable Karachi High Court on this subject vide its order reported as 2005 PTD 1328 not agreed with the judgment of Lahore High Court and dismissed the constitutional petition of assessees upholding the treatment of Collector of Customs to charge the tax u/s.50(5) on total value including Custom Duty and Sales Tax. It is interesting to point out that in this case the order of the honourable Supreme Court of Pakistan has not been referred and discussed at all.

  39. SALARY SECTION 149 [50(1)] read with Div. I of Part I of 1st Schedule 2. Through Finance Act 2004 the exemption limit of taxable income has enhanced from Rs.80,000/- to Rs. 100,00/-. 3. Through Finance Act, 2005 the rates of tax for Salaried persons have also been revised by inserting a new clause 1A in Div.I of Part-I of 1st Schedule to the I.Tax Ord.2001.Whereas Clause I of Part III of 2nd Schedule providing reduction in the tax liability has also been omitted.

  40. SALARY SECTION 149 [50(1)] read with Div. I of Part I of 1st Schedule 5. For facilitation of Salaried persons the CBR has issued Circular No.18 of 2004 dated 09.08.2004 under which the employer in order to work out the tax liability of the employee under section 149 of the Ordinance, is allowed to make adjustments of the income tax paid by such salaried persons under section 234 and 236 of the Income Tax Ordinance, 2001 during a tax year. Such salaried tax payers, are entitled to credit of such tax payment only if they are the owners of the motor vehicle or subscribers of telephone in their own name, as the case may be.

  41. SALARY SECTION 149 [50(1)] read with Div. I of Part I of 1st Schedule 6. In the matter regarding withholding and taxability of Salary of Pakistani Seafarer has been resolved by inserting clause (7F) in Part-I of the Second Schedule to the Repealed Ordinance, through Finance Ordinance, 2001 under which the exemption has been granted to the salary received by the Pakistani Seafarer working on a foreign vessel provided that such income is remitted to Pakistan not later than two months of the relevant income. Same exemption is still available as per clause 4 of Part-I of the Second Schedule to the Income Tax Ordinance, 2001.

  42. DIVIDENDS SECTION 150 [50(6A)] read with Div. III of Part I of 1st Schedule

  43. DIVIDENDS SECTION 150 [50(6A)] read with Div. III of Part I of 1st Schedule 1. Under the following Clauses of Part II of the 2nd Schedule Reduced rates are applicable to an amount:- a) Received by a non-resident company from a company engaged exclusively in mining operations, other than petroleum. [Clause 16] b) Paid by a purchaser of a power project privatized by WAPDA. [Clause 17] c) Paid by a company set up for power generation [Clause 20]

  44. DIVIDENDS SECTION 150 [50(6A)] read with Div. III of Part I of 1st Schedule 2. The Provisions of this section shall not apply to the following as provided in Part-IV of Second Schedule:- a) The Islamic Development Bank [Clause 38B] b) Payments made to the NIT (Unit) Trust or a Mutual Fund. [Clause 47B]

  45. DIVIDENDS SECTION 150 [50(6A)] read with Div. III of Part I of 1st Schedule 3. In respect of Zakat deduction, the law prescribes that deduction should be made on gross amount; however, the tax authorities vide their letter dated 19th March, 1997 agreed that withholding of tax should be made after deduction of Zakat.

  46. DIVIDENDS SECTION 150 [50(6A)] read with Div. III of Part I of 1st Schedule 4. Deduction at source in respect of dividend is to be made at the time of making payment and not at the time of declaration of dividend. - CIT, Companies-I, Karachi v. National Investment Trust Ltd., Karachi [2003] 87 TAX 317 (H.C. Kar). = 2003 PTD 589.

  47. PROFIT ON DEBT SECTION 151 [50(2) 50(2A) & 50(7D)] read with Div. I of Part III of 1st Schd.

  48. PROFIT ON DEBT SECTION 151 [50(2) 50(2A) & 50(7D)] read with Div. I of Part III of 1st Schd. 1. In the case of any resident individual, no tax shall be deducted from income or profits paid on,- i) Defence Savings Certificates, Special Savings Certificates, Savings Accounts or Post Office Savings Accounts, or Term Finance Certificates (TFCs), where such deposit does not exceed one hundred and fifty thousand rupees; and [Clause 59(iv)(a) of Part IV of 2nd Sch]. ii) Investment in monthly income Savings Accounts Scheme of Directorate of National Savings, where monthly installment in an account does not exceed one thousand rupees. [Clause 59(iv)(b)]

  49. PROFIT ON DEBT SECTION 151 [50(2) 50(2A) & 50(7D)] read with Div. I of Part III of 1st Schd. 2. In case of Special US Dollar Bonds purchased by a resident out of deposits made in foreign currency accounts on or after December 16, 1999 shall be taxed @ 10%. [Clause 82 of Part I of 2nd Sch.) 3. The provisions of this section shall not apply in view of various Clauses of Part IV of Second Schedule.

  50. PROFIT ON DEBT SECTION 151 [50(2) 50(2A) & 50(7D)] read with Div. I of Part III of 1st Schd. 4. Vide SROs bearing No.484 (1)/84 dated 14.06.1984 and 594 (1)/91 30.06.1991 issued by the CBR, the following persons have been excluded from operation of this section:- a) Federal Government b) A Provincial Government c) A Local Authority

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