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BUDGET PROPOSALS 2020-21

The Institute of Chartered Accountant of Pakistan01

Budget Proposals 2020-21

PRESIDENT’S MESSAGE

The Institute of Chartered Accountants of Pakistan (ICAP/ the Institute) enjoys a close relationship with the Government of Pakistan and with its commitment to serve public interest has always supported efforts to secure country’s prosperity by advising the government for public policy that simultaneously serves all the stakeholders.

Institute’s Committee on Fiscal Laws formulates tax proposals for Federal and Provincial budgets each year, which are aimed at to assist government, build an innovative and responsive taxation system, broaden the tax culture, improve revenue collections, increase tax payers’ confidence, ensure voluntary tax compliance, improve monitoring and eventually lead towards an all-inclusive, sustained economic growth.

COVID-19 – the Coronavirus Pandemic - has spread worldwide and the economic experts predict that the global economy may soon face double recession. Emergency provisions are being made worldwide in an attempt to support individuals, business and the professional accountants supporting them. Our members in Industry as well as in practice are also facing challenges during this difficult time.

Economies all over the world, including Pakistan are now experiencing a slowdown. Besides, countrywide lockdown has now turned into socio-politico-economic meltdown. In such a global health calamity which has turned into an economic endemic for our country, we wish to share proposals for consideration for the revival of the economy. It is the high time to think about economic success by going beyond GDP and profit.

The Institute, with a consistent commitment to support a sustainable Pakistan economy, stresses the need for forward looking policy, coupled with revamped tax system and simplified procedures. I hope these proposals would be considered by the Government in its true spirit.

I wish to place on record my deep appreciation for the hard work by the members of the Committee on Fiscal Laws, who under the guidance of the Chairman have devoted their precious time and efforts to prepare these proposals, with special thanks to Mr. Muhammad Awais, the Chairman of the Committee.

Khalilullah Shaikh


The Institute of Chartered Accountant of Pakistan 02

CHAIRMAN’S NOTE

The Institute, with its commitment to developing and promoting a responsive and equitable taxation system, has always endeavored to share a unique perspective on matters concerning Pakistan’s tax policy with relevant stakeholders including the Federal and Provincial Governments together with all Boards of Revenue and Revenue Authorities and the revenue field formations across the Country. The Institute aims to harness the professional knowledge and expertise of its members to inform decision makers on key drivers of national economic prosperity. These proposals have been formulated for the consideration of policy makers in the forthcoming budgetary process.

Pakistan has been facing serious economic challenges even before the spread of COVID 19. Following the outbreak of this dangerous pandemic and what is being witnessed as regards its deleterious impact on the global economy, together with the predictions of experts, international Governments and multi-lateral and bi-lateral lending institutions, it is clear that Pakistan, together with other developing and emerging economies is likely to suffer the brunt of the global economic collapse. It is indeed plausible that we may be heading towards to a negative growth scenario in the next fiscal year.

The immediate impact of COVID-19 can be seen in the unfolding of one of the worst healthcare crises across the globe in recent memory. With global supply chains in disruption, cross border trade and movement at a standstill, semi-skilled and unskilled labor retrenchments, a global reduction in consumption and with a lock-down which sees no end in sight at present, COVID-19 is predicted to lead to severe reductions in GDP growth, deterioration in current and fiscal balances, and rampant unemployment.

Pakistan needs to protect its industries and businesses by providing several incentives, including tax incentives, to ensure the wheel of the economy continues to turn in the right direction. The protection of existing jobs, the creation of new opportunities, the generation of revenue and a stimulus to small and medium enterprises are all measures of paramount importance to Pakistan. We have included some recommendations on the handling of the COVID-19 crisis for consideration by the Government.

Our proposals mainly aim at broadening the tax base, improving revenue collections, increasing taxpayers’ compliance and monitoring, that will eventually lead toward an all-inclusive and sustained economic growth. Foremost in our recommendations, are proposed policy actions with the objective of broadening the tax base to enhance resources and plug tax leakages, and to ensure that all sectors of the economy are brought within the tax-net. There is a dire need for administrative reforms and building long term strategic policy for modernizing the tax system and the COVID-19 pandemic has raised the urgency and importance of these reforms tenfold. They are the essential need of the hour if Pakistan is to successfully battle its way through to a stable economic future.

I wish to place on record the efforts and dedication of the Committee members with special thanks to the Conveners of respective Task Forces, who have worked tirelessly in quarantine to make it possible to submit these proposals.

Muhammad Awais



CONTENTS

GLOSSARY OF TERMS

REFERENCE INDEX

COVID-19 RELATED TAX CONSIDERATIONS 13

1 BROADENING OF TAX BASE 14

2 EASE OF DOING BUSINESS 18

3 DIRECT TAXATION 21

4 INDIRECT TAXATION 56

5 HARMONIZATION OF TAX LAWS 78

6 PROVINCIAL SALES TAX ON SERVICES 80



GLOSSARY OF TERMS



BSTSA Baluchistan Sales Tax on Services Act 2015

BSTSR Baluchistan Sales tax on services Rules 2018

FED Federal Excise Duty

FEA Federal Excise Act, 2005

ITO Income Tax Ordinance, 2001

ITR Income Tax Rules, 2002

KSTSA Khyber Pakhtunkhwa Sales Tax on Services Act 2013

KPKWTR Khyber Pakhtunkhwa Sales Tax on Services Special Procedure (Withholding Regulations 2015

PATR Punjab (Adjustment of Tax) Rules 2012

PSTSA Punjab Sales Tax on Services Act 2012

PSTSPR Punjab Sales Tax on Services (Special Provisions) Rules 2012

PSTWTR Punjab Sales Tax on Services (Withholding) Rules 2015

SSTSA Sindh Sales Tax on Services Act 2011

SSTSR Sindh Sales Tax on Services Rules 2011

STAWTR Sales Tax Special Procedure (Withholding) Rules 2007

SSTWTR Sindh Sales Tax Special Procedure (Withholding) Rules 2014

ST/STA Sales Tax Act 1990

STR Sales Tax Rules 2006

1 BROADENING OF TAX BASE

1.01 UTILIZATION OF AVAILABLE DATA AND DOCUMENTING THE ECONOMY

1.02 BRIDGING THE TRUST GAP BETWEEN TAX COLLECTORS AND TAXPAYERS THROUGH FACILITATION/EDUCATION OF TAXPAYERS AND INCENTIVIZING TAXPAYERS

1.03 CAPACITY BUILDING AND ACCOUNTABILITY OF REVENUE AUTHORITIES

1.04 CREATION OF NEW JOBS / PROMOTING IT INDUSTRY

1.05 INTRODUCTION OF SCHEDULE FOR TAXATION OF PERSONS ENGAGED IN SMALL TRADE, VOCATION, CALLING AND PROFESSION

1.06 WITHDRAWAL OF TOTAL EXEMPTIONS FROM TAX

1.07 WIDENING OF TAX ON INCOME FROM PROPERTY

2 EASE OF DOING BUSINESS (EODB)

2.01 SIMPLIFICATION OF TAX LAWS AND SETTING UP OF OVERSIGHT BOARD OF REVENUES

2.02 DELAY AND PROCEDURAL HASSLES IN PROCESSING OF OVERDUE REFUNDS

2.03 INDEPENDENCE OF APPELLATE FORUMS

2.04 RESTRUCTURING OF FBR AS AN INDEPENDENT GOVERNING BODY

2.05 REQUIREMENTS FOR REGISTRATION AS A MANUFACTURER WITH FBR

2.06 CONSOLIDATION OF SROs ISSUED UNDER THE STA 1990

2.07 ACCESS TO DATA OF WITHHOLDING TAXES

3 DIRECT TAXATION

HIGHLY SIGNIFICANT PROPOSALS

3.01 FINAL TAXATION Vs. MINIMUM TAXATION

3.02 REPLACING WITHHOLDING TAX REGIME WITH ADJUSTABLE ADVANCE TAX REGIME FOR LISTED COMPANIES

3.03 DEFINITION OF PERMANENT ESTABLISHMENT

3.04 SALARY - SECTION 12

3.05 INCOME FROM PROPERTY - SECTIONS 15(6), 15(7), 15A AND 155

3.06 AMORTIZATION OF INTANGIBLES - SECTION 24

3.07 CAPITAL GAINS ON DISPOSAL OF SECURITIES – SECTION 37A

3.08 IMPACT OF TAX CREDITS ON EXPORTERS -SECTIONS 65B, 65D AND 65E

3.09 TAXATION OF AOPs OF PROFESSIONALS SECTIONS 92 & 93

3.10 TAX ON SURPLUS FUND OF NON-PROFIT ORGANIZATION SECTION 100C

3.11 INDIRECT TRANSFER OF ASSETS OUTSIDE PAKISTAN - SECTION 101A

3.12 MINIMUM TAX AND ALTERNATIVE CORPORATE TAX (ACT)- SECTION 113 & 113C

REFERENCE INDEX



3.13 MINIMUM TAX - SECTION 113 (2)(C)

3.14 APPELLATE FORUMS – SECTION 127

3.15 GRANT OF STAY BY COMMISSIONER (APPEALS) - SECTION 128(1A)

3.16 STAY BY APPELLATE TRIBUNAL BEYOND 180 DAYS - Section 131

3.17 RECOVERIES OF DISPUTED TAX - SECTION 140(1)(d)

3.18 ESTIMATE AND PAYMENT OF ADVANCE TAX - SECTION 147(4A) & 147(6)

3.19 CERTIFICATE OF EXEMPTION - SECTION 148(7)

3.20 WITHHOLDING TAX ON IMPORTS - SECTION 148(8)

3.21 SERVICES RENDERED BY A PERMANENT ESTABLISHMENT OF NON-RESIDENT - SECTION 152(2B), CLAUSE (2)(I) DIVISION III, PART III - FIRST SCH, CLAUSE (5) DIVISION II FIRST SCH.

3.22 BUSINESS INCOME OF A NON-RESIDENT PERSON - SECTION 152

3.23 TAXATION OF PROFIT ON DEBT PAID TO NON RESIDENT - SECTION 152

3.24 MONITORING OF WITHHOLDING TAX - SECTION 161

3.25 CERTIFICATE OF COLLECTION / DEDUCTION OF TAX - SECTION 164

3.26 REFUNDS - SECTION 170(4)

3.27 ADDITIONAL PAYMENT FOR DELAYED REFUNDS -SECTION 171

3.28 OFFENCES AND PENALTIES - NON-FURNISHING OF RETURN OF INCOME AND WEALTH STATEMENT AND WEALTH RECONCILITAITON STATEMENT WITHIN THE DUE DATE- SECTION 182

3.29 OFFENCES AND PENALTIES - NON-FURNISHING OF STATEMENT WITHIN DUE DATE - SECTION 182

3.30 CONDONING OF TIME LIMIT BY THE BOARD - SECTION 214A

3.31 WITHHOLDING TAX ON SERVICES – SECTION 153(1)(b)

3.32 TAX ON DIVIDEND INCOME - DIVISION III OF PART I OF FIRST SCHEDULE

3.33 EXEMPTION TO WATER DESALINATION OR SIMILAR PROJECTS - PART I & PART IV OF THE 2ND SCHEDULE

3.34 REIT RELATED AMENDMENTS

3.35 LIMIT OF EMPLOYER’S CONTRIBUTION TO PROVIDENT FUND – SIXTH SCHEDULE

SIGNIFICANT PROPOSALS

3.36 EXEMPTION CERTIFICATE – TIMELINE

3.37 POWERS OF DIRECTOR GENERAL (INTELLIGENCE & INVESTIGATION) - SECTION 230 READ WITH SRO 115(I)/2015

3.38 AVAILABILITY OF INFORMATION ON WEB PORTAL

3.39 TECHNICAL MISTAKE IN SRO 947 OF 2008



3.40 THRESHOLD FOR CASH PAYMENTS - SECTION 21(l) & 21(m)

3.41 DEPRECIABLE COST - SECTION 22(13)(A)

3.42 DEPRECIATION - SECTION 22 (15)

3.43 INITIAL ALLOWANCE - SECTION 23

3.44 TAX ON CAPITAL GAINS (SECURITIES) OF NON-RESIDENT - SECTION 37A

3.45 EXEMPTION OF INCOME OF WPPF & WWF – SECTION 54

3.46 SET OFF OF LOSSES - SECTION 56

3.47 GROUP TAXATION - SECTION 59AA

3.48 GROUP RELIEF - SECTION 59B

3.49 PROVINCIAL WWF AND WPPF– SECTION 60A/60B

3.50 EXTENSION OF TAX CREDIT ALLOWED- SECTION 64B

3.51 TAX CREDIT FOR INVESTMENT – SECTION 65B

3.52 INCOME TAX CREDIT ON SALES TAX REGISTERED PERSONS- SECTION 65A

3.53 RECOGNITION OF GAIN ON GIFT BY NON-RESIDENTS SECTION 79

3.54 CAPITAL GAIN ON SCHEME OF ARRANGEMENT AND RECONSTRUCTION – SECTION 97A

3.55 EXPRESSION ‘ANY BUSINESS CONNECTION’ - SECTION 101(3) (d)

3.56 FOREIGN TAX CREDIT - SECTION 103(7)

3.57 TRANSACTIONS UNDER DEALERSHIP ARRANGEMENT – SECTION 108B & SECTION 21(ca)

3.58 TIMINGS FOR FILING OF RETURN OF INCOME - SECTION 114

3.59 TIME LIMIT FOR FURNISHING OF RETURN OF INCOME UPON NOTICE FROM COMMISSIONER – SECTION 114 (4)

3.60 ALTERNATIVE DISPUTE RESOLUTION- SECTION 134A

3.61 RECOVERY OF TAX - SECTION 140 (1)(b)

3.62 DEDUCTION OF TAX FROM PAYMENT OF SALARY - SECTION 149

3.63 PERSONS REGISTERED UNDER THE SALES TAX ACT - SECTION 153

3.64 RATE OF WITHHOLDING TAX ON SERVICES & EXECUTION OF CONTRACTS – SECTIONS 152(2A)(c) and 153(1)(c)

3.65 WITHHOLDING TAX ON PAYMENTS FOR GOODS – SECTION 153

3.66 WITHHOLDING TAX ON PRIZES- SECTION 156

3.67 WITHDRAWAL OF BALANCE UNDER PENSION FUND - SECTION 156 B

3.68 BAR ON SUITS IN CIVIL COURTS- SECTION 227

3.69 ADVANCE TAX ON PRIVATE MOTOR VEHICLES LEASED BY ‘MODARABA’- SECTION 231B

3.70 ADVANCE TAX - SECTIONS 236G & 236H





3.71 START-UP BUSINESS - SECTION 2(62A) & CLAUSE 143 OF PART I OF SECOND SCHEDULE

3.72 EXEMPTION FROM MINIMUM TAX

3.73 CONSTRUCTION CONTRACTS EXECUTED & SERVICES RENDERED OUT OF PAKISTAN - CLAUSE (3) OF PART II OF 2ND SCHEDULE

3.74 CONDITION FOR POWER PROJECTS - CLAUSE 132 - PART I OF 2ND SCHEDULE

3.75 VALUE OF FURNISHED ACCOMMODATION - RULE 4

3.76 SUBMISSION OF AUDITED FINANCIAL STATEMENTS RULE 34E

3.77 EDITORIAL AND TECHNICAL CORRECTIONS

4 INDIRECT TAXATION

HIGHLY SIGNIFICANT PROPOSALS

4.01 REDUCED RATE OF SALES TAX FOR ALL TIER 1 RETAILERS

4.02 BAR CODE ON ALL NOTICES AND ORDERS - SECTION 56(2)

4.03 MODIFICATION OF ORDER UNDER THE SALES TAX AND FED LAW

4.04 TIME LIMIT FOR GIVING APPEAL EFFECT IN CASE OF DIRECT RELIEF - SECTION 11B OF STA AND SECTION 14B OF FEA

4.05 ISSUE OF DRAFT SROs

4.06 RATIONALISATION IN TIME LIMIT FOR DIFFERENT COMPLIANCES / FILINGS – SECTIONS 7, 9 66 & 73

4.07 ADVANCE RULING FOR SALES TAX

4.08 INPUT TAX ON PROVINCIAL SERVICES - SECTIOFERN 8(1)(j)

4.09 ADJUSTABLE INPUT TAX – SECTION 8B

4.10 UNFAIR APPLICABILITY TO EXPORTERS – SECTION 8B

4.11 ADJUSTMENT OF PRIOR PERIOD REFUND CLAIMS AGAINST SUBSEQUENT LIABILITIES – SECTION 10

4.12 REFUND / INPUT TAX CREDIT NOT ALLOWED - SECTION 21(3)

4.13 SERVICE OF ORDERS & DECISION- SECTION 56 OF STA & 47 OF FEA

4.14 INADMISSIBLE INPUT TAX - SECTION 73

4.15 CONDONATION OF TIME LIMIT - SECTION 74 OF STA AND 43 OF FEA

4.16 EXTRA TAX ON ELECTRIC / GAS BILLS

4.17 ADJUSTMENT OF EXCISE DUTY - SECTION 6 AND RULE 13

4.18 ADJUSTMENT OF SALES TAX FED REFUNDS WITH INCOME TAX, SALES TAX & FED LIABILITY AND VICE VERSA

4.19 DEFINITION OF FRANCHISE – SECTION 2(12a) of FEA

4.20 FIVE EXPORT ORIENTED SECTORS



SIGNIFICANT PROPOSALS

4.21 AFGHAN TRANSIT TRADE

4.22 CPEC AND THE MENACE OF SMUGGLING / ILLEGAL TRADE

4.23 NON-ADJUSTMENT OF INPUT TAX PAID THROUGH "BILLS OF ADDITIONAL DUTY" (BoAD) - SECTION 7(2)(ii)

4.24 SALES TAX ON TOLL MANUFACTURING – SECTION 2(33)(d)

4.25 HIRE PURCHASE - TIME OF SUPPLY & VALUE OF SUPPLY - SECTION 2(44) & 2(46)

4.26 SALES TAX ON ADVANCES - SECTION 2(44)

4.27 TAX CREDIT NOT ALLOWED – SECTION 8(1)(ca) & (caa)

4.28 INPUT TAX CREDIT ON BUILDING MATERIALS – SECTION 8(1)(h)

4.29 SHOW CAUSE NOTICES - SECTION 11 OF STA AND 14 OF FED

4.30 DISCHARGE OF LIABILITY AT SUBSEQUENT STAGE – SECTION 11

4.31 CERTIFICATE BY AUDITORS – SECTION 22

4.32 MULTIPLE AUDITS – SECTIONS 25 AND 38

4.33 POWER TO ARREST - SECTION 37A

4.34 POSTING OF INLAND REVENUE OFFICER TO PREMISES OF REGISTERED PERSON – SECTION 40B

4.35 RECOVERY OF ARREARS OF TAX – SECTION 48

4.36 LIABILITY FOR PAYMENT OF TAX - SECTION 58

4.37 DELAYED REFUND – SECTION 67

4.38 BUSINESS BANK ACCOUNTS - SECTION 73

4.39 INVENTORY RECORD FOR GOODS DESTROYED - RULE 23

4.40 UNADJUSTED INPUT TAX - RULE 34

4.41 INITIATION OF RECOVERY ACTION - RULE 71

4.42 UNDUE RESTRICTIONS OVER EXPORTS TO AFGHANISTAN

4.43 SALES TAX WITHHOLDING – ELEVENTH SCHEDULE

4.44 DEBIT AND CREDIT NOTES - RULE 14 A OF FEA

4.45 FED ON FRANCHISE SERVICES

4.46 INPUT TAX ADJUSTMENT AGAINST FED

4.47 REVISION OF RETURN UNDER THE STA AND FEA

4.48 EXEMPTION FROM FED WHERE PROVINCES HAVE INTRODUCED TAX ON SERVICES

4.49 DISCRIMINATORY TREATMENT BETWEEN DTRE / EOU / MANUFACTURING BOND SCHEMES

4.50 ANNEXURE H - FASTER SYSTEM FOR SALES TAX REFUND PROCESSING



5 HARMONIZATION OF TAX LAWS

5.01 INTEGRATION OF TAXATION AUTHORITIES FOR ONE-WINDOW SOLUTION

5.02 SETTING UP OF INDEPENDENT REVENUE POLICY BOARD

5.03 INCONSISTENT CONCEPT OF REVERSE CHARGE IN PROVINCES

5.04 EXPORT OF SERVICES

5.05 TIME LIMITATION FOR CLAIMING INPUT TAX

5.06 SALES TAX WITHHOLDING

5.07 CLASSIFICATION OF TAXABLE SERVICES RULES

6 PROVINCIAL SALES TAX ON SERVICES

HIGHLY SIGNIFICANT COMMON ISSUES

6.01 TIME LIMIT TO CLAIM INPUT TAX BEFORE COMMENCEMENT OF BUSINESS - SECTION 15A(1)(I) OF SSTSA; SECTION 16(1) OF PSTSA; SECTION 16B(1)(I) OF BSTSA; RULE 44(I)(IX) OF KPK RULES

6.02 INPUT TAX ADJUSTMENTS - SECTION 15A OF SSTSA; SECTION 16B OF PSTSA; RULE 27(5) OF BSTSR 2018 & SECTION 32 OF THE KSTSA

6.03 VALUE ADDITION TAX AT IMPORT STAGE - SECTION 15A(1)(K) OF SSTSA; SECTION 16B(1)(R) OF PSTSA; RULE 44(1)(IV) OF KPK RULES & SECTION 16B(1)(D) OF BSTSA

6.04 ADJUSTMENT OF INPUT TAX ON CAPITAL GOODS, MACHINERY AND FIXED ASSETS - SECTION 15B OF SSTSA & SECTION 16C OF PSTSA

6.05 JOINT AND SEVERAL LIABILITY OF REGISTERED PERSONS IN SUPPLY CHAIN WHERE TAX IS UNPAID- SECTION 18 OF SSTSA; SECTION 19 OF PSTSA; SECTION 35 OF KSTSA; SECTION 19 OF BSTSA

6.06 TIME LIMITATION FOR ASSESSMENT & RETENTION OF RECORDS - SECTIONS 24(2) & 32(1) OF PSTA; SECTIONS 23 & 27(1) OF SSTA; SECTION 40 & 48 OF KPSTA & SECTION 24 & 32 OF BSTA

6.07 ASSESSMENT OF TAX - SECTION 23(5) OF SSTSA; SECTION 24(1) & (5) OF PSTSA, SECTION 24 (5) OF BSTSA & SECTION 40(5) OF KSTSA

6.08 CERTIFICATE BY THE AUDITORS - SECTION 26(5) OF SSTSA; SECTION 31(5) OF PSSTA; SECTION 48(5) OF KSTSA; SECTION 31(5) OF BSTSA

6.09 RETURN REVISION - SECTION 35(6) OF PSTSA; SECTION 30(6) OF KSTSA; SECTION 35(6) OF SSTSA & SECTION 35(6) OF BSTSA

6.10 OBLIGATION TO PRODUCE DOCUMENTS AND PROVIDE INFORMATION - SECTION 52(1) OF SSTSA; SECTION 57OF PSTSA, SECTION 57(1) OF BSTSA & SECTION 73 OF KSTSA

6.11 TAX EXEMPTIONS OR ZERO RATING FOR CHARITY

6.12 E-HEARING AT THE LEVEL OF COMMISSIONER APPEALS / APPELLATE TRIBUNAL

6.13 MINIMUM THRESHOLD FOR REGISTRATION

6.14 SALES TAX ON SERVICES RELATING TO E-COMMERCE / E-BUSINESS OR DIGITAL ECONOMY



6.15 SALES TAX AT REDUCED RATE & ITS ADMISSIBILITY AS INPUT TAX

6.16 BROADENING OF TAX BASE

6.17 AUTOMATIC STAY FOR RECOVERY OF TAX ARREARS - SECTION 70 OF PSTSA; SECTION 66 OF SSTSA & SECTION 73 OF BSTSA

6.18 REFUND OF EXCESS INPUT TAX - RULE 23B OF SSTA; RULE 29 OF BSTSA; SECTION 32 OF KPSTA & SECTION 16 OF PSTSA

SINDH SALES TAX ON SERVICES

6.19 DELEGATION OF POWERS - SECTION 36(1)(A)

6.20 H.S CODES/ TARIFF HEADINGS TO VARIOUS SERVICES IN FIRST SCHEDULE

PUNJAB SALES TAX ON SERVICES

6.21 TAXATION THROUGH REPRESENTATION

6.22 BAR ON INPUT TAX ADJUSTMENT UNDER REVERSE CHARGE MECHANISM - RULE 6 OF PUNJAB SALES TAX ON SERVICES (ADJUSTMENT OF TAX) RULES, 2012

6.23 RESTRICTION ON INPUT TAX ON FRANCHISE SERVICES - RULE 61 OF PSTSPR

KHYBER PAKHTUNKHWA SALES TAX ON SERVICES

6.24 PROCEDURE FOR ELECTRONIC INVOICING, MAINTENANCE OF RECORDS ETC.

6.25 SPECIAL PROCEDURAL RULES ON APPOINTMENT OF ELECTRONIC INTERMEDIARY

6.26 DEFINITION OF TAXABLE SERVICES

ISLAMABAD SALES TAX ON SERVICES

6.27 ENACTMENT OF INDEPENDENT SALES TAX ON SERVICES LAW



COVID-19 RELATED TAX CONSIDERATIONS

COVID-19 – the Coronavirus Pandemic - has spread worldwide and the economic experts predict that the global economy may soon face double recession which is likely to last this year as well as next year. IMF believes that even a short-lived outbreak would drag the world into a 3% GDP contraction. IMF has also expressed its concern that a resurgence of COVID 19 in 2021 could leave economies struggling for years to come.

With reference to Asia, IMF expects growth to stall at zero percent in 2020 – the worst performance in 60 years – with China’s growth declining from 6.1% to a projected 1.2% in 2020.

Pakistan is not an exception. Pakistan has been facing serious economic challenges even before the spread of COVID 19. Following outbreak of COVID 19 and its impact on the global economy, Pakistan’s economic condition is more likely to deteriorate to a negative growth. Pakistan needs to protect its industries and businesses by providing several incentives, including tax incentives, to make the wheel of economy moving in right direction to protect the existing jobs and create new opportunities. It is certainly an uphill task to save the economy from shrinking.

Accordingly, the federal government should, inter alia, consider giving the following tax reliefs for the tax year 2020 to the taxpayers:

a) reduce the rate of minimum tax on gross turnover under section 113 at least by 50%;

b) reduce the rate of tax of tax applicable to incomes chargeable to tax under the final tax regimes or minimum tax regimes at least by 50%;

c) suspend the super tax and reduce the corporate rate of tax to 20% for small companies and 25% for all other companies.

d) allow a tax reduction of at least 25% of the tax payable to individuals and association of persons, who are subject to tax under Part I of First Schedule to the Income Tax Ordinance, 2001;

e) donations given for combating COVIT 19 pandemic to the funds created by the Federal and Provincial Governments and some established approved non-profit organizations like SIUT, Indus Hospital, Edhi, and others should be allowed as a direct deduction from the amount of tax due (including tax due under minimum and final tax regimes) by such donors to the Federal Government under the Income Tax Ordinance, 2001. Any unadjusted donations may be allowed to be carried forward for set off against tax due (including tax due under minimum and final tax regimes) in the immediately succeeding three tax years; and

f) Lift the restriction placed under section 8B of the Sales Tax Act, 1990 on adjustment of input tax up to 90% of the output tax, thereby requiring a mandatory payment of sales tax equal to 10% of the output tax by the registered person.



1. BROADENING OF TAX BASE

PRELIMINARY COMMENTS

Pakistan’s opting for a policy of higher rate of taxation in the past, both for corporate and non-corporate persons, actually paved the way for tax evasion, tax avoidance and lack of participation of private sector in the economic development of the country and be an active part of tax system. Having failed to win the trust of the taxpayers collect the right amount of tax from them, the government resorted to take support of several tax amnesty schemes at regular intervals, introducing several minimum and final tax regimes, withholding tax regimes, both on income and expenditure, and massive indirect taxation in the form of heavy excise duty and sales tax, thereby passing on the burden of taxes indirectly to the entire nation. These unreasonable methods employed by the government led to the promotion of informal economy and wrong practices, which have sadly become the norm in Pakistan.

There have never been serious efforts made to widen the tax base. Most of the efforts failed simply because there was no political will of the government. No serious efforts were made to respect the taxpayers, eliminate the trust gap between the tax collectors and taxpayers, giving incentive to the taxpayers, and provide the taxpayers a clear visibility of the tax money put to best use for the benefit of the general public.

In the name of widening or broadening of the tax base, the Revenue Authorities in Pakistan have targeted to further squeeze or burden the existing or compliant taxpayers. In addition, instead of widening, they actually resorted to a policy of deepening the tax base (which by no means qualify as widening or broadening of the tax base) by increasing the tax rate on the same taxable activity or putting restrictions on deductibility of expenditure or disallowing deductible legitimate expenditure in the name of tax audit or otherwise. Failure of the tax machinery in widening of the tax base, the recent trends have been to exert further pressure on the law-abiding taxpayers to the extent of destroying them in the process. Such unwise policies of the government force the taxpayers to opt for wrong practices which includes maintenance of two sets of books – formal and informal – to avoid excessive taxation.

The government should reform the tax administration by liberating it from the shackle of interference by the bureaucracy or members of parliament or power corridors. A totally independent tax collecting machinery should be set up to be controlled, run and managed by qualified professionals comprising accountants, lawyers, economists, IT experts, MBAs, and graduates selected through an independent recruitment system. This is absolutely necessary to dispel the perception that the genuine taxpayers will be burdened with undue taxes by taking legally unsustainable acts.

1.1 UTILIZATION OF AVAILABLE DATA AND DOCUMENTING THE ECONOMY

Currently, a large volume of financial and non-financial data is available with the federal and provincial revenue authorities and other government bodies working at National and Provincial level that could be integrated and effectively used for value addition and broadening of tax base.

Further, it is an undeniable fact that there is a parallel undocumented economy that is flourishing without any worries of not being on the tax net. This is not only discouraging the compliant taxpayers, but also giving rise to their difficulties as revenue short fall is being collected from the same taxpayers either through raising exaggerated tax demands or curtailing or preventing disbursement of legitimate tax refunds.

It is proposed to give due attention to the following for broadening of the tax base:

• Introduce an integrated tax system that allows online collection and payment of withholding tax by the withholding agents and their automatic reporting or uploading in the taxpayer’s portal.



It should also enable timely monitoring of the deposit of collected or withheld tax into Government Treasury at the Point of Sale. Similarly, the system should also generate automatic email or SMS on real-time basis for customers and taxpayers.

• Work with banks and financial institutions to develop system for capturing online payments and movement of funds that is automatically reflected in the taxpayer’s portal;

• Invest in the automation of all Government Securities including investment and deposit schemes of the National Savings and deduction and reporting of taxes thereon. Also, all such securities should be held electronically as it is done in case of shares held by the CDC.

• All foreign currency transactions should be routed through Banks, instead of Money Exchange Companies, and documented in accordance with the foreign exchange regulations of the SBP.

• FBR, together with private institutions, must run Tax Education Campaigns using digital, print and social media for awareness of the general public. GPS mapping of commercial shops be carried out in major cities of Pakistan;

• Radiographic scanning of all inbound and outbound containers be carried out to plug revenue leakages; • A step can be taken to provide commercial / industrial electricity, gas and water connections to those

having NTN only; • Along with educating the potential taxpayers, a relaxation should be given in order to bring them in tax

net, such as, no audit proceeding will be initiated prior to the date of registration.

1.2 BRIDGING THE TRUST GAP BETWEEN TAX COLLECTORS AND TAXPAYERS THROUGH FACILITATION/EDUCATION OF TAXPAYERS AND INCENTIVIZING TAXPAYERS

There is a trust gap between the tax collectors and existing and potential taxpayers, and that is one of the major impediments for documentation and payment of taxes by the persons earning taxable income. In addition, they lack the understanding of complex tax laws, tax collection procedures and utilization of taxes, and they only consider it as burden.

There is strong need to bridge the trust gap by educating the people the importance of their role in nation building through payment of taxes and how such taxes are used for providing free or concessional medical care, education, insurance, infrastructure, and other privileges.

The following minimum steps should be considered for achieving this objective:

• establishing improved and effective tax facilitation centers at every tax office; • availability of simplified tax guidelines and assistance through qualified staff; • conducting tax education – Public Private Partnership; emphasizing on:

o benefits of being a taxpayer; o contribution to the national exchequer; and o road shows/social media/TV; and

• giving tax incentive for starting new businesses in the form of concessional rate of taxation in the initial period of not less than three years.

1.3 CAPACITY BUILDING AND ACCOUNTABILITY OF REVENUE AUTHORITIES

There is strong need to train staff of the revenue authorities on how to identify potential taxpayers and support them in becoming tax compliant and remain on ATL. This certainly would require hiring of professionals having expertise in the tax laws, accounting principles, soft skills, and taxpayers’ facilitation capabilities, for playing effective roles for the enhancement of tax base of the country. Alongside capacity building, a mechanism should be set up for accountability of the revenue authorities for checking their negligence,



misfeasance, corrupt practices, underperformance, red-tape, partiality, favoritism, private practice, and brazen misuse of power.

While addressing the above, it is suggested to take the following minimum steps: • There should be separate wing for Audit, Legal and Enforcement in the revenue authorities managed by qualified audit professionals, as it is done by the SRB and PRA; • Increased focus on capacity building of the staff through on-going trainings by professionals; • Introduction of Service Standards for all field force with clear KPIs; • Strengthening the transparency by elimination of contact between the tax collector and taxpayer; • Establishing a toll-free Hotline with Whistle Blower mechanism that anyone can reach and complain; • Providing support through improved IT infrastructure, strong MIS and access to available databases; • Introduce a system of conducting, at regular intervals, review of the internal control processes of revenue

authorities to put a check on their operation and effectiveness by establishing independent internal monitoring boards of professionals;

• The performance of the tax officials should not be judged solely on the basis of tax collection, but their efforts on documentation and broadening should also be appreciated and rewarded; and

• Establishment of mechanism for accountability of revenue staff.

1.4 CREATION OF NEW JOBS / PROMOTING IT INDUSTRY

The Information Technology industry is globally growing at a very rapid pace. With the technology advancement, business will undergo drastic changes and everyone’s lives will be greatly impacted. Unfortunately, Pakistan has not been able to leverage the IT growth at its true potential in exports of goods and services in the IT industry.

A long-term policy is to be developed on the lines it is done by other countries in the South Asia to attract Global giants for establishment of their businesses in Pakistan under the transfer of technology agreements over a period of time through a process of continuous training of Pakistani personnel. Local IT business and online services like (freelance services etc.) should be further incentivized. The Governmental support should be provided for creation of outsourced serve hubs for increase in foreign exchange revenues.

This will also encourage local software service providers to get registered and earn from local advertisements.

1.5 INTRODUCTION OF SCHEDULE FOR TAXATION OF PERSONS ENGAGED IN SMALL TRADE, VOCATION, CALLING AND PROFESSION

These persons are mostly out of the tax net simply because they are neither interested nor have the capacity to maintain proper books of account, and do not trust or have faith in the current complex and corrupt tax system. It is also on record that representative bodies of such persons wish to pay tax and become contributories to the national exchequer.

As a first step, the Government should seriously consider bringing them in the tax net by introducing a separate Schedule for them for taxation under fixed tax scheme (preferably at a reasonably lower rate) subject to an annual increase of not exceeding 10% each year for first five years.

1.6 WITHDRAWAL OF TOTAL EXEMPTIONS FROM TAX

Second Schedule to the ITO has provisions that gives a message that the government is not impartial in levying tax on all sectors of the economy or sections of the society. It demonstrates partiality by providing tax concessions and exemptions to those in power or hold high profile positions in the government thereby



giving a message that the tax policy is tilted towards elites including landlords or wealthy. The classic example is of exemptions available to agricultural income and the perquisites given to the military, president of Pakistan, judges, etc.

The Government should seriously consider withdrawal of all unwarranted and discriminatory tax exemptions/ concessions provided in the Second Schedule to the ITO as without it broadening of tax base will remain a dream.

1.7 WIDENING OF TAX ON INCOME FROM PROPERTY

There is a strong perception that income from property is not fully tapped due to lack of monitoring. It is suggested to take the following steps for expanding the tax base under the head income from property.

• For preventing escape of taxation on rent from immovable property, every tenant, by statute, should be required to file a copy of the lease agreement to the FBR or any other designated office to ensure that tax return is filed by the lessors and tax thereon is paid.

• Data should also be collected from the development authorities or municipal administration of the rented-out properties (both commercial and residential) subjected to property tax.



2. EASE OF DOING BUSINESS (EODB)


The proposals presented here are merely from tax perspectives. Accordingly, the measures to be taken to address EoDB issues related to regulations, business friendly environments, better infrastructure, cross border compliances, foreign exchange regulations, one-stop shop or window, Board of Investment, etc. are not discussed here.

The issue that requires serious consideration from tax perspective is to have a highly improved tax framework, which should, inter alia, include true enforcement of self-assessment scheme, minimization of red-tape or web created around approvals etc., eliminating final, minimum, alternate and super tax regimes for corporate taxpayers, slashing of withholding tax regimes and compliances, setting up of a more independent appellate forum, easy and quick disposal of tax refunds, limiting the incidence of tax audits (exception to apply only in case of tax fraud or false tax declarations), attachment of bank accounts for recovery of disputed tax to be used only as a final course of action, rationalization of penalty and default surcharge for offenses, etc. Similarly, a uniform tax system for goods and services tax is to be introduced within the constitutional framework of Pakistan.

2.1 SIMPLIFICATION OF TAX LAWS AND SETTING UP OF OVERSIGHT BOARD OF REVENUES

Over the time, the complexity level of tax laws and procedures have substantially increased due mainly to rapid significant changes made in the tax laws by introducing several final, minimum, alternate and super tax regimes with several exceptions which added to the confusion. Similarly, a large number of withholding taxes are introduced both on income and expenditure. For instance, in the name of “Transitional Advance Tax Provisions – Chapter XII”, the five sections allotted to it is converted into 33 withholding tax provisions by extensions of alphabets to sections in the last 20 years. This, at times, becomes more vulnerable as field force of the revenue authorities make different interpretations which open the doors for long drawn litigations giving rise to exorbitant increase in “cost of doing business”.

Further, interaction with revenue authorities in multiple tax jurisdictions without harmonization of goods and services tax laws of the federal and provincial governments results in tax disputes which adds significantly to the cost of doing business.

A concerted effort is needed for bringing all revenue authorities together on the agenda of harmonization of

goods and services tax laws of the federal and provincial governments. Similarly, it is strongly recommended to reform the existing tax framework to make it less complex and easy to comply. These may include the following:

• Harmonization of rates of sales tax on goods and services across the country; • Single tax collecting platform for all federal and provincial taxes; • True enforcement of Self-assessment scheme; • Lower tax rates - Single flat rate for income tax: o 15-20% for small companies; o 25% for other companies; o 5-20 % on individuals / AoPs. o Taxation of retailers with turnover less than 5 Million at a flat rate on the basis of their location. • Step by step reduction of withholding taxes; • Efficient completion of assessments; • Automated refunds in designated bank account of taxpayer, without requirement of filing application; • Recovery of disputed tax to be made by giving advance notice to the taxpayer only after the appeal is

decided and delivered by the Appellate Tribunal.



• Workers related federal and provincial taxes and levies namely Employees old-age pension benefits, social security, surplus (un-distributable) workers profit participation fund and workers welfare fund should be deposited in designated banks and financial institutions using one consolidated payment document.

2.2 DELAY AND PROCEDURAL HASSLES IN PROCESSING OF OVERDUE REFUNDS

Protracted delays in settlement of tax refunds is one of the bigger contributors to distorting the commercial image of Pakistan depicted through Perception and Ease of Doing Business Surveys which impacts negatively the inflow of FDI in the country. In this connection reference may be made to the five surveys carried out by OICIC in 2011, 2013, 2015, 2017 and 2019. This has been regularly pointed out at the relevant forums, including the Offices of Prime Minister and Minister of Finance. The Finance Act, 2019 has tried to address this issue by introducing refund bonds for the settlement of long outstanding income tax refunds. These refund bonds carry a simple interest of 10%, which is payable along with principal amount of refunds on attaining maturity period of three years.

However, the processing of refunds continues to be long drawn and refunds of many companies have not been processed for many years although FBR already has the information readily available on the system. Furthermore, despite specific directions in the ITO, fair mechanism for issuance of government bonds for settlement of income tax refund is not in place. Nevertheless, where the bonds are issued, they are neither traded freely in the market nor discounted by the banks due mainly to low interest versus prevailing discount rate.

In the aforesaid circumstances, and for addressing the overdue refund issues, it is proposed to consider the following steps:

• All pending tax refund be cleared within next six months. • Processing of refunds should be entrusted to a separate wing, and such process should begin immediately

on filing of an application for refund by the taxpayer and completed for issue of refunds within 45 days. • The tax laws should be amended to allow inter-adjustment of Income tax and Sales tax refunds. • Amendment should be made in the FTO Ordinance to allow the FTO to accept cases of refund disputes

for issuing an order binding on the tax authorities. • The fixed rate of 10% on delayed refunds be substituted with 3% above monthly or quarterly KIBOR.

2.3 INDEPENDENCE OF APPELLATE FORUMS Currently, the first and second appellate forum, where both fact and law points are decided, are not fully

independent. Whilst the Office of Commissioner Appeals is under the control of tax administration, the appellate tribunal is under the control of Ministry of Law and Justice. The aggrieved taxpayers are therefore deprived of the fully independent forum for redressal of their grievances from the first two appellate forum and therefore they end up seeking redressal on point of law only in the Higher and Superior courts.

It is strongly recommended that the Office of Commissioner Appeals should be brought under the Ministry of Law & Justice and the Appellate Tribunal under the High Courts. In order to build the confidence of the taxpayers in the appeal system, it is also recommended to publish the decisions of the Commissioner Appeals and the Appellate Tribunals.

2.4 RESTRUCTURING OF FBR AS AN INDEPENDENT GOVERNING BODY

It is our understanding that a proposal is already under active consideration of the Government to convert the FBR into an autonomous body on lines similar to SBP and SECP or IRS of USA. Whilst this is indeed a welcome step, it is proposed to also consider the following further steps:

• FBR should operate and work in a corporate governance structure with a Board of Directors, vested with powers similar to the Boards of Public listed companies. Fifty percent of the Board members including Chairman FBR may be nominated by the government (Ministries of Finance, Law, and Commerce) and,



the remaining fifty percent should be nominated by the established trade and professional bodies like OICCI, PBC and ICAP. • A transparent accountability system in tax administration should be introduced, and reasonable

independence and empowerment given to various operational positions. • Annual external audit of FBR should be done jointly by two independent international audit firms whose

report should be presented to the Tax Policy Board for their recommendation to the Board of Directors. • There should also be an Internal Audit Department within the FBR for conducting an effective internal

audit functions and submit their report directly to a committee of Board members selected equally from government and non-government members.

2.5 REQUIREMENTS FOR REGISTRATION AS A MANUFACTURER WITH FBR

The registration for sales tax purposes as a manufacturer is not possible unless a list of machinery installed at the manufacturing facility is provided and it is ready for physical inspection by the designated FBR official. This requirement is impractical as sales tax registration is to be obtained for acquisition of machinery (whether local or foreign) and their installation may take several months. This issue is partly addressed by issue of temporary registration as manufacturer with a time limitation of 60 days to fulfill the conditions of registration as manufacturer failing which the relief available to manufacturer is withdrawn. Similarly, the company intending to carry out manufacturing may prefer to use the toll manufacturing facility of a third party. In the absence of registration as manufacturer or failing to meet the conditions of being registered as manufacturer within 60 days following temporary registration, the investor would suffer 3% extra sales tax on import of machinery for setting up a manufacturing facility; or where the investor intends to use a toll manufacturing facility of a third party.

It is strongly recommended to consider making following changes for addressing this issue:

• The requirements of having the machinery installed at the manufacturing facility should be waived; or (alternatively) the temporary registration as manufacturer be allowed with conditions that extra sales tax would apply if the machinery is not installed at the manufacturing facility within a period of at least six months or any extended period with the approval of FBR; or

• Where toll manufacturing facility is used, a Certificate from the toll manufacturer should be sufficient evidence for allowing manufacturing status, as definition of manufacture contains the toll manufacturing.

2.6 CONSOLIDATION OF SROs ISSUED UNDER THE STA 1990

Sales tax SROs are issued so frequently that it is very difficult to keep track of them or keep oneself updated on their validity. It is strongly recommended that all active SROs should be incorporated in the Act; or compiled separately by giving references of the applicable SROs in the relevant provisions of the Act.

2.7 ACCESS TO DATA OF WITHHOLDING TAXES

Currently, every taxpayer suffers withholding taxes on their income and expenditure and, unless proper evidence of the deposit of such taxes is available, the taxpayer is prevented from claiming credit of such taxes. Presently, there is no facility available with the recipients of payments to access the data of withholding tax on a real-time basis to check whether the tax deducted or collected from his payments is deposited in the Government treasury.

It is strongly recommended that the taxpayers should be allowed access to data of withholding taxes to be maintained by the revenue authorities on a real-time basis. This will enable the recipient of payments to access the data and inquire, on a timely basis, from the withholding agent in case of any discrepancy therein. This will also greatly assist the tax department in the verification of tax credits, and processing of tax refunds.



3 DIRECT TAXATION HIGHLY SIGNIFICANT PROPOSALS 3.01 FINAL TAXATION VS. MINIMUM TAXATION

Several incomes which were falling under the Final Tax Regime have been replaced with Minimum Tax Regime by the Finance Act, 2019. This is not a welcome change as it is against the true spirit of taxation of income of the taxpayer.

In order to revert to the original provision for taxation of taxable income, it is proposed to take the following next steps:

a) Listed companies be taxed under normal tax regime, i.e. taxation of taxable income; b) Non-listed companies be taxed under minimum tax regime provided where the minimum tax exceeds the

tax due under normal tax regime, the excess shall be eligible for carry forward for set off in the following three succeeding tax years; and

c) Non-corporate persons should continue to be taxed under minimum tax regime without carry forward option.

Rationale

This will promote the culture of income-based taxation rather than receipt-based taxation. Inclination of the Government to Final and Minimum taxation is a defeatist policy and speaks of inefficiency.

3.02 REPLACING WITHHOLDING TAX REGIME WITH ADJUSTABLE ADVANCE TAX REGIME

FOR LISTED COMPANIES

The corporate sector taxpayers are compliant taxpayers and contribute significantly to the tax revenue, but they are exposed to several challenges including very stringent and cumbersome ever-expanding withholding tax regime, and facing difficulties in getting credit of withholding taxes due to non-availability of CPRs or late or non-deposit of withholding tax by the withholding agents or their non-verification in the FBR’s electronic database.

As a first step, the FBR should seriously consider lifting the burden of withholding taxes and substituting it with payment of monthly advance tax in case of listed companies. Accordingly, it is proposed that instead of exposing the listed companies to a large number of withholding taxes on their income and expenditure, amend Section 147 of the ITO for the listed companies to make them pay the advance tax on a monthly basis, instead of quarterly.

Rationale

Implementation of this proposal will lift a significant burden from the listed companies and make the life of FBR officials easier as they would be getting the payment of taxes on a monthly basis directly from the taxpayers instead of through withholding agents. It would also substantially reduce the unnecessary documentation and hassle of verification and risk of withholding agents committing frauds. It will also improve the cash flow of the companies and minimize the exposure of tax refunds.

3.03 DEFINITION OF PERMANENT ESTABLISHMENT - SECTION 2(41)

Under section 2(41)(d), furnishing of services, including consultancy services by any person through employees or other personnel engaged by the person for such purpose is considered to be Permanent Establishment. However, minimum threshold of presence of employees or other personnel in Pakistan is not provided.



It is proposed to amend the definition to provide that, in case of services, a PE shall be established where the stay of employees or other personnel exceeds 90 days in a tax year.

Rationale

The absence of minimum threshold for services give rise to a situation where services provided for even a day in Pakistan could give rise to a PE situation thereby disentitling the non-resident from fixed taxation envisaged in section 6 at the rate of 15%.

3.04 SALARY - SECTION 12

Income under the head “salary” is currently taxed on the gross amount. This policy was introduced by bringing down the corresponding rates of tax for each income slab. However, gradually the income slabs as well as rates of tax were enhanced without restoring the deductible allowances when income from salary was taxed at higher rates.

It is proposed to either rationalize the rates of tax or restore the deductible allowances on account of house rent, utilities, conveyance, etc. to minimize the tax burden of salaried individuals.

Rationale

It is not justified to tax the salaried individuals (particularly in high income slabs) at such a high rate when other taxpayers are subject to tax on their net profits at much lower rates.

3.05 INCOME FROM PROPERTY - SECTIONS 15(6), 15(7), 15A AND 155

The policy on taxation of income from property has seen several back and forth changes without properly evaluating what the long-term policy should be. The Institute has been constantly advocating the concept of global taxation and do-away with all separate block and final tax regimes. However, it is currently retained as a separate block of income and taxed on gross rent at the rate applicable to rental income with an option for net income taxation at the general rate applicable to Individual and AOP under Part I of the First Schedule where the rental income exceeds Rs. 4,000,000 in a tax year.

It is proposed that the option for net income taxation at the general rate applicable to Individual and AOP under Part I of the First Schedule be extended to rental income below the threshold of Rs. 4,000,000.

Rationale

The upward revision of the rates of tax on Gross income from Property as a separate block / final tax through Finance Act, 2019 for income below the threshold of Rs. 4,000,000 are unrealistic and discriminatory.

3.06 AMORTIZATION OF INTANGIBLES - SECTION 24

The maximum amortization period of intangibles for tax purposes be restored to 10 years. Alternatively, it is proposed to allow amortization equal to 40% of the cost of intangibles as first year allowance, and the remaining 60% equally over the period of remaining life of the intangibles but not exceeding 15 years where the life of intangibles is either more than 15 years or where the life is not defined or not determinable.

Rationale

Intangibles are significant business assets both for manufacturing and service sectors of the economy. 10 years period too is quite long as compared to the initial, normal and first year depreciation allowances available on tangible assets.



3.07 CAPITAL GAINS ON DISPOSAL OF SECURITIES – SECTION 37A

The following Explanation or Proviso should be inserted in sub-section (2) of Section 37A to clear the ambiguity or misinterpretation that exists with reference to the shares of unlisted company not qualifying as security and the date of acquisition of such shares on their listing on the Pakistan Stock Exchange on change of their status from unlisted company to a listed company:

“Explanation: It is clarified that the shares of unlisted company will qualify as security on listing of the company’s shares on the Pakistan Stock Exchange and the date of their acquisition for disposal following the listing shall be reckoned from the date of acquisition of shares in the company whose shares are listed.”

Rationale

The above Explanation is necessary to address the issue that arose due to an order of the Honorable Sindh High Court with reference to shares of unlisted company not qualifying as security and the date of acquisition for disposal purposes of such shares following the listing of shares on Pakistan Stock Exchange. It is also necessary to undo its adverse impact on the new listing of shares, as sponsors of the companies opting for listing are deprived of being taxed under section 37A on disposal of their shares if they remain shares following listing of the shares of the company on the Pakistan Stock Exchange.

3.08 IMPACT OF TAX CREDITS ON EXPORTERS -SECTIONS 65B, 65D AND 65E

Exporters are not able to practically reap the benefits of tax credits available under sections 65B, 65D and 65E owing to withholding tax at 1% and no specific provisions regarding exemption or reduced rate certificate is available. This leads to serious cash flow problems as refunds are not readily available.

Following be inserted as sub-section 5 to Section 154 in order to avoid problems being faced by exporters:

“The Commissioner may, on application made by the recipient of a payment referred to in sub-section (1) and after making such inquiry as the Commissioner thinks fit, may allow in cases where sufficient tax credits under sections 65B, 65D and 65E are available to absorb the tax deductible under sub-section (1), by an order in writing, allow any person to make the payment without deduction of tax.”

Deduction of taxes at standard tax rate of 1% in spite of tax credits under sections 65B, 65D and 65E results in piling up of substantial refunds and unnecessary financial cost for the Exporters.

Rationale

The proposed amendment is in line with the intention behind introduction of tax credits under sections 65B, 65D and 65E against final tax as well in order to promote industrialization. Facilitating Exporters to reduce the unnecessary working capital requirements will result in increased Exports, Foreign Exchange Reserves and pace of Industrial growth.

3.09 TAXATION OF AOPs OF PROFESSIONALS - SECTIONS 92 & 93

The income of association of persons (AOP) of the professionals, which are prohibited from incorporating as a limited company, should not be taxed in hands of the AOP and instead share of each partner / member be taxed in his/her hands equated with salary income or rate applicable for business individuals for the purposes of determining the tax liability.

For this purpose, sub-section (2), (3), (4) and (5) of Section 92 and Section 93 of the ITO omitted by Finance Act, 2007 should be restored.



Rationale

Professionals like Architects, Accountants, Advocates etc., are not allowed by their respective governing statues to form a limited liability company. Thus, the professionals have no alternative but to join hands in the status of an AOP. This brings the AOP of professionals at a disadvantageous position in respect of effective tax rate as compared with a company, since member’s salary is not a deductible expenditure, whereas in case of a company, director’s remuneration is a deductible expenditure and such remuneration is taxed at rates applicable to a salaried individual. Further, where the members of such AOP have no other taxable income, they are deprived of all deductible allowances and tax credits available under the ITO.

3.10 TAX ON SURPLUS FUND OF NON-PROFIT ORGANIZATION - SECTION 100C

Currently, sub-section (1A) of section 100C of the ITO provides that surplus funds of non-profit organization shall be taxed at a rate of ten percent. Moreover, surplus funds under section 100C(1B) have been defined as funds or monies:

(a) not spent on charitable and welfare activities during the tax year; (b) received during the tax year as donations, voluntary contributions, subscriptions and other incomes; (c) which are more than twenty-five percent of the total receipts of the non-profit organization received

during the tax year; and (d) are not part of restricted funds. Most of the non-profit organizations establish and run welfare related projects such as schools, clinics,

vocational training centers etc. and for the purpose, huge capital expenditures are required to be incurred to develop the infrastructure, erect the buildings, provide equipment etc.

Such capital expenditure is incurred over a period and cannot be expended in one fiscal year. Further, to incur such expenditure, as and when required, cash is to be retained in respect of projects, which are to be completed over a period exceeding one year.

It is proposed to abolish sub-section (1A) and (1B) of section 100C of the ITO as it is directly causing hindrance to the welfare activities involving capital expenditure to be incurred over a period exceeding one year.

Alternatively, the limit of spending in a year on charitable and welfare activities from receipts during that year currently set at minimum 75% of such receipts may be analyzed over a reasonable period (atleast three years), to account for expenditures which are inevitably spread over a period exceeding one year.

Surplus funds may be calculated after taking impact of revenue expenditure as well as capital expenditure incurred during the year.

The proposed recommendation is being suggested to ensure the smooth functioning of welfare projects that are specially meant for the benefit of the deprived members of the society.

Rationale

There is a dire need in the society for charitable and welfare related projects specially in the education, health and social sector for uplifting of the under-privileged class dominating the population. The prevailing provision is imposing restriction and hindering the smooth functioning of such welfare projects. It is also highly unreasonable on the part of the Government to be a partner in donations received for the charitable purpose. It does not give a right message.



3.11 INDIRECT TRANSFER OF ASSETS OUTSIDE PAKISTAN - SECTION 101A

The Finance Act, 2018 introduced a new section 101A to tax gain arising on disposal of Pakistan assets through non-resident holding company structures. Advance tax collection mechanism has been kept within the provisions of section 101A to ensure payment of tax at the higher of 10% of the Fair Market Value of the asset or 20% of the gain arising on such disposal.

A specific provision should be added within section 101A empowering the Commissioner to issue an exemption or lower rate certificate on an application to be filed by a Resident Company or the seller where it can be demonstrated that the actual capital gains tax liability on such transaction is lesser than 10% of FMV or where the seller is covered under the provision of a favorable Double Taxation Treaty.

As an alternative, section 101A can be placed within the Chapter of withholding taxes to which the provisions of section 159 is applicable.

Rationale

In certain cases, 10% of FMV can result in much higher incidence of tax if compared with usual Capital Gains Tax rate on direct disposal transactions. Furthermore, in certain cases, the alienator would be genuinely covered under Double Taxation Treaty whereby such gains cannot be taxed in Pakistan.

3.12 MINIMUM TAX AND ALTERNATIVE CORPORATE TAX (ACT)- SECTION 113 & 113C

Whilst there is already a minimum tax regime, which imposes tax on the gross turnover u/s 113, having another minimum tax regime for services, and an ACT, which actually operates as alternative minimum tax regime, for the corporate sector (with exceptions), has rendered the computation of income and tax liability very complex for the corporate sector. It is also noted that the ACT rate, which was fixed at 17% by the Finance Act, 2014 (i.e. 50% of the corporate tax rate then applicable) remained unchanged whereas the rate of corporate tax has been reduced from 34% to 29%, and in case of small companies, the rate was reduced from 25% to 24% in 2019. On the other hand, the rate of minimum tax u/s 113 is increased from 0.5% to 1.5% during this period.

Considering the above, it is strongly proposed that the ACT should be withdrawn; or the rate be revised downward to 50% of the normal corporate rate of tax applicable to the companies.

Rationale

The minimum tax regime of ACT at such a high rate in the presence of two more Minimum Tax Regimes at high rates is highly unreasonable and discriminatory. Only one type of Minimum Tax Regime should be applicable on the taxpayer.

3.13 MINIMUM TAX - SECTION 113 (2)(C)

Where tax paid under sub-section (1) of Section 113 exceeds the actual tax payable under Part I, clause (1) of Division I, or Division II of the First Schedule, the excess amount of tax paid shall be carried forward for adjustment against tax liability under the aforesaid Part of the subsequent tax year.

It is proposed to insert an explanation stating that the expression “tax payable” includes zero or no tax where taxable loss is assessed. Further, the increase in rate of tax made through Finance Act, 2019 from 1.25% to 1.5% should be restored to 1% in line with corporate tax rate which has been decreased from 35% to 29% over the period of last six years to facilitate the corporate sector and encourage investment in the Country.



Rationale

The increased percentage of minimum tax would increase the cost of business and will discourage future investments. This is an additional burden on the cash flow of the loss making taxpayers. It is quite ironical that the benefit of reduction in corporate tax rate is reclaimed by increasing the burden of minimum tax, tax on dividend, and levying super tax.

The definition of income provided in section 2(29) includes loss of income, and accordingly there should not be any incidence of tax, except for minimum tax, which, by statute, could be carried forward for adjustment against future tax liability (other than minimum tax). However, as held by the Honorable Sindh High Court, the FBR has taken a position that minimum tax can be carried forward if and only if the tax paid exceeds the actual tax payable (i.e. if normal tax liability is greater than zero). This is an unjust position taken by the FBR as it discriminates between a legitimate loss making taxpayer and a nominal profit making taxpayer chargeable to normal tax of even Rs.1. The insertion of the proposed explanation is necessary to address the controversy arisen due to fallible interpretation.

3.14 APPELLATE FORUMS – SECTION 127

Commissioner-Appeals should be brought under the administrative control of Federal Ministry of Law and the Appellate Tribunal under the control of the High Court of the respective jurisdiction. Further, establish Tax courts appointing learned judges of High Court as its member for speedy process against the decision of ATIR.

All decisions of Commissioner-Appeals and Appellate Tribunal should be reported for transparency and

improvement of confidence of the taxpayer on the taxation system in Pakistan.

It is also suggested that an officer once appointed as Commissioner-Appeal should not be subsequently assigned any functions, powers and responsibilities of an office or authority subordinate to the Federal Board of Revenue.

Rationale

It is felt that the principles of justice and total independence are not met at the appellate forums in real terms. 3.15 GRANT OF STAY BY COMMISSIONER (APPEALS) - SECTION 128(1A)

The inherent power of Commissioner (Appeals) to grant stay against recovery of tax in hardship cases (where an appeal is pending before him/her) has been given a legal cover and regulated by insertion of Sections 128(1A) and 128(1AA) by Finance Act, 2012 and 2015 respectively. Now, the aggregate period of stay that can be granted is for 60 days, besides the auto stay until decision of appeal by the Commissioner (Appeals) subject to payment of 10% of the disputed tax demand raised through the assessment order.

The Finance Act, 2018 inserted a provision that allows the taxpayer to seek automatic stay till the decision of appeal on payment of 10% of the disputed tax demand.

With the exorbitant tax demands created in certain cases, even 10% payment is likely to cause grave hardship for the taxpayers. Further, no mechanism is provided for refund of the 10% tax demand, if the demand is extinguished or materially reduced in the appeal. The payment by the taxpayer may also cause prejudice to his case or cause.

In Section 128(1A), the period of “thirty days” should be substituted with “till the decision of the appeal” and sub-section 128(1AA) be deleted. Moreover, at all appellate stages, stay should also be deemed to have been



granted in case of availability of refunds to the taxpayer in excess of the tax demand. Further, the condition of 10% payment of tax demand may be done away with and instead 100% of the disputed demand be stayed until the decision of first appellate authority.

Rationale

The change is proposed in the interest of natural justice and to give due consideration to the established history of unsustainability of the tax demands at the appellate forum.

3.16 STAY BY APPELLATE TRIBUNAL BEYOND 180 DAYS - SECTION 131

Prior to amendments introduced through the Finance Act, 2018, the Appellate Tribunal Inland Revenue was empowered to stay recovery of tax payable under the Ordinance till the time appeal is pending for disposal. A new proviso has been inserted through the Finance Act, 2018 in the section providing such powers to the Tribunal, which has restricted the effect of such stay for a period not more than 180 days.

It has been observed in various cases that due to the pendency of appeals before the Tribunal, on the expiry 180 days of stay granted by the Tribunal, the taxpayers have to approach the Higher Courts for necessary intervention and for seeking further stay. Through the amendments made through the Finance Act, 2018, the Government has effectively encroached into the power of the Tribunal whereas focus should be given to introduce measures for expediting the disposal of cases pending with the Tribunal.

Rationale

Considering the aforesaid grievances and limitation on the powers of the Tribunal, the Courts are generally considering this aspect judiciously and graciously, and granting stay in all such cases. However, this is requiring the intervention of Courts on this matter and also resulting in additional litigation cost to the taxpayers.

This matter requires re-examination with reference to the pronouncements by the Higher Courts in respect of power of stay by the judicial forum. For fairness and equality, it is suggested that amendments made through the Finance Act, 2018 restricting the powers of the Tribunal should be deleted and the powers of the Tribunal for granting stay till the pendency of appeal (as available prior to Finance Act, 2018) should be restored.

3.17 RECOVERIES OF DISPUTED TAX - SECTION 140(1)(d)

There exists a concept of automatic stay on payment of 10% of the disputed tax demand until the appeal is decided by the Commissioner Appeals.

It is proposed to extend this option to the next appellate forum, i.e. Appellate Tribunal by amending the Proviso as follows:

In proviso to section 140(1)(d) after the words “under section 127” the words “or section 131” should be inserted and after the words “Commissioner (Appeals)” the words “or the Appellate Tribunal” should be inserted.

Rationale

The relief provided against recovery of disputed tax demand should be extended as this is a mutually win-win situation for the taxpayers and the FBR. Taxpayers will prefer to deposit 10 per cent of the tax due instead of seeking stay from the Appellate Tribunal without any payment against the disputed tax. It will also drastically reduce the burden of ATIR dealing with hundreds of stay cases on a daily basis, thereby preventing it from deciding the main appeals within a reasonable time.



3.18 ESTIMATE AND PAYMENT OF ADVANCE TAX - SECTION 147(4A) & 147(6)

An association of persons (AOP) and company were required to estimate their income before payment of last installment of advance tax. If such estimate results into tax payable higher than on the basis of last completed assessment (base year), there was a requirement to pay the difference along with the 4th installment.

The time for making the estimate of income has been changed by the Finance Act, 2015 from ‘before the last installment is due’ to ‘before the 2nd installment is due’. 50% of the difference is required to be paid along with the 2nd installment and 50% of the difference with 3rd and 4th installments in two equal installments.

Sub-section (6) further provides that before the last instalment is due where the taxpayer estimates that his tax liability will be lower than the amount due under sub-section (4), he is required to submit the actual turnover of completed quarters of the tax year with estimate of the turnover of remaining quarters along with reasons for any decline in the estimate along with documentary evidences of expenses and estimated computation of income. The Commissioner is now also empowered to reject the estimate by providing an opportunity of being heard, if he is not satisfied by the reasons and evidence of estimate, and direct the taxpayer to pay advance tax as due under sub-section (4). The requirement of producing documentary evidence of expenses or deductions and the computation of estimated taxable income is highly stringent and prone to a high risk of rejection by the Commissioner. This change in law and the power given to the Commissioner to reject such estimate is highly unreasonable and unwarranted.

It is proposed to withdraw the amendments made in section 147(6) and restore the original provisions prior to the amendments made through Finance Act, 2015.

Rationale

The amendments are non- practical, particularly, in cases of non-listed company and association of persons, who are not required to prepare quarterly financial statements. Further, even in case of listed companies, the estimate of tax liability on quarterly basis after determining the taxable income is not a simple task.

Vesting Commissioner with the power to reject own-estimate in a country with uncertainty and sentiments driven market is highly susceptible to exercise of discretion. Furthermore, keeping in view the collection-oriented attitude of the filed officers, it is more likely that own estimate will be rejected by raising unnecessary objections, and that may lead to tax controversy to be settled at the appellate forum. Moreover, section 205(1B) becomes redundant if inquiry is made at the end of every quarter.

3.19 CERTIFICATE OF EXEMPTION - SECTION 148(7)

Procedures and rules for obtaining exemption certificates for import of plant & machinery and Raw material by taxpayers has serious restrictions which causes hardship and increases cost of doing business. The issues are listed below:

• Current income tax rules do not support issuance of exemption certificate for import of raw material by manufacturers starting new business, gone into expansion in the current product or launched a new product etc. These restrictions are hindering industrial growth in the country.

• For qualifying for exemption, maximum import of raw material is restricted to the extent of 125% of the material previously imported and consumed.

• In order to qualify for exemption, the law requires minimum tax (equal to higher of last two years’ tax liability) to be paid before qualifying for exemption. This means that in the case of lower taxable profits due to expansion or operational reasons, the taxpayer will inevitably have a tax refundable in the current year.



• In case of newly established undertakings, tax credit under section 65D is not being allowed by the department while working out tax liability of the last two years.

• Coupled with a high rate of withholding at 5.5%, these restrictions badly affect working capital of the manufacturers.

• Currently, certificate of exemption from withholding tax on imports u/s 148 is not allowed to persons who are importing raw material, plant, machinery, equipment and parts for its own use unless they qualify as industrial undertaking. The tax paid at import stage on such imports by persons other than the industrial undertaking is treated as a minimum tax, which is highly unreasonable where the imports are not commercial imports meant for sale, but are for own use particularly by service sector taxpayers.

To address the issues faced in respect of claim of exemption under section 148 of the ITO, following

amendments are proposed: • Restrictions in respect of issuance of exemption certificate for new projects / capacity expansions /

formula and process changes may be removed which will allow industrial growth in the country. • Maximum volume restriction be at least enhanced to 150% of last year’s raw material imported. • Requirement to meet the tax payment equal to previous two tax years be abolished and may be linked

with payment of advance tax liability for the respective period (as in the case of exemption under section 153).

• Amendments may be made to allow tax credit under section 65D while working out previous year’s tax liability for newly established undertakings already under immense cash-flow burden. This would help eliminate piling up of unnecessary refunds for newly established undertakings.

• The rate of tax on import of raw material and plant & machinery may be gradually reduced to 1%. • Clause (a) of sub-section (7) of Section 148 should be amended as under: (a) raw material, plant, machinery, equipment, parts or any other goods by any person for its own use. Rationale

The recommended measures will help in decreasing the cost of doing business and would also have a positive impact on profitability, which will ultimately contribute to more taxes.

New industries need to be supported for industrialization and job creation therefore these measures will ease their working capital requirement and in turn allow them to invest such funds in productive activities rather than being stuck in refunds.

Whilst the provisions of Section 148(7) are abundantly clear that the tax required to be collected under Section 148 shall be a minimum tax on the income of the importer arising from the imports subject to sub-section (1). The Commissioners have been treating the tax collection from all the imports meant for own use as a minimum tax, which is exactly opposite of the express provision and spirit of sub-section (7) in those cases where the goods imported are not meant for sale but for own use to derive income which is chargeable to tax.

The amendment is necessary to treat the tax collected u/s 148(1) as minimum tax only on the income of any person arising from the imports, which are meant for sale, i.e. commercial imports.

3.20 WITHHOLDING TAX ON IMPORTS - SECTION 148(8)

Some of the Zone Enterprises using plastic based material as Raw Material (covered under Chapter 39 of Custom Tariff) cannot apply for exemption due to restriction imposed through section 148(8) of ITO.

Since income of Zone enterprise is exempt from income tax under clause 126E, it is proposed that a proviso be inserted in sub-section (8) of section 148 to exclude Zone Enterprises from the application of minimum



tax to enable the Zone Enterprises to apply for exemptions online for the Raw Materials covered under section 148(8).

Rationale

Since exemption is available from taxation of income of Zone Enterprises under clause (126E), it cannot be the intention of legislature to levy minimum tax on manufacturers using the imported materials listed in sub-section (8) of section 148.

3.21 SERVICES RENDERED BY A PERMANENT ESTABLISHMENT OF NON-RESIDENT -

SECTION 152(2B), CLAUSE (2)(I) DIVISION III, PART III - FIRST SCH, CLAUSE (5) DIVISION II FIRST SCH.

Section 152(2B) provides that the tax deductible under clause (b) of sub-section (2A) shall be a minimum tax and the provisions of sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (3) of section 153 shall mutatis mutandis apply. This reference has lost its utility following amendments made in Section 153(3)(b)(i)(ii)(iii) by the Finance Act, 2019. The Finance Act, 2019 has inserted clause (2) in Division III of Part III of First Schedule to ITO to provide a withholding tax rate of 3% for resident taxpayers on some specified services, which was earlier dealt with under clause (94) of Part IV of Second Schedule to the ITO.

The Finance Act, 2019 omitted to address this change in case of non-resident having a permanent establishment in Pakistan. It is therefore proposed to delete sub-section (2B) of section 152 and amend clause (5) of Division II of Part III of First Schedule to provide for a withholding tax rate of 3% for the services specified in clause (2(i) of Division III, Part III of the First Schedule to ITO.

Rationale

Since the application of provisions of clause (94) of Part IV of Second Schedule to ITO, which was for resident, was mutatis mutandis extended to the non-resident having a permanent establishment in Pakistan by inserting sub-section (2B) of Section 152 of the ITO, it has to be restored by amending clause (5) of Division II, Part III of First Schedule to rectify the omission.

3.22 BUSINESS INCOME OF A NON-RESIDENT PERSON - SECTION 152

The Finance Act 2018 brought about amendments in sections 2(41), 101(3) and 152(7) to tax supply of goods by a non-resident in case of overall arrangements for the supply of gods, installation, construction, assembly, commission, guarantees or supervisory activities (“the EPCC Contract) even if the supply is made outside of Pakistan and the importer on record is the purchaser.

These amendments were made following signing of Multilateral Implementation Agreement (“the MLI”), signed in Paris on 07 June 2017. Pakistan is a signatory to the MLI. The purpose of MLI was to amend some 2,200 bilateral treaties and conventions by a single instrument to stop Base Erosion and Profit Shifting (“BEPS”) by artificial use of permanent establishment and misuse of bilateral treaties.

Before ratification, each participating country is required to convey (a) the list of “Covered Tax Agreements” that a country wants to amend through MLI; (b) the reservation as to non-application of any of the Articles of the MLI in entirety, or to the extent as provided in the Article; (c) to exercise options given in some of the Articles; and (d) to notify depository of the clauses of their respective bilateral agreements, which already contain the amendments proposed to be made by MLI.

Out of 65 Full Scope Bilateral ADTT agreements, Pakistan has notified 63 as “Covered Tax Agreements” under the MLI. The two bilateral agreements excluded are Brunei Darussalam and Korea.



Pakistan has excluded almost all the articles from application of the “Covered Tax Agreements” in entirety, and has opted to apply actions relating to improving dispute resolution, arbitration and certain mandatory provisions relating to treaty abuse.

Practically speaking, Pakistan has agreed to its 63 Bilateral Treaties only to the extent of improving the dispute resolution, arbitration, and treaty abuse to a restricted extent. Moreover, Pakistan has not thus far ratified MLI and has not deposited the instrument of ratification, and the notification of entry into force has not been issued.

Primarily taxing supply of goods from outside Pakistan is against the fundamental principles of international tax as the jurisdiction from where the supply has been made has the right to tax such income.

The impact of such an amendment would be as follows:

a) Keeping in view the overall strategy of the government to boost foreign investment, these amendments seem to contravene the objective as the foreign investors would not be subject to Pakistan tax in respect of their supply of plant machinery and equipment;

b) Multinationals would be hesitant to accept projects in Pakistan unless the tax is borne by the recipient of goods or services;

c) The cost of doing business for local companies may increase if the non-residents require tax gross-ups to neutralize the tax impact of such an amendment;

d) The non-residents may not be able to claim credit for taxes paid in Pakistan on such supplies; and

The objective should be to ensure that excessive value is not arbitrarily attributed to the offshore supply portion of a contract versus the onshore services portion, so that the revenue authorities get their due share in relation to the Pakistan source income attributable to onshore services.

Instead of taxing off-shore supplies, in violation of international tax principles, this objective can be achieved by robust practical implementation of the amended provisions of section 152(7), whereby the Commissioner is now empowered to examine the EPCC contracts in relation to supply of goods and its installation and commissioning.

Keeping in view the above position of MLI, no ADTT signed by Pakistan has been amended so far by operation of MLI. Even after delivery of ratification instrument and notification of entry into force, there will be no material change in Pakistan’s position viz-a-viz bilateral treaties. Therefore, the changes brought in sections 2(41), 101(3), 152(7) and 107(2) through Finance Act 2018, are in contravention of the existing bilateral treaties, as well as plethora of judgments by the superior judiciary on the point of overriding effect of ADTTs over the domestic law. However, as part of Standard Operating Procedures, the field officers should be given directives to evaluate the EPCC contracts under sections 108 and 109 to determine the arm’s length price in relation to offshore supply and onshore services.

Rationale

The amendments were introduced as per the recommendations of BEPS Action Plan 7. However, the intent of BEPS Action Plan 7 is to ensure taxation of artificial fragmentation of activities / splitting of contracts, and not to tax off-shore supplies altogether. Hence, the amendments in sections 101(3), 152(7) and the newly inserted explanation in section 2(41) are beyond the scope envisaged by Action Plan 7 and should be curtailed.



3.23 TAXATION OF PROFIT ON DEBT PAID TO NON-RESIDENT - SECTION 152

Under section 152 read with Clause 5A of Part II of the Second Schedule, profit on debt paid to a non-resident not having a PE in Pakistan is subject to reduced rate of withholding at 10%. However, such withholding tax is only considered to be final tax in those cases where investments in certain debt instruments are made through Special Convertible Rupee Account maintained with State Bank of Pakistan.

In all those cases where the non-resident lender does not have a PE in Pakistan, withholding tax at 10% or any other rate prescribed in the applicable Double Taxation Treaty, whichever is lower, on payments may be treated as final tax.

Rationale

In the absence of above proposed amendment, non-residents not having a PE in Pakistan are technically subjected to tax on Net Income Basis at the applicable corporate rate of tax. As there are no accounts maintained in Pakistan, the admissibility of expenses against interest income is a subjective matter. In order to remove this anomaly, it is suggested that final tax regime may be made applicable on all non-residents not having a PE in Pakistan at the rate of 10% or the one prescribed in DTT, whichever is lower.

3.24 MONITORING OF WITHHOLDING TAX - SECTION 161

The taxpayers are being selected for monitoring of withholding tax under Section 161 simultaneously for more than one year. In most of the notices, figures are taken from the financial statements and withholding agent is required to reconcile those figures with the payments. This lengthy exercise involves lot of time and resources of the taxpayers.

As per provisions of Section 174 of the ITO, a taxpayer is required to maintain accounts and documents for six years after the end of tax year to which they relate. Since no time limit is prescribed in Section 161 of the ITO for monitoring of withholding tax, the taxpayers are receiving notices for the period beyond six tax years for which they are not obliged to maintain / retain records, which create hardship to the taxpayers.

Furthermore, the field officers force on recovery from the withholding agent despite the fact that the person from whom tax was to be withheld has already discharged his tax liability.

Since the taxpayers are filing withholding tax statements, it is suggested that the same data should be used for monitoring, and notices should only be issued in case of material differences. Moreover, monitoring of one year should be carried out at one time. Further, a time limit should also be provided in Section 161 of the ITO for monitoring of withholding taxes.

Although section 161(1B) exists, application of section 162 of the ITO should be mandatory for filed officers before invoking section 161 of the ITO. It is proposed to make the following amendments in section 161(1) of the ITO

“the person shall be personally liable to pay the amount of tax to the Commissioner who may pass an order within a period of five years from the end of the financial year in which the payment was made, after ensuring that provisions of sub-section (1B) are not met”

Rationale

Monitoring of withholding taxes is to be used as deterrent and not as revenue measure. This kind of exercise also results in harassment and unethical practices, which will be avoided.



3.25 CERTIFICATE OF COLLECTION / DEDUCTION OF TAX - SECTION 164

The Institute fully appreciates and endorses the need for submissions of the challans as evidence of tax paid. However, keeping in view the prevailing ground realities, it is very difficult for the taxpayers to obtain copies of challans from the withholding agents in many cases and in particular where the tax withheld is paid through book entry or through a single consolidated challan without the details of the persons from whom it has been collected or deducted e.g., tax collected or deducted from dividend, profit on debt, export realizations, petroleum products, cash withdrawal from a bank, issuance of instruments, sale of securities (NCCPL), registration of motor vehicle, gas consumption by CNG stations, electricity consumption, telephone usage, domestic and international air tickets, etc. and tax collected or deducted by Governments under various provisions. Accordingly, the Institute is of the view, that until each and every withholding agent complies with his obligation of providing the challans of tax collected or deducted at source, any other equivalent document or certificate of tax collected or deducted should be acceptable as evidence of tax paid by way of collection or deduction of tax at source.

Sub-section (1) of section 164 requires that the withholding agent has to provide copies of the challan (CPR) or any other equivalent document along with a certificate of the amount of tax collected or deducted.

Sub-section (2) of section 164 requires furnishing of copies of challan (CPR) along with the return of income as evidence of tax paid by way of collection or deduction at source but does not provide for acceptance of 'any other equivalent document'. The term 'any other equivalent document' used is sub-section (1), is neither defined nor explained.

It is proposed to consider the following amendments to address this issue:

• The term 'any other equivalent document' used in section 164(1) should be defined or explained, which may include electricity bills, telephone bills, airline tickets, bank statements, etc.;

• In section 164(2), the words 'any other equivalent document' be added as evidence of tax payment to be furnished along with the return; and

• A proviso be added under section 164(2), whereby only a certificate of collection or deduction of tax would also be acceptable as evidence of tax payment, where the withholding agent does not separately identify the person from whom tax has been collected or deducted in the respective tax deposit challan (CPR) or the tax is deposited through internal government adjustments.

In addition, a new clause should be inserted in Part IV of Second Schedule as follows:

"Section 164 shall not apply in the case of following withholding agents: - Electricity Distribution Companies - Telecommunication Companies - Airlines - Banks and other financial institutions - Local, statutory and other government bodies

The certificate issued by the above companies or bodies or their agents mentioning the amount of tax collected shall be treated as sufficient evidence."

Rationale

This may result in resolving dispute with tax authorities and restricting disallowance of credit for taxes deducted at source.



Various withholding agents including but not limited to electricity distribution companies, telecommunication companies, airlines and other government and local bodies do not provide copies of challans to the taxpayers, as their customer base is too high and they undertake business with masses at large.

3.26 REFUNDS - SECTION 170(4)

Sub-section (4) of Section 170 states that "The Commissioner shall, within sixty days of receipt of a refund application under sub-section (1), serve on the person applying for the refund an order in writing of the decision after providing the taxpayer an opportunity of being heard."

The following proviso should be added to the said sub-section:

"Provided that where the Commissioner does not pass an order after the expiry of sixty days from the date of receipt of a refund application, the said order shall be deemed to have been passed by the Commissioner on the basis of application under sub-section (1)."

On insertion of aforesaid Proviso, clause (b) of sub-section (5) of section 170 should be deleted.

Alternatively, a sub-section may be inserted to provide that effect to the appellate order of the Commissioner Appeals be given within 60 days from the date of service of the appellate order, and where the Commissioner fails to give effect to such appellate order within 60 days, the refund order shall be deemed to have been passed based on the application filed by the taxpayer under sub-section (1) of Section 170.

Rationale

Providing for early release of tax refunds increases the confidence of the taxpayers in discharging their tax obligations, even the disputed tax on the assurance of getting refunds as soon as appeal is decided favorably.

3.27 ADDITIONAL PAYMENT FOR DELAYED REFUNDS - SECTION 171

Under Section 170(4) of the ITO, the Commissioner on receipt of a refund application may serve an order within 60 days. Section 171(1) provides that the refund may be paid within three months of the due date, which has been explained to be the date of order under Section 170.

Rationale

In order to remove anomaly in the law, it is suggested that where the refund order is not passed by the Commissioner within 60 days, it shall be deemed to have been passed on the 60th day for the purpose of computing additional payment.

3.28 OFFENCES AND PENALTIES - NON-FURNISHING OF RETURN OF INCOME AND WEALTH

STATEMENT AND WEALTH RECONCILITAITON STATEMENT WITHIN THE DUE DATE - SECTION 182

Penalty for non-furnishing of return of income within the due date prescribed under Section 182 is equal to 0.1% of the tax payable for each day of default subject to a minimum penalty of Rs. 40,000 and a maximum penalty of 50% of the tax payable in respect of that tax year.

Similarly, where a person fails to furnish wealth statement or wealth reconciliation statement it attracts a penalty of 0.1% of the taxable income per week or Rs. 100,000, whichever is higher.

Through an explanation, it has been declared that the expression ‘tax payable’ means tax chargeable on the taxable income on the basis of assessment made or treated to have been made under sections 120, 121, 122 or 122C of the ITO.



It is proposed to delete the explanation of the expression ‘tax payable’ in column (3) of Para (1) of the Table under Section 182(1) of the ITO.

It is also proposed to substitute the penalty in case of non-filing of wealth statement and wealth reconciliation statement with a penalty of 0.1% of the tax payable with the return per day but not exceeding Rs. 10,000.

It has been noted that the tax authorities have invariably started levying penalty based on the tax chargeable on the taxable income declared in the return without taking into account the taxes already paid / deducted. This situation is causing serious hardship to the taxpayers, as tax authorities are using the explanation as a tax collection avenue instead of a deterrent.

Rationale These are harsh provisions. Logically, imposition of penalty should have been restricted on the amount of

balance tax paid, or due but not paid, along with the return, as was held by the appellate authorities before insertion of the said explanation, and if there was no tax payable then token amount of penalty should have been imposed, as was the case before substitution of Section 182 of the ITO.

3.29 OFFENCES AND PENALTIES - NON-FURNISHING OF STATEMENT WITHIN THE DUE DATE

- SECTION 182

Penalty for non-furnishing of statement under section 115, 165, 165A or 165B within the due date, as prescribed under section 182, is Rs. 2,500 for each day of default subject to a minimum penalty of Rs. 10,000.

Penalty for failure to furnish statements u/s 115, 165, 165A or 165B should be reduced to Rs. 500 per day subject to a maximum penalty of Rs. 10,000; and in case of continuation of default after the imposition of first penalty a further penalty of Rs. 1,000 per day.

It is also proposed to insert an Explanation or Proviso stating that no penalty shall apply in a case where there was nothing to report in the statement u/s 165.

Rationale

The present quantum of penalty is too harsh and highly unreasonable. In many cases, practically, the quantum of penalty exceeds the actual tax liability itself.

3.30 CONDONING OF TIME LIMIT BY THE BOARD - SECTION 214A

The Federal Board of Revenue (FBR) is empowered to condone the time or period specified under any of the provisions of the ITO or rules made there-under within which any application is to be made or any act or thing is to be done, in any case or class of cases and permit such application to be made or such act or thing to be done within such time or period as it may consider appropriate. The scope of exemption was extended by introducing an explanation in Section 214A vide Finance Act, 2012 by way of which the scope to grant condonation was extended to cover the defaults of the officials of Inland Revenue for non-fulfillment of their official duties within the prescribed time.

Amendments made in Section 214A through Finance Act, 2012 should be withdrawn.

The provisions of Section 214A, prior to amendment made through Finance Act, 2012, implied that this power cannot be used in a manner detrimental to a taxpayer. However, by virtue of the amendment made through Finance Act, 2012 it has been specifically provided that this power to condone the time or period of an act or thing to be done by any of the Income Tax Authorities can also be condoned.



Rationale

This amendment is highly prejudicial to the interest of taxpayers and indirectly gives a blanket power to the FBR to override the statutory time limit or period of any act or thing to be done by the Income Tax Authorities. This provision is also unconstitutional as it gives power to an administrative body to nullify the time limitation provided to the income tax authorities under the ITO to act or do things within the timeline provided in the ITO.

3.31 WITHHOLDING TAX ON SERVICES – SECTION 153(1)(b)

It is proposed that the rate of withholding tax be reduced from 10% to 8% in case of AOPs comprising professional services firms, which, by the statute under which they are incorporated or regulated, are prevented from forming themselves into a company under the Companies Act, 2017 or a corporate entity under any other law for the time being in force.

Rationale

It will provide alignment of the tax rate with that of the company and provide a level playing field for such AOPs having limitation in forming themselves into a company.

3.32 TAX ON DIVIDEND INCOME - DIVISION III OF PART I OF FIRST SCHEDULE

Rate of Dividend tax provided in Division III of Part I of First Schedule was substituted by the Finance Act, 2019, whereby taxation at 7.5% is restricted to payment of dividend to shareholders by the IPPs where the dividend is a pass-through item under the implementation or power purchase agreement. This has resulted in taxation of dividend from the IPPs set up under the power policy of 1994 at 25%, which is more than thrice the rate originally committed to the shareholders of such IPPs.

Similarly, taxation of dividend at 15% is retained for dividend earned from mutual funds and from all other companies, with the exception of dividend payment by the companies which are not liable to pay tax due to exemption of income or carry forward of business losses; and the rate of tax on divided from such companies has been enhanced to 25%.

REIT, Modarba, National Investment Trust, Collective Investment Scheme, Venture Capital Company and Venture Capital Fund are broadly Mutual Funds, but all these entities have been defined separately in the ITO and not specifically included or covered in the definition of Mutual Fund. Accordingly, we understand that as per current provisions, with the exception of dividend received from mutual funds, dividend received from all other entities like REIT, Modarba, National Investment Trust, Collective Investment Scheme, Venture Capital Company and Venture Capital Fund, which are not liable to pay tax due to exemption of their income under various clauses of Part I of Second Schedule to the ITO, attracts tax on dividend at the rate of 25%.

It is therefore proposed that:

• the rate of 7.5% as it was applicable prior to this amendment to the shareholders of IPPs be restored. • Either the definition of Mutual Fund in sub-section (35A) of section 2 of ITO be amended to include

REIT, Modarba, National Investment Trust, Collective Investment Scheme, Venture Capital Company and Venture Capital Fund; OR

• In clause (b) of Division III, of Part I of First Schedule to ITO, after the words “Mutual Funds”, the words and comma “REIT, Modarba, National Investment Trust, Collective Investment Scheme, Venture Capital Company and Venture Capital Fund” be inserted; OR

• Clause (c) should be deleted and clause (b) be substituted to read “(b) 15%, in cases other than mentioned in clause (a).



Rationale

Under the 1994 Power Policy, dividend was assumed @ 7.5%, and accordingly provisions were then incorporated in the ITO 79 and also maintained in the ITO 2001. Such abrupt change contrary to the government’s assurance shakes the confidence of the existing and prospective investors as it is more likely to work as an impediment for fetching FDI.

This disparity of rate of tax on dividend between dividend from Mutual Funds and all other entities (stated above), will force investors to move their investments from such entities to Mutual Fund. Similarly, taxing dividend at 25% in the hands of the shareholders of other exempt entities or entities not liable to tax due to carry forward of tax losses is highly unreasonable and opposed to the investment friendly policy and environment to which the government is fully committed to welcoming both domestic and foreign investments in Pakistan.

3.33 EXEMPTION TO WATER DESALINATION OR SIMILAR PROJECTS - PART I & PART IV

THE 2ND SCHEDULE

We understand that the government is actively considering to address the acute shortage of clean water and exploit processing of water based on sea water, untreated water and similar source of water. In order to encourage local and foreign investments in this important sector, it is proposed to insert appropriate clauses in Part I and Part IV of the Second Schedule to the ITO to grant tax exemptions to such projects on the lines the exemptions are allowed to greenfield industries, IPPs and similar other projects of national importance.

Rationale

• Water shortage in Pakistan in general and specially in Karachi has created problems for the civic bodies, consumers, industries, etc.

• According to a recent report by the IMF, Pakistan ranks third in the world among countries facing acute water shortage. According to UNDP & PCRWR report, the country will face absolute water scarcity by 2025

• With a population of over 20 million research suggests that Karachi is currently short of water around 550 MIGD

• Due to abrupt increase in population coupled with inability of the civic bodies to tap and utilize new water resources necessitated involvement of private sector

• In order to facilitate the private sector investors and to minimize the cost of project, the Government should exempt such projects.

3.34 REIT RELATED AMENDMENTS

a) Clause (99A) of Part I of Second Schedule b) Advance tax under sections 236C and 236K c) Exemption from WHT u/ss 155 to Rental REIT d) Part I, Division III of First Schedule to ITO on dividend tax rate e) Rental REIT under sections 15, 15A and 16 REIT is a mutual fund for making investment in real-estate to derive income for the Unit Holders who could

be a natural or artificial juridical person including corporates. REIT Scheme, as per REIT Regulations, 2015 (“Regulations”), is a listed closed end Scheme registered with the SECP under the Regulations.

Under the REIT Scheme, the Central Depository Company (“CDC”) acts as a Trustee to undertake the

custody of the entire assets including the real-estate of the REIT Scheme along with its legal title on behalf



of the Unit Holders to protect their interest. CDC also provides assurance that the REIT assets and the income are used by the REIT Management Company (“RMC”) as per Regulations and Trust Deed.

The parties under the Trust Structure are CDC, RMC and the Unit Holders.

Under the Regulations, there could be three types of REIT Scheme: Developmental; Rental; and Hybrid (i.e. a mix of Developmental and Rental REIT). The Regulations also provide for making mandatory administrative appointments of positions namely Chief Executive Officer, Chief Financial Officer, Chief Internal Auditor, Chief Compliance Officer, and Company Secretary as per criteria defined in the NBFC Rules and Code of Corporate Governance (“CCG”).

Currently, to promote REIT in Pakistan, the following exemptions are allowed to REIT, the Unit Holders, and Seller of immovable property to REIT:

a) Clause 99 of Part I of Second Schedule to ITO allows exemption to any income of REIT if 90% or more of the accounting profit, as reduced by realized and unrealized capital gains, is distributed among the Unit Holders. Distribution shall not include issue of bonus units.

Interestingly, clause 57(2) of Part I of Second Schedule to ITO also allows exemption to any income (other than capital gains) derived by a REIT Scheme if 90% or more of such income is distributed to the Unit Holders.

b) Clause 99A of Part I of Second Schedule to ITO allows exemption from tax the profit and gain arising to a person on sale of immovable property to a Developmental REIT up to 30 June 2020 and to Rental REIT up to 30 June 2021.

c) Clause 103 of Part I of Second Schedule to ITO grants exemption from tax on any distribution received by a taxpayer from a REIT Scheme out of capital gains provided such exemption is available to only such mutual funds, collective investment schemes that are debt or money market funds and these do not invest in shares.

d) Clause 47B of Part IV of Second Schedule to ITO provides that provisions of sections 150 (Dividend), 151 (Profit on Debt), 233 (Commission) and Part I, Division VII of First Schedule (Capital Gains), shall not apply to persons making payments to an approved REIT Scheme.

Unfortunately, REIT business model did not receive proper recognition and, as of today, there is hardly one or two REITs in operation. In order to promote REIT, there is a need to bring several changes in the REIT Regulations and in the ITO to make it a success. It is therefore proposed to make the following amendments in the ITO:

a) Exemption available under clause (99A) of Part I of Second Schedule to ITO, to profit and gain arising to a person on sale of immovable property to both Developmental and Rental REITs be extended to 2025.

b) A proviso should be inserted in sections 236C and 236K to exclude the transaction of sale or transfer of the title of REIT property to CDC from the application of sections 236C and 236K.

c) Income of REIT being exempt from tax should be exempted from the operation of provisions of withholding tax. Currently, clause 47B of Part IV of Second Schedule provides coverage to sections 150, 151, 233 and Part I, Division VII of First Schedule. It is proposed to extend its coverage to section 155, which may apply in case of Rental REIT.

d) Rate of Dividend tax provided in Division III of Part I of First Schedule was substituted by the Finance Act, 2019, whereby taxation at 15% was retained for mutual funds, but excluded the companies making payment of dividend are exempt from tax on their income. Dividend received from such exempt companies are now taxed at 25%. Income of REIT being exempt, the rate of 25% would also apply to Unit Holders receiving dividend from REIT. By nature, REIT is a mutual fund, and accordingly the rate



of 25% is not only discriminatory but also discouraging for people to invest in REIT, which needs to be re-visited to retain it at 15%. (Please refer to our proposal under “Rate of tax on Dividend Income” for further reasons and rationale.)

e) Whist the income of Rental REIT is currently exempt from tax under clause 99 of Part I of Second Schedule to ITO provided at least 90% of its accounting income (other than realized and unrealized capital gains) is distributed to its Unit Holders, it is most likely that income from rent received by a rental REIT would be taxed under sections 15,15A and 16 of the ITO if it fails to distribute 90% of such income. Clause (h) of the deductible expenses admissible under section 15A puts a restriction of 6% of the gross rent for claiming any expenditure including administration and collection charges. The threshold of 6% appears to be insufficient for meeting the cost of mandatory administrative appointments under REIT Regulations read with NBFI Rules and CCG. It is therefore proposed that the restriction of 6% be increased to at least 10%.

Rationale

REIT is a specialized business worldwide and in order to promote REIT and make it a success in Pakistan, there is a need to bring several changes in the ITO as well as REIT Regulations. Unfortunately, there is only one approved REIT in operation and the other one is struggling to get documentation requirements sorted out. It is therefore proposed to make the above amendments in the ITO.

3.35 LIMIT OF EMPLOYER’S CONTRIBUTION TO PROVIDENT FUND - SIXTH SCHEDULE

Under clause 3 of Part I of Sixth Schedule the employer’s contribution in the recognized provident fund in excess of Rs. 150,000 (increased from Rs. 100,000 by Finance Act, 2016) is deemed to be income of the employee.

This provision is invalid as the accumulated balance (it includes employer’s contribution) due and becoming payable to an employee participating in a recognized provident fund is totally exempt from tax u/c 23 of Part I of Second Schedule to the ITO.

Without prejudice to foregoing, since employer’s contribution does not constitute an actual receipt as the same is not at the disposal of an employee and therefore tax incidence should not be levied at the time of contribution.

Alternatively, the threshold of Rs. 150,000 should be increased to Rs. 250,000.

Taxing of employer’s contribution in excess of Rs. 150,000 as deemed income under the head salary is also illegal as taxation of salary income is permitted by Section 12 on receipt basis only.

Further, the employer’s contribution can be withheld by the employer in case the employee is charged with misconduct. Due to such eventuality, it is only at the time of retirement or resignation that one can say with certainty that the employer’s contribution would be received by the employee.

Rationale

It is illogical to tax an amount at the time of contribution when it is ultimately exempt in the hands of recipient when it becomes payable to him u/c 23 of Part I of Second Schedule to ITO.



SIGNIFICANT PROPOSALS 3.36 EXEMPTION CERTIFICATE - TIMELINE

Over a period of time, the system of online exemption certificate has much improved. However, the only issue that requires attention is the time frame for processing and granting approval or rejection of the request for exemption certificate. Moreover, the tax department, before issuance of exemption certificate, usually starts verification of the tax paid or withheld as claimed in the return, thereby denying the taxpayers the benefit of the self-assessment scheme, which is the hallmark of the ITO.

A time limit of 7 days be prescribed and be followed in letter and spirit. Moreover, online system should be geared up to send weekly report to the Chief Commissioner Inland Revenue highlighting the age analysis of pending applications for exemption certificates. Moreover, taxpayers should be provided with a complaint portal to report their grievances relating to the issues being faced while getting approval for exemption certificates.

The tax department may scrutinize the tax paid or withheld through a separate proceeding after having issued the exemption certificate. This will prevent undue delay in processing of exemption certificates and harassment of genuine taxpayers. Additionally, IRIS should be able to capture the data of tax paid or withheld in case of each taxpayer, and that may be used as sufficient evidence to process the exemption certificates within 7 days.

Rationale

This will not only facilitate the genuine taxpayers in reducing the cost of doing business but also using the precious time saved for the promotion and development of his business to earn more profit and pay tax thereon.

3.37 POWERS OF DIRECTOR GENERAL (INTELLIGENCE & INVESTIGATION) - SECTION 230

READ WITH SRO 115(I)/2015 The Federal Board of Revenue vide S.R.O. 115 (I)/2015 dated 9th February, 2015 conferred upon the

Directorate General (Intelligence and Investigation), Inland Revenue, the powers of the Chief Commissioner/Commissioner:

• to exercise powers and perform functions under Sections 174, 175, 176, 177 (other than power to initiate audit), 178, 179, 180, 181, 182, Part III, Part XI of Chapter X, Sections 205 and 221; and

• to investigate Suspicious Transactions Reports (STRs) or other assets of persons or classes of persons impounded by any department or agency of the Federal or Provincial government and prepare/transmit reports to respective RTOs or LTUs for the purpose of application of Section 111 and for taking appropriate action under the ITO.

The law should be amended so that the authority of Director General Intelligence and Investigation is exercised only to investigate Suspicious Transactions Reports (STRs) or other assets of persons or classes of persons impounded by any department or agency of the Federal or Provincial government and prepare / transmit reports to respective RTOs or LTUs for the purpose of application of Section 111 and for taking appropriate action under the ITO and should not exercise the powers under various sections of the Ordinance.

Rationale

The creation of parallel authorities for the purpose of sections 174, 175, 176, 177, 178, 179, 180, 181, 182, Part III, Part XI of Chapter X, Sections 205 and 221 is causing problems to the taxpayers.



3.38 AVAILABILITY OF INFORMATION ON WEB PORTAL

Currently, information relating to goods declaration and tax deposited by the withholding agents on behalf of the taxpayer are not available for the taxpayers on FBR web portal which is available on 'Iris' system.

The information regarding Goods Declaration (GD) and tax deposited in government treasury should be available on web portal with CPR numbers, of both tax withholding agent and for the person whose tax is withheld and deposited.

Rationale

This will significantly reduce efforts and time to collect and produce tax challans/ certificates to the tax officers. In addition, this will facilitate in making compliance to the tax notices especially notices u/s 161 or under any other provision of income tax law.

3.39 TECHNICAL MISTAKE IN SRO 947 OF 2008

As per specific condition "V(b)" of SRO 947 dated September 5, 2008, exemption certificate is only issued in cases where the taxpayer is not likely to pay any tax, due to brought forward assessed losses or depreciation allowance in the tax year in which the import is made. As per the specific wordings of law, it appears that exemption certificate will not be issued in case the taxpayer is not likely to pay tax due to availability of excessive refunds and tax credits OR where income of the importer is exempt from Income Tax, which is against the principles of natural justice.

It is proposed to amend the SRO 947 dated September 5, 2008 to allow exemption certificate also in cases where the taxpayer is not likely to pay any tax during the tax year due to availability of tax refunds, tax credits or exemption from tax.

Rationale

This amendment is necessary to remove the anomaly in the SRO 947 dated September 5, 2008 and to provide justice to a taxpayer who is not liable to tax in a tax year.

3.40 THRESHOLD FOR CASH PAYMENTS - SECTION 21(l) & 21(m)

Clause (a) of the second proviso to Section 21(l) specifies that cash expenditure exceeding Rs. 10,000 is not allowed as tax deductible expenditure.

Similarly, under Section 21(m) of the ITO, any salary paid exceeding Rs. 15,000 per month otherwise by a crossed cheque or direct transfer of funds to the employee’s bank account are not allowed as tax deductible expenditure.

It is proposed to increase the threshold to at least Rs. 25,000 in case of cash expenditure u/s 21(l) and to Rs. 30,000 in case of payment of salary under section 21(m).

Rationale

Keeping in view the inflationary trend, the thresholds need to be enhanced both for cash expenditure and salary. In case of salary, it is also necessary because the threshold of taxable income from salary has increased from Rs. 100,000 in tax year 2008 to Rs. 400,000 in tax year 2020.

3.41 DEPRECIABLE COST - SECTION 22(13)(A)

The maximum cost of vehicle for claiming tax depreciation is currently fixed at Rs.2.5 million, irrespective of the actual cost of vehicle.



The depreciable cost of vehicle should be increased to Rs.5 million due to substantial increase in cost of vehicles.

Rationale

Use of vehicles having engine capacity of 1800cc and above has now become common in Pakistan, and their prices have gone up significantly due to depreciation of Rupee and general inflation.

3.42 DEPRECIATION - SECTION 22 (15)

It is proposed to insert the following explanation after the Proviso to Section 22(15) of the ITO: For the removal of doubt, it is clarified that the above Proviso shall be deemed to have always been there.” Rationale

Tax Authorities have taken the stance that tax depreciation on Assets held under Musharika arrangements is not admissible since the documents executed between the Bank and the borrower are construed as Sale Purchase documents.

The Finance Act, 2017 has resolved the issue, however, there is a dire need to make the amendment retrospective to end the controversy on this matter.

3.43 INITIAL ALLOWANCE - SECTION 23

It is proposed that the Initial Depreciation Allowance rate be restored to 50% for Plant, Machinery & Equipment and 25% for Buildings as was the case prior to the Finance Act 2013 and 2014 respectively.

Rationale

This incentive is a major investment driver and motivates investments in different sectors of the economy. The benefits of accelerated depreciation is merely a timing difference whereby providing relief to the investor by paying less tax in the initial period of investments and higher tax in the later years of project maturity.

3.44 TAX ON CAPITAL GAINS (SECURITIES) OF NON-RESIDENT – SECTION 37A

There is a need to rationalize the regime for taxation of capital gains in case of a non-resident person.

It is proposed that tax on capital gain in case of non-resident should be calculated after allowing indexation for change/ devaluation in exchange rate of Pakistani Rupee, if any.

Rationale

Similar treatment is also provided in Section 48 ‘Mode of computation’ of Indian Income Tax Act 1961, as follows:

“The Income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely: expenditure incurred wholly and exclusively in connection with such transfer; the cost of acquisition of the asset and the cost of any improvement thereto:

Provided that in the case of a taxpayer, who is a non-resident, capital gains arising from the Transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value



of the consideration received or accruing as a result of the transfer of the capital asset into the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so however, that the aforesaid manner of computation of capital gains shall be application in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company……..”

3.45 EXEMPTION OF INCOME OF WPPF & WWF – SECTION 54

Income of the Workers’ Profit Participation Fund and Workers Welfare Fund is exempt under the WPP Fund Act and WWF Ordinance respectively, and the same was accepted under the ITO by virtue of proviso to Section 54 of the ITO as it stood before an amendment brought in through the Finance Act, 2008. However, through the Finance Act, 2008 the proviso to Section 54 of the ITO was omitted.

As a result, exemption provided to the income of the WPP Fund under the WPP Act and WWF under the WWF Ordinance lost its applicability, which appears contrary to the entire scheme.

A corresponding amendment should be made giving exemption to the income of WPP Fund established under the WPPF Act or under any provincial WPPF Act and WWF established under the WWF Ordinance, 1971 or under any provincial WPPF and WWF Acts. Accordingly, it is proposed that the following sub-clause be inserted in Clause (66) of Part I of Second Schedule to the ITO.

“Workers Participation Fund established under the Companies Profits (Workers Participation) Act, 1968 or under any provincial WPPF Act and Workers Welfare Fund established under the Workers Welfare Fund Ordinance, 1971 or under any provincial WWF Act .”

Rationale

The amendment in Section 54 of the ITO had jeopardized a number of entities, which were exempt from income tax under various statutes other than the Income tax law. Accordingly, certain sub-clauses were inserted in Clause (66) of Part I of the Second Schedule to the ITO granting exemption from Income Tax to entities, which were enjoying such exemptions under their respective statutes after the proviso to Section 54 of the ITO, was withdrawn. However, due to an oversight, the exemption of income of WPPF and WWF could not find a place in Clause (66) of Part I of the Second Schedule.

It may also be noted that salient features of Budget 2012 indicated that exemption for WPPF is provided in Finance Bill, however it appears to have been inadvertently escaped the corresponding amendment in law. Clause (14) of Salient features of Finance Bill 2012 states:

“The income of the Workers Profit Participation Fund (WPPF) is exempt under the Companies Profit (Workers Participation) Act 1968. However, ITO does not recognize this exemption. In order to streamline and to remove the lacuna, it is proposed that the exemption to WPPF be granted in the ITO”.

3.46 SET OFF OF LOSSES - SECTION 56

Section 56 was amended through Finance Act, 2013, whereby loss (excluding speculation and capital loss under sections 58 and 59) sustained under any head of income cannot be adjusted against the income under the head ‘income from salary’ and ‘Income from Property’.

The position prior to amendment made through Finance Act, 2013 should be restored to allow set off against property income as well.



Rationale

The logic behind this amendment through Finance Act, 2013 was against the basic concept of taxation of ‘Global Income’.

3.47 GROUP TAXATION - SECTION 59AA

Under Section 59AA of the ITO, holding companies and 100% owned subsidiaries may opt to be taxed as one fiscal unit subject to fulfillment of certain conditions as provided in the aforesaid section read with Rule 231D of the ITR. Moreover, in order to claim exemption from withholding and taxability of inter-corporate dividend, such group companies are mandatorily required to file groups consolidated income tax return based on consolidated financial statements.

Furthermore, the benefit of group taxation is available to local group and foreign subsidiaries cannot become part of the group taxation.

The condition for filing of groups’ consolidated return is only of procedural nature and the same should be made optional, as was the position before the Finance Act, 2015. In order to mitigate the above discrimination as contained in the existing provisions of Section 59AA of the ITO, the following clause may be inserted in Part IV of the Second Schedule to the ITO:

“The condition of 100% shareholding in the subsidiary company by the holding company as prescribed in Section 59AA is relaxed to 75% with effect from tax year 2020”.

The above amendment will also address the hardship being faced by the holding companies of companies delisted from the Stock Exchanges and failed to acquire 100% shares due to some shareholders who are either not contactable or who is unwilling to surrender their shares.

In addition, the Foreign owned 100% subsidiaries should become part of group taxation under section 59AA of the ITO who comply with the investment permission granted by the State Bank of Pakistan and Foreign Exchange Regulations of Pakistan and incorporated in countries with whom Pakistan has double tax treaty, following amendments should be made to section 59AA (3) of the ITO:

“The group taxation shall be restricted to companies locally incorporated under the Companies Act 2017 (or the Repealed Act of 1913 and Ordinance of 1984,) and where such locally incorporated companies are subsidiaries of companies incorporated outside Pakistan, the group taxation shall be allowed to the companies whose holding companies are incorporated in countries with whom Pakistan has agreement for the avoidance of double taxation and prevention of fiscal evasion under section 107 of the Ordinance and comply with investment permission granted by the State Bank of Pakistan and provisions of Foreign Exchange Regulations Act, 1947”

Preparation and filing of consolidated income tax returns results in undue hardships, along with reconciliation issues, to the taxpayers and, that too, without any additional revenue to the Government treasury. Moreover, at the time of monitoring / other tax proceedings, consolidated return creates difficulties to the tax officers to understand reconciliation between figures reported in the income tax return on consolidated accounts basis with standalone figures reported in monthly / annual withholding statements of the Parent / Subsidiary company.

Under normal circumstances, the condition of 100% ownership can easily be met but there may be situations where, due to circumstances beyond the control of the holding company, it is not possible to hold 100% shares in the subsidiary company.



For instance, in case where certain shares are owned by employees or when a subsidiary company is listed for substantial number of years and subsequently becomes delisted, some minor shareholders remain untraceable for a variety of reasons and therefore the holding company is unable to acquire all the shares although it is willing to do so. It is also pertinent to mention that in a number of countries, there are instances where 100% ownership by the parent is not mandatory for the purpose of availing the benefit of group taxation. The required percentage of shareholding by the parent company to avail the benefit of group taxation in France is 95%, Spain & UK is 75% and that in Denmark & Italy is 50%.

Rationale

In terms of Section 59B of the ITO, holding company is required to maintain 55% shareholding in case one of the companies in the group is listed whereas 75% shareholding is required to be maintained if none of the companies in the group is listed. The provisions of Section 59AA of the ITO requiring 100% ownership to avail group taxation are discriminatory if compared with the provisions of Section 59B of the ITO, allowing group relief to the companies.

Furthermore, extension of group taxation to foreign subsidiaries will not only result in declaration of foreign subsidiaries and compliance with SBP permission and foreign exchange regulations (positively impacting balance of payment) but in line with international principles of group relief extending cross border like in EU group relief companies can include any tax resident subsidiary in any of the EU countries.

3.48 GROUP RELIEF - SECTION 59B

Section 59B seeks to provide group relief in the form of adjustment of losses between holding and subsidiary or subsidiary-to-subsidiary if they fulfil the minimum holding criteria. The required holding is 55%, if one of the companies in the group is a listed company and 75% if none of the companies in the group is listed company.

The law further prescribes certain conditions that the group companies have to fulfil in case they avail the facility of group relief. The conditions are set out in sub- section (2) of Section 59B. One of the conditions under sub-section 2(c) of Section 59B is as follows:

“…. holding company, being a private limited company with seventy-five percent of ownership of share capital gets itself listed within three years from the year in which loss is claimed.”

It is proposed that clause (c) of sub-section (2) of Section 59B be substituted as follows:

“At least one of the companies of the group shall get itself listed within three years from the year in which loss is claimed if all companies of the group including the holding company are private limited companies.”

Similarly, sub-section (1A) restricts the admissibility of loss of the subsidiary company to the percentage of shareholding in the subsidiary, which requires to be revisited in view of provision of sub-section (6).

It is proposed to delete sub-section (1A) as sub-section (6) puts a condition on the loss acquiring company to transfer cash equal to the amount of tax payable on profits to be set off against the acquired loss to the loss surrendering company.

Rationale

This would bring the condition in line with other condition of minimum holding discussed above where a higher holding is only required if none of the companies in a group is a listed company.



Further, the requirement to list the holding company is against the principle of group formation and consolidation as a group may not like to keep its investments in a listed company due to the risk of hostile takeovers etc. as in such an event the group may lose control on its entire entities within the group.

Restricting the availability of loss to the percentage of shareholding, when cash equal to the amount of tax payable on the profit to be set off against such loss, is unjustified.

3.49 PROVINCIAL WWF AND WPPF – SECTION 60A & 60B

After 18th Constitutional Amendments, matters relating to Welfare of Labour, conditions of labour, and workmen’s compensation, Health Insurance including invalidity pension, old age pension are provincial subjects as mentioned in Serial No.26 of concurrent legislative list at Part II of the Fourth Schedule to the Constitution of Islamic Republic of Pakistan.

Consequently, provinces have enacted or in the process of enacting their respective laws. Therefore, an amendment in Income-tax law is required to take into account deduction for WWF and WPPF paid under provincial laws.

It is proposed to amend these sections to provide for availability of a deductible allowance for any amount paid as WWF or WPPF under the provincial laws by the taxpayer.

Rationale

To remove the anomaly and facilitate the taxpayers for claiming contributions to WWF and WPPF as deductible allowance in determining their taxable income.

3.50 EXTENSION OF TAX CREDIT ALLOWED- SECTION 64B

It is proposed that tax credit for employment generation by manufacturers under section 64B of the ITO be extended and appropriate amendment in the condition for such tax credit be made.

Rationale

It was an excellent provision for promoting employment generation. 3.51 TAX CREDIT FOR INVESTMENT – SECTION 65B

Rate of tax credit for investment should be restored to 10 percent and period of investment be extended up to 30th June 2025.

Rationale

a). This will gear up investments in the industrial sector resulting in job creation and increased tax revenues for the Governments once the unit starts earning profits and will improve declining growth rate in GDP.

b). Limitation of time period from 30th June 2021 to 30th June 2019 will adversely impact the pipeline projects specially when planning of these were done while taking effect of tax credit (major factor to push this planning into viability).

c). This is also contrary to the present Government’s vision that continuity of policies is critical for sustainable development, and the government is striving to promote industrialization, wealth creation and tax culture to place the country on the road to sustainable economic growth.

d). Investment incentives are provided worldwide, these have contributed to the rapid economic growth of countries such as the Republic of Korea, Malaysia, Mauritius, Ireland, Taiwan, and Singapore.



3.52 INCOME TAX CREDIT TO SALES TAX REGISTERED PERSONS- SECTION 65A

No income tax credit is presently available to sales made to sales tax registered persons. The tax credit available u/s 65A, introduced by the Finance Act, 2009, was withdrawn by the Finance Act, 2017.

It is proposed to re-introduce the tax credit allowed u/s 65A with a revised sales threshold of 75%, and such credit should be available to all taxpayers instead of only manufacturers.

Rationale

It was an excellent provision for promoting documentation and broadening of tax base. 3.53 RECOGNITION OF GAIN ON GIFT BY NON-RESIDENTS - SECTION 79

Under sub-section (1) of Section 79, no gain or loss is taken to have arisen on the disposal of an asset, inter alia, by reason of (i) a gift of an asset, (ii) on the transmission of an asset on the death of a person, or (iii) on the parting of an asset by a company or an AOP to its shareholders or members on liquidation of the company or on dissolution of the AOP. However, the concession of such transfers not being treated as a taxable event is not available, where the person acquiring the asset is a non-resident person at the time of the acquisition [subsection (2)].

It appears that the restriction has been placed to avoid a situation where assets are transferred under the garb of the above non-recognition provisions to such non-residents who are not liable to tax on any subsequent disposal of such assets either due to domestic provisions on geographical source or under any beneficial provisions of the Double Tax Treaty.

However, if the above rationale is assumed to be correct, the only situation where the above provisions can be misused is the case of ‘gift’. In other cases, there appears to be no plausible reason for treating the gain or loss as taxable in the hands of transferor especially in the case of death of a person as well as on liquidation of company (when the definition of dividend already includes distribution of assets to the extent of accumulated profits).

Sub-section (2) of Section 79 be restricted to gifts only, i.e. clause (c) of sub-section (1). Rationale

This provision could cause genuine hardship in cases of transmission of assets on the death of a person, to the person’s non-resident family members. In the case of distribution of assets to non-resident shareholders or non-resident members of an AOP on liquidation of the company or dissolution of the AOP, the gain would be taxable in the hands of the liquidated company or the AOP. The law is illogical since it is not the non-resident transferee of the asset that is being affected but the resident transferor, who will cease to exist on death or liquidation.

3.54 CAPITAL GAIN ON SCHEME OF ARRANGEMENT AND RECONSTRUCTION - SECTION 97A

"No gain or loss shall be taken to arise on disposal of asset from one company (hereinafter referred to as the “transferor”) to another company (hereinafter referred to as the “transferee”) by virtue of operation of a Scheme of Arrangement and Reconstruction under sections 282L and 284 to 287 of the Companies Ordinance, 1984 (XLVII of 1984) or section 48 of the Banking Companies Ordinance, 1962 (LVII of 1962), if the following conditions are satisfied, namely...

(d) scheme is approved by the High Court, State Bank of Pakistan or Securities and Exchange Commission of Pakistan, as the case may be, on or after first day of July, 2007."



The existing reference to Companies Ordinance 1984 should be replaced with references to the corresponding sections of the Companies Act 2017.

Furthermore, section 97A should also be amended to the extent of amendment made in section 284(2) of the Companies Act 2017. Section 284 (2) of the Companies Act 2017 has waived-off the requirement of approval of the Scheme of Arrangement and Reconstruction by the High Court for amalgamation of two or more companies, each of which is directly or indirectly wholly owned by the same person.

Rationale

In the absence of corresponding amendments in the Income Tax Ordinance 2001, approval of the High Court or the Securities and Exchange Commission of Pakistan is still required.

3.55 EXPRESSION ‘ANY BUSINESS CONNECTION’ - SECTION 101(3) (d)

The words ‘any business connection’ have very broader meaning. The same has been used liberally by tax authorities even for activities carried out by independent third parties including but not limited to distributors and other intermediaries, in the ordinary course of their own business, outside Pakistan. This results in unnecessarily extending the scope of Pakistan source income.

It is proposed that clause (d) in sub-section (3) of Section 101 be omitted for clarity and preventing its misinterpretation.

Rationale

The concept of ‘any business connection’ is no more applicable internationally due to the usage of the term ‘permanent establishment’, which is understood internationally in the context of Double Taxation Treaties and their commentaries.

3.56 FOREIGN TAX CREDIT - SECTION 103(7)

A credit is allowed under Section 103(7) only if the foreign income tax is paid within two years after the end of the tax year in which the foreign income to which the tax relates was derived by the resident taxpayer.

This sub-section should be omitted. Alternatively, the period of two years should be increased to at least five years.

Where a taxpayer adopts accrual basis of accounting, the foreign source income is offered to tax in the year in which it becomes due. However, receipt of the income in some cases is delayed beyond the time period of two years due to procedural limitations and regulations imposed by the remitting country. The taxpayer in this case is unable to claim foreign tax credit (usually withheld by the remitting country in the year of payment) on the income already taxed two years ago.

Rationale

In many countries, assessment of the income and tax liability takes a long time and the tax paid on completion of such assessments cannot be claimed due to the limitation of two years from the end of tax year. In particular, this problem is very common in case of resident taxpayers deriving foreign source income from Azad Kashmir, which for taxation purposes is treated as a foreign country.

Further, where a taxpayer adopts accrual basis of accounting, the foreign source income is offered to tax in the year in which it becomes due. However, actual receipt of the income and deduction of tax in some cases



is delayed beyond the time period of two years and, as a result, the taxpayer is unable to claim foreign tax credit on income already taxed on accrual basis of accounting.

3.57 TRANSACTIONS UNDER DEALERSHIP ARRANGEMENT – SECTION 108B & SECTION 21(ca)

Finance Act, 2019 introduced Section 108B penalizing the compliant taxpayers for the fault/non-compliance of dealers apparently jeopardizing the freedom of trade. Under this section, 75% of dealer’s margin shall be added to the income of the supplier where the supplier makes supplies to a person who is not registered under the sales tax and is not on active taxpayers list. Margin of dealer is to be taken at 10% for making additions to the income of the supplier.

It is proposed to delete section 108B of the ITO.

Similarly, section 21(ca) puts a restriction on admissibility of Commission exceeding 0.2% of the gross amount of supplies of items listed in the Third Schedule of Sales Tax Act, 1990, as deductible expenditure if the person receiving the Commission is not on the Active Taxpayers List.

It is proposed to delete clause (ca) of section 21 of the ITO.

Rationale

These are harsh provisions and amount to interference in the business affairs of the taxpayers. When complete particulars of the transactions are reported by the suppliers, it is highly unreasonable on the part of FBR to shift the burden of making supplies only to the registered persons listed on the Active Taxpayers List and penalize them so heavily for making supplies to unregistered persons or those who are not on the ATL. FBR should perform its duties of bringing the defaulters/non-compliant persons into tax net on the basis of information provided by compliant taxpayers in their sales tax and income tax returns and/or as and when demanded by the tax authorities.

3.58 TIMINGS FOR FILING OF RETURN OF INCOME - SECTION 114

In case of individuals, association of persons and companies the due date of filing of income tax return and statement of final tax is 30th September or 31st December.

Instead of extending the due dates of filing of tax returns etc., which causes un-necessary burden of last-minute rush of work, the taxpayers should know the due date well in advance. It is therefore proposed to fix the filing date of individuals to 31 October and for AOP to 31 December as in case of Companies.

It is also proposed to insert a proviso that the prescribed due dates will automatically stand extended by the period beyond the date of close of fiscal year taken by the FBR to issue the notification of return forms and readiness of the e-filing system.

Rationale

Experience shows that the return forms etc. and the e-filing system are neither notified nor ready in time. Resultantly, from time to time the due date of filing tax returns is extended by the Board mainly for these reasons.

3.59 TIME LIMIT FOR FURNISHING OF RETURN OF INCOME UPON NOTICE FROM COMMISSIONER – SECTION 114 (4)

The Commissioner is empowered to call for the return of income from any person who in his opinion was required to file a return of income for the current year or any of the preceding five years but has not furnished



the same. A minimum time of 30 days was required for compliance. Through an amendment in Section 114(4), this minimum period has been dispensed with and left open at the discretion of the Commissioner. The amendment made through Finance Act, 2013 should be withdrawn.

Rationale

The dispensation of the minimum time for compliance of notice under Section 114(6) [furnishing of return of income upon notice from Commissioner] means further discretionary powers to the Commissioner. There may be cases where the return could not be furnished within the short time allowed by the Commissioner for genuine reasons.

3.60 ALTERNATIVE DISPUTE RESOLUTION- SECTION 134A

"…The decision of the committee under sub-section (5) shall be binding on the Commissioner and the aggrieved person..."

The words "with further recourse to the appropriate court of law" should be added at the end of the sub-section 7 of section 134A.

Rationale

Taxpayers should not be deprived of their fundamental rights to appeal against decision which is prejudicial to their interest. They should have a recourse against the decision of ADRC before the court of law.

3.61 RECOVERY OF TAX - SECTION 140 (1) (b)

It has become practice of tax authorities of visiting the taxpayer’s bank with a notice u/s 140 without first exhausting the requirement of notice u/s 138 of the ITO and coercing the bank manager to immediately pay the amount from taxpayer’s account against the tax amount recoverable or else face the consequences. In some cases, recoveries have been made in haste even where the matter has already been decided by the judicial forum in favour of taxpayer or even where huge amount of refund is pending to the taxpayer exceeding the amount of demand raised.

While recognizing the need of some surety of recovery for the exchequer, in view of some cases where the taxpayers tend to deliberately avoid payment of tax by resorting to malpractice of withdrawing money from their account, it is suggested (in view of parallel presentation of compliant, honest and prestigious taxpayers) to first exhaust the requirement of section 138 to allow all taxpayers some time to resort to legal means of contesting the recoveries which are considered by the taxpayers to be unlawful.

After having exhausted the requirement of section 138 of the ITO, the win-win situation for both the exchequer and taxpayers would be to ask the taxpayer’s bank, by a notice in writing, to freeze the bank account(s) and set-aside the amount sought to be recovered, in the first instance, till end of the fifteen days from the date of receipt of notice served on the bank and in the second instance, requiring the bank to make payment of the default amount after end of fifteen days unless the bank notice of recovery is withdrawn. Necessary amendment is suggested in the law to incorporate the above proposal.

Rationale

This practice of tax authority has shaken the confidence of the taxpayers at the altar of so-called taxpayer friendly policies of FBR. The amendment is necessary to build the confidence of the taxpayers and to meet end of justice. The practice of raiding the banks to collect highly unreasonable and disputed tax, which is yet to meet the test of first appeal, has in many cases in the past crippled the operation of taxpayers.



3.62 DEDUCTION OF TAX FROM PAYMENT OF SALARY - SECTION 149

The employer is entitled to make certain adjustments from the average rate of tax for the purposes of deducting tax from payment of salary, which includes tax credits under section 61, 62, 63, and 64.

It is proposed to rewrite this section to provide full coverage to the following provisions of the ITO for computation of withholding tax due from salary by the employer in each tax year:

Allow adjustment of “Deductible allowances" available under Part IX of Chapter III of the ITO;

Allow adjustment of “Tax credits" available under Part X of Chapter III, read with Second Schedule, of the ITO;

Allow adjustment of “Advance tax” collected at source under Chapter XII of the ITO; and Allow application of average rate of tax of preceding three tax years for determination of withholding tax on

payments received by an employee under sub-clause (iii) of clause (e) of sub-section (2) of section 12 of the ITO.

Rationale

The amendments are necessary to ensure that the employees are allowed full adjustments of all withholding taxes deducted or collected and tax credits, and applied the applicable rate on payments subject to average rate of preceding three tax years, and the employees do not suffer tax in excess of what is due.

3.63 PERSONS REGISTERED UNDER THE SALES TAX ACT - SECTION 153

Through Finance Act, 2013 every Sales Tax Registered person was added in the list of prescribed persons for the purposes of Section 153. As a result, small entities in the status of AOP and Individual registered under the STA have also been made withholding agents without any threshold. These small entities are mainly suppliers to withholding agents under the ITO who fall in the definition of wholesaler under the STA.

This category introduced vide Finance Act 2013 under Section 153(7) (i) (j) should be deleted or alternatively be restricted to persons having annual turnover of Rs.50 million or more.

Rationale

To be a withholding agent for such small entities is very cumbersome and requires additional resources and cost. We understand that the monitoring cost and resources required by FBR has no cost benefit. Further this provision is a bottleneck in registering under the STA.

3.64 RATE OF WITHHOLDING TAX ON SERVICES & EXECUTION OF CONTRACTS – SECTIONS

152(2A)(c) and 153(1)(c)

Different rates of withholding tax are prescribed for rendering and providing of services and execution of contracts. Currently, it is not easy to differentiate between services and execution of contracts, particularly in case of composite contract. This confusion is always a cause of concern for the taxpayers and withholding agents.

It is proposed that the rates of withholding tax for rendering or providing of services and execution of contracts be aligned; or alternatively, the expression “execution of contract” be defined for the purposes of Section 152(2A)(c) and 153(1)(c) to prevent the confusion that exists and leads to controversy. One suggestion could be to adopt the definition as given by the FBR in Circular issued under the repealed 1979



Ordinance where the term was defined to include certain specific types of contracts, such as Construction contracts, Engineering Contracts, Labour Contracts, etc.

Rationale

Probability of wrong application of law will be minimized as the expression “execution of contract” is unique in Pakistan and leads to ambiguity.

3.65 WITHHOLDING TAX ON PAYMENTS FOR GOODS – SECTION 153

Prescribed persons are required to withhold tax from payments exceeding Rs. 75,000 in aggregate per annum to a supplier of goods. Such withholding tax is adjustable for manufacturing companies and listed companies.

Manufacturing companies and listed companies should be excluded from the purview of such tax withholding as it is already adjustable and quarterly advance tax is also being paid by such companies.

Rationale Such tax withholding results in creation of huge tax refunds which are very difficult to be liquidated,

especially in the current scenario. This will result in ease of doing business for regulated sector and will encourage corporatization, moreover there will be no loss of revenue as quarterly advance tax is mandatory for such taxpayer along with annual filing of tax return and payment related thereto.

3.66 WITHHOLDING TAX ON PRIZES - SECTION 156

Withholding tax @ 20% is required to be withheld from prizes offered by companies for promotion of sales.

The term Prize should be distinguished from normal trade schemes which are offered by manufacturing & trading companies to their distributors and dealers as per the business norms. The following explanation should be added under Sec 156:

"The term Prize means winning by chance and does not include - free samples, - promotional giveaways of petty amounts, and - payments either in cash or in kind to any person on achieving sales target. The explanation shall be deemed always to have been so added and shall have effect accordingly" Rationale The tax authorities tend to treat the normal trade schemes like post sales discounts, free issues, promotional

giveaways and target incentives as 'prize', and accordingly demand 20% withholding tax. 3.67 WITHDRAWAL OF BALANCE UNDER PENSION FUND - SECTION 156B

A pension fund manager making payment from individual pension account maintained under approved pension fund is required to deduct tax at source under Section 156B.

Under clause (23C) of Part I of Second Schedule to the ITO the amount withdrawn from the voluntary pension fund representing the amount transferred from an approved provident fund is exempt from tax. However, the corresponding exemption from deduction of tax at source under Section 156B from such withdrawal is not available.



In Part IV of the Second Schedule following clause should be inserted:

“The provisions of section 156(B) shall not apply on the amounts withdrawn from the voluntary pension funds which are exempt from the tax under Clause (23C) of Part I of the Second Schedule of the Ordinance.”

Rationale

In the presence of exemption from taxation of said income, there remains no logic for withholding of tax on disbursement of such income.

3.68 BAR ON SUITS IN CIVIL COURTS – SECTION 227

Amendment brought through Finance Act 2018 by inserting the words “or any notice issued” at two places in sub-section (1) of Section 227 should be deleted.

“... No suit or other legal proceedings shall be brought in any civil court against any order made [or any notice issued] under this Ordinance and, no prosecution, suit or other proceedings shall be made against any person for anything which is in good faith done or intended to be done under this Ordinance or any rules or orders made [or any notice issued] thereunder...”

Rationale

Obtaining interim relief from civil courts against Show Cause notice is a remedy available to taxpayers in respect of unjustified tax demands. Restriction on obtaining stay against Show Cause notices will result in undue harassment of taxpayers. The bar on filing suits in civil courts is surely contrary to the provisions of the Constitution of Pakistan.

3.69 ADVANCE TAX ON PRIVATE MOTOR VEHICLES LEASED BY ‘MODARABA’ - SECTION 231B

Currently advance tax under Section 231B applies on purchase of locally manufactured motor vehicles. Persons such as ‘Modaraba’ have to bear this tax on the motor vehicles leased by them.

‘Modaraba’ should be exempted from payment of advance tax under Section 231B in respect of vehicles leased by them. It may be provided by inserting following new clause in Part IV, Second Schedule of the ITO:

“The provision of sub-section (1) of section 231B shall not apply to Modarba companies”.

Rationale ‘Modaraba’ is exempt from income tax provided they distribute 90% of the profits to their members

(shareholders). Thus, a ‘Modaraba’ being a lessor cannot adjust the advance tax paid which results into refund claim.

3.70 ADVANCE TAX - SECTIONS 236G & 236H

Currently, varying rates of advance tax is provided for sale of same goods, except for fertilizer, specified in sections 236G when sold to wholesales and dealers by the manufacturer and commercial importer (i.e. 0.7% for fertilizer and 0.1% for others), and Section 236H when sold to retailers by the manufacturer, distributor, dealer and wholesaler or commercial importer (i.e. 1% for electronics and 0.5% for others).

It is proposed that a uniform rate of 0.1% is provided for the advance tax u/s 236G and 236H for all items. Rationale It is unreasonable and discriminatory to have separate rates of advance tax on the same goods when sold to

dealers and distributors and retailers.



3.71 START-UP BUSINESS - SECTION 2(62A) & CLAUSE 143 OF PART I OF SECOND SCHEDULE

Exemption granted to start up business in the IT sector for 3 years having a turnover threshold of Rs.100 million should be extended to at least 5 years with turnover threshold of Rs.250 million.

Rationale

This will attract more investment in the IT sector thereby creating more employment opportunities, which in turn will generate revenue for the government.

3.72 EXEMPTION FROM MINIMUM TAX

Clause 126E of Part I & Clause 11A of Part IV of Second Schedule Clause 145A, 146 & Clause 11A of Part IV of Second Schedule Since income of Zone enterprise is exempt from income tax under clause 126E of Part I of Second Schedule

to ITO, it is proposed that exemption be granted to Zone enterprises from the application of minimum tax under section 113 of the ITO by inserting a sub-clause in Clause 11A of Part IV of the Second Schedule to the ITO.

Similarly, the income of residents of former FATA/PATA are not chargeable to tax under clauses 145A and

146 of Part I of Second Schedule to ITO up to 30 June 2025, it is proposed that the minimum tax u/s 113 of the ITO should also be made inapplicable until 30 June 2025.

3.73 CONSTRUCTION CONTRACTS EXECUTED AND SERVICES RENDERED OUT OF PAKISTAN - CLAUSE (3) OF PART II OF 2ND SCHEDULE

Construction contracts executed and services rendered outside Pakistan (subject to the conditions that the income/receipts are brought into Pakistan through proper banking channel) were previously taxable at flat rate of 1%. Through Finance Act, 2016, the rate of tax has been enhanced to be equal to 50% of the withholding tax rate applicable to similar services and contracts in Pakistan.

As the export of services from Pakistan could not be tapped to its enormous potential, increase of tax rates is likely to work as a disincentive to the execution of construction contracts and rendering of services outside Pakistan, which is already lagging behind.

It is proposed that the previous rate of 1% should be restored, to provide incentive for execution of construction contracts and rendering of services outside Pakistan.

Rationale

It would not only increase the export of services by the existing taxpayers, but would also encourage the persons outside the tax net to bring foreign exchange into Pakistan by making tax declarations.

3.74 CONDITION FOR POWER PROJECTS - CLAUSE 132 - PART I OF 2ND SCHEDULE

One of the conditions [i.e. condition (c)] of Clause 132 of Part I of Second Schedule to the ITO for claiming exemption from income is that the power project is “owned by a company fifty per cent of whose share are not held by the Federal Government or a Provincial Government or a Local Government or which is not controlled by the Federal Government or a Provincial Government or a Local Government.”

This condition specifically excludes the projects owned and controlled by the Federal, Provincial or Local Governments, which does not make sense, particularly when the income tax paid is a pass-through item. It is therefore proposed to remove this condition.



Rationale

The condition is discriminatory, and, being a pass-through item, it merely poses a cash flow issue, which further aggravates the circular debt issue.

3.75 VALUE OF FURNISHED ACCOMMODATION - RULE 4

"The value of accommodation provided by an employer to the employee shall be taken equal to the amount that would have been paid by the employer in case such accommodation was not provided.

Provided that the value taken for this purpose shall, in any case, not be less than forty five percent of the minimum of the time scale of the basic salary or the basic salary where there is no time scale..."

A further proviso should be added to clarify that the first proviso is not applicable in a case where lease agreement is provided to substantiate the actual value of accommodation (rent). Overseas companies usually provide accommodation to non-resident employees to simplify their relocation process. Actual rent of accommodation provided to the employees in most of the cases is lower than 45% of their salaries.

Rationale

This results in excess taxation in the hands of employees where the actual rent is less than 45% of minimum of the time scale of the basic salary or the basic salary, as the case may be.

3.76 SUBMISSION OF AUDITED FINANCIAL STATEMENTS - RULE 34E

Proviso to section 223(5) of the Companies Act 2017 has waived the requirement for the audited financial statements for a Company having paid up capital of not exceeding 1 million rupees. Rule 34E of the Income Tax Rules 2002 should be amended to include corresponding changes as in proviso to section 223(5) of the Companies Act 2017. Accordingly, the rule “In case of companies, the return of income shall be accompanied by audited accounts.” Should be substituted by the following:

“the return of income of companies shall be accompanied by audited accounts where the companies are required to have their accounts audited under section 223 (5) of the Companies Act, 2017”

Rationale

To align with the requirement of the Companies Act, 2017, which exempts the companies having paid up capital not exceeding 1 million rupees from the requirement of producing audited accounts.

3.77 EDITORIAL AND TECHNICAL CORRECTIONS

It is proposed to rectify the editorial mistakes in the following provisions of the ITO:

a. Section 114(1)(ad) Reference to clause (58) of Part I of Second Schedule after its omission is redundant and needs to be

corrected; b. Clauses (56C), (56D), (56E) and (56G) of Part IV of 2nd



4 INDIRECT TAXATION

HIGHLY SIGNIFICANT PROPOSALS 4.1 REDUCED RATE OF SALES TAX FOR ALL TIER 1 RETAILERS

Currently, the tier 1 retailers engaged in the business of finished fabric, and locally manufactured finished articles of textile and textile made-ups and leather and artificial leather are allowed reduced sales tax rate of 14%, if their sales transactions are integrated with the FBR system. Unfortunately, such retailers are not interested in implementing the POS integration with FBR due mainly to the reason that the rate of 14% is not much attractive, in addition to other issues.

It is proposed that the Government should seriously consider taking following steps to achieve

implementation of POS system by retailers:

a) consider further reduction in the rate of sales tax; and b) consider extending the reduced rate to all tier 1 retailers; and c) consider removing bottlenecks that made the reduced rate offer unattractive in consultation with the

representatives of tier 1 retailers. Rationale

Tier 1 retailers are significant players and it is necessary to build their confidence in the tax system and convince them to achieve implementation of POS system.

4.2 BAR CODE ON ALL NOTICES AND ORDERS - SECTION 56(2)

Currently, the requisition, notices and orders are issued without system generated Bar Code, whereas this system is implemented by the FBR in case of income tax with effect from July 1, 2015.

It is proposed to insert the following proviso in section 56(2) of the STA:

“Provided that the notice, order or requisition served as mentioned in clauses (a) to (d) above shall be valid only if the said notice, order or requisition bears system generated bar code on them duly verifiable from the FBR’s database”

Rationale

Implementation of bar code system will strengthen the controls over the issue, delivery and action on the requisition, notices and orders, both by the tax collectors and taxpayers.

4.3 MODIFICATION OF ORDER UNDER THE SALES TAX AND FED LAW

Currently, there is no provision in the STA and FEA which is parallel to section 124A of the ITO. Section 124A allows the Commissioner to follow the judgment of the ATIR or the Honorable High Courts in any assessment pending before them until such judgment is reversed by the superior forum.

It is proposed to introduce new sections in the STA and FEA on the lines it is done under the ITO. Rationale

Such provisions will enable the tax authorities to follow the decisions of the Appellate Tribunal or Honorable High Court in taxpayer’s own case until such decisions are modified/reversed by the higher forum. This will



reduce the unnecessary litigation process and facilitate registered persons by bringing procedural harmony among tax laws.

4.4 TIME LIMIT FOR GIVING APPEAL EFFECT IN CASE OF DIRECT RELIEF - SECTION 11B OF STA AND SECTION 14B OF FEA

Currently, the Officer is required to issue an appeal effect order under section 11B of the STA and section 14B of the FEA, within one year from the end of the financial year in which appellate order is served.

It is proposed that the appeal effect in case of direct relief should be issued within a period of 60 days from the date of service of the appellate / court order.

Rationale

It is proposed to harmonize the provisions in line with the requirements of section 124(4) of the ITO. 4.5 ISSUE OF DRAFT SROs Currently, the SROs under the STA and FEA are issued without publication of draft for comments of the

stakeholders, whereas it is so done in case of income tax under section 237(3) of the ITO.

It is proposed to introduce new sections in the STA and FEA for publication of draft SROs for comments of stakeholders before their implementation.

Rationale

The issue of SROs without publication of drafts for seeking comments is contrary to the procedure followed in case of income tax, and it is also against the judgment of the Honorable Supreme Court (2009 SCMR 1279)

4.6 RATIONALISATION IN TIME LIMIT FOR COMPLIANCES / FILINGS – SECTIONS 7, 9, 66 & 73 The time period specified in various sections and rules require rationalization to facilitate compliances by the

taxpayers.

Moreover, such powers are being used by Commissioners Inland Revenue to allow condonation to tax officers to perform tax assessment for time barred cases, which is against the spirit of these sections.

Powers of condonation be allowed to be used rationally with specific restrictions on condonation for tax assessment of time barred cases.

It is proposed to rationalize the time period provided in the following sections:

i. Time period for claiming of input tax u/s 7 should be increased from 6 months to 1 year. ii. Time period for filing of refund claim u/s 66 should be increased from 1 year to 2 years. iii. Time limit of 180 days for payment of input tax u/s 73 should be either withdrawn as under STRIVE it is

now allowed when the sales tax is paid by the seller; or the time limit be increased to at least 1 year. iv. Time limit for issuing debit / credit notes u/s 9, as provided under the rules, should be increased from 180

days to 1 year. Rationale

The implementation of this proposal will not only facilitate taxpayers but will also reduce the burden of seeking approvals for condonations and related workload of both taxpayers and tax collectors.



4.7 ADVANCE RULING FOR SALES TAX

Currently, there is no provision in the STA which allows a person to seek advance ruling on any sales tax matter from the FBR, as it is allowed to a non-resident in case of income tax under Section 206A of the ITO.

It is proposed to insert a new section in the STA to allow a person to obtain an advance ruling on any sales tax matter from the FBR.

Rationale

Advance Ruling should be able to assist greatly in case of merger and acquisition transactions and entering into business in Pakistan by the foreign investors.

4.8 INPUT TAX ON PROVINCIAL SERVICES – SECTION 8(1)(j)

The Finance Act, 2015 inserted clause (j) in Section 8(1) to put a restriction on claiming input tax on services (including reduced rate services) where such input tax adjustment is barred under the respective provincial sales tax on services laws.

It is proposed to delete clause (j) as it is contrary to the generally accepted principles of VAT worldwide. Rationale

It is unjust to prevent a taxpayer paying output tax at the general rate (full rate) from claiming the input tax suffered at reduced rate whether it is paid under the Federal or Provincial sales tax laws.

4.9 ADJUSTABLE INPUT TAX – SECTION 8B Presently, Section 8B restricts the claim of input tax up to 90% of the output tax and requires mandatory

payment of 10%. At the time of introduction of section 8B, various stages of value additions were not subjected to sales tax, however, post Finance Act, 2019, almost all value addition cycles are subject to sales tax.

Input tax is now applicable almost on all value additions by the manufacturer, e.g. conversion cost [gas / electricity], transportation charges, manpower services and even on import of Plant & Machinery. These are in fact “VALUE ADDITIONS” in the process of manufacturing.

Considering the aforesaid changes, it is proposed to delete Section 8B as a mandatory payment of at least 10% of the output tax (even though the input tax may be greater than output tax) is highly unjustified.

Alternatively, the mandatory payment of 10% should be reduced to 5% for manufacturing sector owing to the fact that input tax is now applicable on almost all stages of manufacturing.

Rationale

Any provision deferring the claim of legitimate input tax / refunds of a registered person is not justifiable in any fiscal law as it poses serious liquidity problems for the taxpayers.

4.10 UNFAIR APPLICABILITY TO EXPORTERS – SECTION 8B

Currently, section 8B does not apply to manufacturers achieving an export threshold of 50% on a monthly basis.



Section 8B restricts Input tax adjustment to the extent of 90% of the Output tax [i.e. ratio of Input / Output ≤ 90%]. Input tax relating to Exports is included in working out the 90% limit, therefore, manufacturers failing to achieve the threshold of 50%, are always forced to pay minimum tax as per existing condition.

In order to facilitate the manufacturers engaged in exports, the threshold for non-application of section 8B should be relaxed from 50% to 20%.

Rationale

This change is more likely to courage manufacturers to maximize export of their surplus production. 4.11 ADJUSTMENT OF PRIOR PERIOD REFUND CLAIMS AGAINST SUBSEQUENT LIABILITIES – SECTION 10

Section 7 of STA allows taxpayer to adjust input tax paid on purchases from their output tax liability within six months. Section 10 of STA allows taxpayer to file refund claims in case input tax paid on purchases exceeds output tax on account of zero-rated local supplies or export, while for non-zero-rated cases the Rule 34 of STR allows selected category of taxpayers to claim refunds instead of carry forward of unadjusted input tax.

Further, Section 10 of STA requires payment of refund claims within 45 days of the filing. However, practically refund claims are neither processed nor paid within the prescribed time.

It is proposed to address this issue by inserting a proviso or sub-section in Sections 7, 10 and 66 of STA to allow taxpayers to adjust refund claims against any subsequent tax liability in any of the following three situations:

1. where the refund application is filed but the processing did not commence; or 2. where the application is processed and the registered person has complied with all the requirements of the

Tax Department, but the refund payment order (RPO) has not been issued; or 3. where the RPO has been issued, but the Refund Cheque is neither received, nor credited into account of

the taxpayer. Rationale

Timely refund of sales tax has always been a painful and disturbing issue for the taxpayers from liquidity perspective, and it would be a welcome move if the refunds are allowed within a reasonable time whether in cash or through adjustment against any existing or future tax liability to Government under any fiscal laws.

4.12 REFUND / INPUT TAX CREDIT NOT ALLOWED SECTION 21(3)

Under sub-section (3) of Section 21, the invoices issued by a person during the suspension of his registration shall not be entertained for claiming sales Tax refund or input tax credit. Further, once such person is black listed, the refund or input tax credit claimed against the invoices issued by him, whether pre or post black listing, shall be rejected through a self-speaking appealable order and after affording an opportunity of being heard to such person.

It is proposed to rationalize the provisions of Section 21(3) to create an exception to allow input tax in the following situations:

a) where the buyer holds valid tax invoice; b) where the supplier’s name was appearing in the Active Taxpayers’ List at the time when purchases were made;



c). where purchase relates to the date prior to the date of suspension and blacklisting; and d). where the payments were made through banking channel in compliance with Section 73 of the STA. Rationale

Refund/Input tax is only claimable by buyer once the same is deposited into the Government treasury by the supplier, therefore, there is no justification for disallowance of input tax adjustment claimed by the buyer in respect of period prior to blacklisting / suspension and that too for non-compliance of the supplier without knowledge of buyer at the time of execution of transaction. A registered person should not be deprived of his legitimate right of input tax relating to period before suspension or blacklisting of supplier if the transaction is falling in the ambit of abovementioned situations. The principle of natural justice demands that a taxpayer should not be penalized for a non-compliance of another taxpayer. It is also so held by the Honorable Lahore High Court in its judgement STR No.98/2014 dated March 12, 2015 and eSTR No. 207/16 dated 16.10.2018.

4.13 SERVICE OF ORDERS & DECISION- SECTION 56 OF STA & 47 OF FEA

The Finance Act 2017 inserted clause (d) in Sub- section (1) section 56 of STA and in sub-section (2) of Section 47 of FEA, whereby the service of notice and order are treated as properly served if they are served electronically through email or to the e-folder maintained for each taxpayer on IRIS. This was not a welcome provision as the taxpayers have been finding it difficult to switch over to the changed system from the traditional service of notice as fully elaborated in these sections. Accordingly, it became a point of dispute in appeal that notices sent or order served electronically did not reach the taxpayer mainly for the following reasons:

a) it was not practically possible for most of the taxpayers to visit e-folder every day for one reason or the

other. Most common issue would be absence of concerned employee or his slackness; or b) in various cases, the email address of the senior person is given who may not be checking his emails on

a regular basis.

Considering the above, and for the rationale provided below, it is proposed that electronic service of notice may be declared mandatory, but until such time, the taxpayers are well conversant with the computers and developed the skills and habits to visit electronic sites regularly, the following proviso should be inserted to provide for simultaneous delivery of notices and orders as was done prior to introduction of electronic delivery.

“Provided that the service of notices, orders, etc. referred to in clause “d” shall be treated as validly served if the same has been duly served under any of the clauses “a” to “c” above.”

Similar proviso should be inserted in section 47(2) of the FEA Rationale Most of the taxpayers may not have been using computers or have expertise to use email either due to lack of

skills or absence of internet or both, and may have used someone else’s email ID for access to IRIS; or outsourced the work to a friend or third party, who may not necessarily be under obligation to access the electronic site regularly and passing on the information to the taxpayers.

4.14 INADMISSIBLE INPUT TAX - SECTION 73

Section 73 puts a time limit of 180 days for the buyer to make the payment to the suppler, failing which the input tax of buyer becomes inadmissible. It appears to be a harsh proposition considering the fact that related sales tax is already paid by the supplier into government treasury at the time of issuing tax invoice.



Section 73 further does not have any provision that accepts the concept of constructive payments where both the buyer and the seller may also conduct business with each other and they have both receivable and payable accounts with each other and they decide to knock off the receivable and payable and make the net payment to the other to settle their account.

It is proposed to insert a proviso to section 73 which allows constructive payments in the form of set off as discussed above. It is also proposed to prescribe proper procedure that the taxpayers would follow to evidence the constructive payment.

Rationale

The knocking off of receivable and payable with the same party is normal in every business and that should be accommodated under the STA. This has already been accepted in case of ITO by Circular No. 1 of 2009.

4.15 CONDONATION OF TIME LIMIT - SECTION 74 OF STA AND 43 OF FEA

In terms of Section 74 of the STA and Section 43 of FEA read with notifications SRO 394(I)/2009 and 395(I)/2009 respectively, the Commissioner and the Board are allowed to condone a lapse of one year and more in any compliance related issue respectively, where any timeline has been prescribed under any provision of the law.

However, e-FBR web portal does not allow automatic adjustment of purchase invoice or debit / credit notes where manual condonation has been granted by the Commissioner or the Board, as the case may be. Further, there is no procedure for e-filing of Condonation Applications. The taxpayer has to file manual applications and physically follow-up with the Tax Officers for processing.

Furthermore, there is no prescribed time limit to decide condonation applications or filing of review application where the application is rejected by the Commissioner.

It is proposed to insert a provision within the STA and FEA to address the following:

a) a detailed mechanism for e-filing of Condonation Applications and approval may be laid down by the Board;

b) on approved of the Condonation Application, it should automatically be uploaded and available on STRIVE system;

c) where the Condonation Application is rejected by the Commissioner, it should be subject to review by the Chief Commissioner or the Board, as the case may be; and

d) a timeline should be provided for deciding the Condonation Application or the Review Application, failing which the Condonation or the Review Application, as the case may be, shall be deemed to have been treated as approved. The timeline provided shall exclude the additional time requested by the taxpayer to provide any additional information or explanation or evidence required by the Commissioner or the Chief Commissioner or the Board, as the case may be.

Rationale

The above changes are necessary to make the process efficient and prevent unreasonable delays, reduce the costs to the taxpayers, and ensure proper accountability of the FBR officials in attending to taxpayers’ genuine issues.

4.16 EXTRA TAX ON ELECTRIC / GAS BILLS

In terms of S.R.O. 509(I)/2013, every electric power and gas distribution company / organization supplying electricity or gas to commercial & industrial consumers is required to charge and collect extra tax @5%



having monthly bill exceeding Rs. 15,000/- and which have either not provided their sales tax registration number or not appearing in the Active Taxpayers’ List. It also provides for payment of extra tax on accrual basis by the Utility companies.

It is proposed to make reasonable amendments in the SRO 509(I)/2013 to provide for the following:

a) extra tax should be recovered on actual receipt of the bills by the Utility companies considering the reasons listed in clause (e) of “Rationale” below; and

b) make changes to prevent burdening the taxpayers with extra tax by the Utility companies to their consumers considering the practical issues being faced by them as listed under clauses (a) to (d) of the “Rationale” below:

Rationale

a) Majority of electricity connections / accounts are maintained in the name of person who possesses the ownership of commercial / industrial property. Therefore, particulars of the consumers available on sales tax registration certificate / upon FBR portal do not match with the name of the account holders.

b) Banks, Insurance companies, Telecommunication companies, Large Multinational and other similar organisations operate through numerous business locations, manufacturing premises, facilitation offices, distribution & warehouses, which, in most cases, are not in the name of such organisations. Further, sales tax registration particulars on FBR Portal do not reflect all such business places from which business operations are carried out. If the procedures envisaged in SRO 509 are followed, extra tax would be charged and collected from registered persons in respect of all of their electric connections, which are not in the name of such registered persons.

Furthermore, updating of these particulars (e.g. business locations) on FBR database may take considerable time and Banks, Insurance companies, Telecommunication companies, Large Multinationals which are already registered for sales tax, will have to bear extra tax of 5% on all such electricity and gas connections just because they are not updated in their name over FBR Web Portal.

c) Institutions owned by Federal and Provincial governments, defense organisation, social sector institution and various other service providers are either not required to obtain sales tax registration number or are registered under the Provincial Laws. Hence, they neither possess any sales tax registration number nor are required to obtain any registration under the STA. However, most of the aforesaid organisations or institutions are commercial consumers and, by virtue of the SRO, they are unnecessarily suffering extra tax.

d) Cottage Industry, retailers, hospitals, various agencies, diplomatic missions, privileged persons and organisations have been specifically exempted under the Sixth Schedule to the STA and are not required to obtain registration. However, most of the aforesaid organisations or institutions are commercial consumers and, by virtue of SRO, they are unnecessarily suffering extra tax.

e) Payment of extra tax on accrual basis (bill basis) by utility companies in the backdrop of low recovery ratio / non-payment of electricity bill by government and private institutions poses a great liquidity threat to utility companies. Hence, it is recommended that extra tax should be recovered on receipt basis, as it was never a tool for revenue generation but a penal provision to induce registration drive.

4.17 ADJUSTMENT OF EXCISE DUTY - SECTION 6 AND RULE 13

Federal Excise Duty (FED) on purchases is adjustable on payment basis rather than on accrual basis. Moreover, there is also a condition for adjustment that sales proceeds of goods including related FED are received through banking channel.

Section 6 read with Rule 13 specifically mention that the adjustment of duty of excise is allowable, only if it is paid on purchase of dutiable goods, which are used directly in manufacture or production of dutiable goods only.



This means that FED paid on acquisition of dutiable services may not be adjusted against supply of dutiable goods and further no adjustment of duty whether paid on dutiable goods or services is at all available against rendering of dutiable services.

It is proposed to make the following changes:

a) adjustment of FED should be allowed on accrual basis i.e. in the month in which purchase is made, in the same manner as it is allowed under the STA;

b) the condition of adjustment after receiving sale proceeds of goods should be abolished; c) cross adjustment of FED on acquisition of dutiable goods or services should be available for adjustment

against both dutiable goods and services charged or levied by registered person on supply, or rendering, of such goods or services;

d) the Condition of claiming FED on payment basis is inconsistent with the requirement of discharging FED liability on sale of goods on accrual basis i.e. in the month of sales/ supply.

Rationale

The above changes are necessary for addressing cash flow problem and cost of doing business of the registered person.

4.18 ADJUSTMENT OF SALES TAX AND FED REFUNDS WITH INCOME TAX, SALES TAX & FED LIABILITY AND VICE VERSA

It has been seen that a registered person’s funds are stuck with the Inland Revenue in the form of sales tax and FED refunds and, at the same time, the taxpayer is required to pay income tax at the time of assessment of his income tax liability.

It is proposed to introduce enabling provisions in the STA and FEA for adjustment of sales tax and FED refunds against sales tax, FED and income tax payable and vice versa.

It is also proposed to insert, within the laws, the existing mechanism for refund adjustment as laid down in FBR’s Circular letters dated 20 December 1999 and C.No.3(6)ST-L&P/2002 dated 24 April 2007.

Rationale

These changes are necessary to prevent accumulation of refunds and address the cash flow issues faced by the taxpayers.

4.19 DEFINITION OF FRANCHISE – SECTION 2(12a) OF FEA

The definition of ‘Franchise’, reproduced below, has been subject to varied interpretation leading to unending tax disputes.

(12a) “franchise” means an authority given by a franchiser under which the franchisee is contractually or otherwise granted any right to produce, manufacture, sell or trade in or do any other business activity in respect of goods or to provide service or to undertake any process identified with franchiser against a fee or consideration including royalty or technical fee, whether or not a trade mark, service mark ,trade name, logo, brand name or any such representation or symbol, as the case may be, is involved;

It is proposed to substitute the existing definition with the following:

"Franchise" means an authority given by a franchiser by an agreement under which the franchisee is granted any right to produce, manufacture, sell or trade in goods or to provide services or undertake any



process identified with the franchisor in consideration of a fee or charge, regardless of whether the agreement involves the use of a trade mark, service mark, trade name, logo or any such symbol.

Rationale

Existing definition is contrary to the spirit of law and commercial understanding of the said term. 4.20 FIVE EXPORT ORIENTED SECTORS

SRO 1125(I)/2011 dated 31st December 2011 applicable to five export oriented sectors was rescinded on the pretext that it was being misused to make local sales instead of exports by those sectors. Resultantly:

• Import of the industrial inputs and machinery of these five sectors which were earlier subject to 0% sales tax; also became subject to sales tax at 17% and 10% respectively.

• Processing of the goods owned by registered manufacturers of these five sectors became subject to 17% sales tax.

• The entire supply chain is paying 17% sales tax for the products / articles of these sectors which are ultimately to be exported.

Sudden removal of zero rating for export oriented sectors has financially crippled the already struggling export oriented sectors due to accumulation of huge refunds, thereby forcing the genuine direct and indirect exporters to undergo through a long drawn process of refund for issuance of RPOs.

It is proposed to revisit the change and, after proper analysis, either fully restore SRO 1125(I)/2011 dated 31 December 2011, or issue a modified SRO reducing the burden of sales tax from 17% (or 10% in case of plant and machinery) to 1% to 5% on import and local purchases of the raw materials by the five sectors.

Rationale

The withdrawal of SRO 125 has put the Pakistani exporters in jeopardy as Pakistani products are failing in competing with the products of Bangladesh, Vietnam, and others. The removal of zero rating has made it almost impossible for direct and indirect exporters to stand anywhere near global competitors.

Removal of zero rating has unnecessarily resulted in wastage of tax officers’ time in verification, and of taxpayers’ time in preparation, filing and follow up for refund claims. Moreover, in order to get maximum possible input tax adjustment, suppliers, who are able to supply locally as well as in international markets, are preferring local sales at the cost of exports to get maximum possible input tax adjustment.

SIGNIFICANT PROPOSALS 4.21 AFGHAN TRANSIT TRADE

Smuggling through Afghan Transit Trade has always been the biggest threat for economic growth, and this menace has affected all sectors if the economy. Smuggled goods through the borders of Afghanistan, Iran, China, India and the Afghan Transit Trade form a chunk of the informal economy.

It is costing the national exchequer in billions. Markets across the country are flooded with smuggled goods and local industries are struggling for survival as smuggled goods are not only easily available everywhere but are also attracting the buyers who prefer foreign merchandise.

In order to allow industry to fairly compete with unscrupulous imports and Government to benefit from increased revenue, it is proposed to implement the following protocol:



i. SCANNERS be installed at Pak Afghan Borders at Turkham and Chaman as it is presently working at Port Qasim (ICG3) Karachi for USA exports, in order to check/verify each and every container with its contents to cross verify that the same have been delivered to Afghan Border without its misuse. The scanning machines and its tracking/integration should be initiated right from import gate to Pak border to Afghanistan border.

ii. Scanning image of import should be compared with the scanning image of goods delivered to Afghan border, until then entry should remain open for scrutiny.

iii. Afghan importers should also file the entry in the WeBOC system of Afghanistan (which Pakistan is helping to develop) and then Pakistan should have access to the Afghan WeBOC system to mark the cleared container green in the Afghan WeBOC. The containers not yet cleared; or in transit; or if not cleared after 7 days of being released from Pakistan port, should be marked red (for the risk of being misused).

iv. Pakistan Customs should collect duties on behalf of Afghan government at the time of entry via Pak port and the said amount be handed over to Afghan government once the said consignment is cleared / entered into Afghanistan. ITP also to be applied on ATT imports for collection of duties for Afghan government.

v. Pakistan government should collect 17% sales tax as "commitment fee for safe transit into Afghanistan" on all imports under ATT citing past data of rise in ATT on high tariff items and the same amount should then be refunded on clearance of goods into Afghanistan, just as it is done with our exporters.

vi. Income Tax / Sales Tax registration number of Importer under ATT should be submitted in the Afghan transit trade entry filed in port of import at Karachi and the same should be verified online with Afghanistan's tax registration system. Data base of imports value per year under each registration number be maintained. Moreover, importer should be made liable to submit copy of Afghan sales tax return with Pak customs at end of the year to monitor that such importer is declaring these imports in his afghan import in order to enable him to qualify for next year under ATT. In order to circumvent this, traders may close old company and form a new company but then Pakistan will have a data base of how many companies did that. Incase Afghan Government says that Income Tax / Sales Tax registration number is not allotted to importers then they should be allowed a period of one year to create such system and allot registration number.

Rationale

Improved protocol for Afghan transit trade is necessary to curb smuggling, illegal trade and fake imports & exports.

4.22 CPEC AND THE MENACE OF SMUGGLING / ILLEGAL TRADE

China Pakistan Economic Corridor (CPEC) is a journey towards economic regionalization in the globalized world. This will deepen and broaden economic links between Pakistan and China and will surly leave a positive impact on other countries in the region.

The success of CPEC is directly proportional to three factors viz. (a) security arrangements, (b) infrastructural development and (c) smooth e-based Customs operations. Whereas, a number of initiatives are being taken, and proposed to be taken, on two fronts viz. security and infrastructure, but Customs operations, have hitherto been given little attention. In order to ensure that the foreign trade conducted through CPEC is free from menace of smuggling or illegal trade, it is proposed to take the following steps:

i. SCANNERS be installed at Pak China Borders and at Gwadar / Karachi Port in order to check / verify each and every container with its contents to cross verify that the same have been exported / imported without its misuse.

ii. Scanning image of exports from China border should be compared with scanning image of goods delivered from Gwadar / Karachi port and vice versa for imports until then entry should remain open for scrutiny.



iii. Chinese exporters / importers should also file the entry in the WeBOC system of China, and Pakistan should have access to the China WeBOC system to mark the cleared container green in the WeBOC. Entry to remain open until the same is verified by actual export / import routed through Gwadar / Karachi. The containers not yet cleared; or in transit; or if not cleared after 7 days of being released from Pakistan port; should be marked red (for the risk of being misused). In such cases, show cause notices be sent to exporters / importers, as the case may be, for further inquiry.

iv. In case of exports, goods should only be allowed in containers loaded in China and evidence of shipping line booking and Bill of Lading be obtained as proper evidence.

v. There should also be a set up for custom offices after every 200 km intervals along the routes of CPEC to ensure effective monitoring of transit trade flows.

In order to ensure swift and smooth monitoring, e-tagging be installed on vehicles carrying cargo. vi. When a vehicle crosses the designated customs office at the pre-marked route, the data of cargo

movement should automatically enter the system showing location and brief description of goods, etc. vii. The online movement of the cargo should be viewed by both customs offices at port of entry and exit.

The containers carrying cargo be sealed and de-sealed by customs at entry and exit points respectively. This will ensure safety of the cargo and avoiding en-route pilferage.

viii. Both Governments must agree to strengthen customs controls at the border and to establish "Electronic Data Interchange" (EDI) linkage between Pakistan and China on "Real Time Basis" to ensure reconciliation of export/ import data of cargo routed through CPEC route.

ix. In case of imports, evidence of payment of goods by Chinese importer to their suppliers and submission of bank guarantee equivalent to government levies to be collected on China imports by Pakistan Customs before release.

Transit cargo will be transported from and to China, which needs Customs facilitation as well as monitoring both en-route and entry/exit stations to avoid menace like presently being faced in case of Afghan Transit Trade.

CPEC also envisages establishment of export processing zones, special economic zones and free zones. This requires door-step Customs facilitation to ensure swift clearances of goods without any pilferages. More importantly, the duty/tax free goods will be transported across Pakistan, which needs en-route monitoring so that the same are not pilfered, jeopardizing the very essence of CPEC. Moreover, any smuggling/pilferage of Chinese goods en-route will have direct and serious repercussions on Pakistani industry and duty paid goods.

Rationale

A case in hand is Afghan Transit trade cargo. It used to suffer from different infirmities, which kept on hindering its smooth operations. These issues ranged from mis-declarations, delays, isolated and partial e-monitoring, en-route pilferages, smuggling etc. A number of adhoc arrangements such as verifications of cross border certificates, random examinations at port of entry and enhancement of anti-smuggling operations etc. were made, but desired results could not be fetched.

4.23 NON-ADJUSTMENT OF INPUT TAX PAID THROUGH BILLS OF ADDITIONAL DUTY (BoAD) - SECTION 7(2(ii)

The taxpayers are currently unable to claim adjustment of sales tax paid through Bills of Additional Duty (BoAD) while e-filing the sales tax return as the same is not uploaded automatically in Annexure B from FBR portal. It also restricts manual entry in the Annexure. The BoAD is generally issued in the following situations:

a) Where additional duty is paid due to difference in currency exchange rate or weight of the consignment, etc; and



b) Where the imported raw material could not be used in manufacturing items of export within the prescribed time limit provided under sales tax SRO 492(1)/2009 dated June 13, 2009 and customs SRO 490(1)/2001 dated June 18, 2001.

It is proposed to address this important issue by uploading the BoAD document on the FBR’s e-filing system portal as it is done in case of duties paid through GDs.

Rationale

It is a genuine issue and its redressal is necessary to allow the taxpayers to claim sales tax which is actually paid to the customs authorities.

4.24 SALES TAX ON TOLL MANUFACTURING – SECTION 2(33)(d) The Federal Government has been collecting sales tax on toll manufacturing charges as it has repeatedly

defined/clarified that the toll manufacturing activity falls under the definition of manufacturing. The Federal Government has further strengthened its stance over collection of sales tax on toll manufacturing by inserting clause (d) in Section 2(33) through the Finance Act, 2015; followed by FBR clarification letter dated January 8, 2016 to KCCI that only the Federal Government is authorized to charge and collect sales tax on processing of goods owned by other persons.

Whilst the Federal Government is considering toll manufacturing charges paid to a third party as chargeable to sales tax, the Governments of the Punjab and Sindh have ruled that the toll manufacturing activity is a service and chargeable to provincial sales tax. This has created a tax controversy between the Federation and Provinces, but the dispute is heavily impacting the taxpayers, as they cannot afford to pay taxes to both Federal and Provincial Governments.

It is proposed to address this dispute immediately to save the taxpayers from making payment of sales tax in duplicate and bear the cost of fighting the tax controversy thrust upon them due to indecision of the two governments.

Rationale

Making the taxpayers to bear the brunt of disputes between the federal and provincial revenue authorities is highly unreasonable and amounts to financially crippling the toll manufacturers.

4.25 HIRE PURCHASE - TIME OF SUPPLY & VALUE OF SUPPLY - SECTION 2(44) & 2(46)

Section 2 (44) defines time of supply in case of supply of goods under hire purchase agreement to be the time at which agreement is entered into.

Hire Purchase’ (HP) transaction involves payments in instalments over a period of time. Currently, Sales Tax is being charged at the time of signing of hire purchase agreement, which invariably means charging of sales tax on full value of the transaction under the agreement.

It is proposed to modify the definition of ‘time of supply’ for incidence of sales tax under Hire Purchase Agreement be linked with the time of payment of each instalment.

It is also proposed to modify the definition of ‘value of supply’ to exclude the element of interest embedded in each instalment paid under the hire purchase.



Rationale

Charging sales tax on full amount including embedded interest at the time of signing of hire purchase agreement is not justified.

4.26 SALES TAX ON ADVANCES - SECTION 2(44)

Prior to amendment made in Section 2(44) through the Finance Act 2013, Sales tax was levied at the time of actual delivery of goods regardless of time of payment. Subsequent to the amendment, sales tax is also being charged at the time of advance payment received by the seller of goods against future supply.

It is proposed to reverse this amendment to do away with incidence of sales tax on advances as it is always received against future supply. Any payment received against part supply should remain subject to sales tax.

Rationale

It is unreasonable to levy sales tax on any advance payment received against future supply of goods or goods to be manufactured and delivered later. It also triggers serious accounting and reconciliation issues without any benefit to the FBR as input tax is fully claimed by the payer under STRIVE.

4.27 TAX CREDIT NOT ALLOWED – SECTION 8(1)(ca) & (caa)

Under STRIVE system, input tax adjustment is available to the buyers only after the related output tax is deposited by the suppliers. In this respect appropriate amendments have been made in section 7 and section 8(1)(l) of the STA.

It is proposed to delete clauses (ca) and (caa) of sub-section (1) of Section 8 as necessary enabling provisions are already made in section 8 of the STA

Rationale

Clauses (ca) and (caa) have become redundant following implementation of STRIVE with effect from 1 July 2016. Section 8(1)(ca) has even otherwise been declared unconstitutional by the Honorable Lahore High Court (DG Khan Cement case).

4.28 INPUT TAX CREDIT ON BUILDING MATERIALS – SECTION 8(1)(h)

In terms of Section 8(1)(h), input tax paid on acquiring building materials is not allowed except for those used directly in the production or manufacture of taxable goods. The department disallows input tax paid on building materials even in cases of construction of projects assisting the taxable activity.

Similar restriction has also been imposed vide SRO 490(I)/2004 as amended by SRO 450(I)/2013. Such restriction is against the principle of VAT. Moreover, in WP no. 4231 of 2015, the Lahore High Court has set aside the amendments made in SRO 490(I)/2004. Further, ATIR Islamabad, in judgment STA no. 64/PB/2015 has held that building materials used for construction of projects assisting the taxable activity is allowed.

It is proposed to relax the restriction and allow input tax on building materials especially in case of construction of projects assisting the taxable activity as held by ATIR and honorable High Court.

Rationale

Removal of restriction is in line with generally accepted VAT principles worldwide, and it is more likely to boost the investment in projects and economic activity with corresponding generation of revenue for the Government.



4.29 SHOW CAUSE NOTICES - SECTION 11 OF STA AND 14 OF FEA

It has been observed that Show Cause notices are invariably issued to taxpayers under Section 11 of the STA and Section 14 of the FEA on frivolous and intangible basis. This leads to passing of illegal and unsustainable assessment orders.

In order to address this issue, the aforesaid sections should be amended to the effect that unless definite information of any tax evasion, illegal input tax adjustment or refund is available with the tax officer, show cause notice should not be issued. Further, definite information should be defined on the lines suggested below:

“definite information includes relevant substantial evidence about sales or purchases of any goods and rendering or acquiring of services on which sales tax or duty is not paid.”

Rationale

Amendment of assessment based on definite information surely helps in passing of legally sustainable amendment order, in addition to saving time of both the taxpayers and tax collectors.

4.30 DISCHARGE OF LIABILITY AT SUBSEQUENT STAGE – SECTION 11

The Sales Tax law requires the payer to withhold certain amount of sales tax from the recipient and deposit the same to the credit of the recipient. In case of default, the tax authorities can recover the amount of sales tax not withheld from the withholding agent.

Based on the judgements of the Superior Court, it is now a settled principle of law that if any liability for short paid tax is subsequently discharged then the same cannot be recovered from the taxpayer again, as it would tantamount to double taxation. However, unfortunately, such provision is not part of the STA.

It is proposed to insert a new sub-section 4B in Section 11 as follows:

“Where at the time of recovery of Sales Tax under sub-sections (1), (2), (3),(4) or (4A), it is established that the sales tax that was required to be paid or deducted has meanwhile been paid by that person or recovered from the supply chain, no recovery shall be made from the person who had initially failed to pay or deduct the sales tax or had paid or deducted short amount of sales tax.

Provided that the default surcharge, for delay in payment of sales tax, will be recoverable from the person who has failed to pay or deduct or deducted but not deposit the sales tax.”

Rationale

The proposed amendment is justifiable to prevent recovery of tax from the withholding agent where the recipient has deposited the entire sales tax himself at the time of filing his sales tax return.

4.31 CERTIFICATE BY AUDITORS – SECTION 22

As per sub-section 4 of section 22, registered persons whose accounts are subject to audit under the Companies Ordinance, shall be required to submit a copy of annual audited accounts along with a special certificate by the auditors certifying the payment of tax due has been discharged by the registered person.

It is proposed to either delete the requirement of submitting a special certificate by the auditors or it may be modified to provide for issue of a certificate in the format as per procedure to be framed in consultation with the ICAP.



Rationale

Issue of a certificate in the manner requested under the STA is not within the mandate of auditors’ role as external auditors under the Companies Act, 2017 (Repealed Ordinance 1984).

4.32 MULTIPLE AUDITS – SECTIONS 25 AND 38

Section 25 and Section 38 empower the tax authorities to conduct sales tax Audit / Investigation. Section 72B empowers the Board to select persons or classes of persons for audit of tax affairs through computer ballot. In terms of Section 25, an audit of a registered person may be conducted once a year. On the other hand, Section 38 empowers the tax department to conduct investigation of registered persons without any time limitation and allied framework.

It is proposed that no audit should be initiated unless specific scope, guidelines and mechanism of Investigation is available in the law to bring clarity. Likewise, if detailed investigation of a registered person has already been conducted under Section 38, there should be no need to conduct audit of that person under Section 25 and Section 72B again in order to save taxpayers from double jeopardy.

Alternatively, Section 38 be amended to include time limitation of six years, in line with record keeping requirements in Section 24 of STA.

Rationale

Multiple audits of sales tax record of the same tax period without any incontrovertible evidence of tax fraud or wrongdoing is a burdensome and unproductive exercise both for the taxpayers and tax collectors.

4.33 POWER TO ARREST - SECTION 37A

Presently, Inland Revenue Officers are authorized to execute arrest of any person if that officer on the basis of material evidence has reason to believe that such person has committed a tax fraud or any offence warranting prosecution under STA. Moreover, the powers given to officers also include powers to arrest any director of the company if the officer has reasons to believe that such director or officer is personally responsible for actions of the company contributing to tax fraud.

It is proposed that This Section should only be applicable where the tax fraud has already been established at the stage of first appeal. Alternatively, the amendment to be made in Section 37A in line with the amendment made in Section 8A through Finance Act 2015 and the burden to prove the allegations should be on the tax department.

Rationale

Such an open-ended power could lead to harassment of the genuine taxpayer. 4.34 POSTING OF INLAND REVENUE OFFICER TO PREMISES OF REGISTERED PERSON –

SECTION 40B

Section 40B authorizes the FBR to post officer of Inland Revenue to the premises of registered person or class of such persons, to monitor production, sales of taxable goods and the stocks position.

There is a general perception that this provision leads to misuse of power or authority and undue harassment by the tax authorities and is main concern of various trade bodies as reported on and off in various sections of the media as well.



It is proposed to prescribe a detailed and transparent mechanism for compliance by the Officer before exercising such power.

Rationale

Such an open-ended power could lead to the harassment of the genuine taxpayers if they are applied without following a well-documented procedure.

4.35 RECOVERY OF ARREARS OF TAX - SECTION 48

Finance Act, 2018 introduced a provision that allows automatic stay up to the first stage of appeal on payment of 10% of the disputed tax demand. However, considering that the tax demands mostly are frivolous and legally unsustainable, the option of automatic stay was very rarely exercised by the taxpayers. Another reason for not opting for automatic stay is the absence of any provision that provides immediate refund of the tax paid if the appeal is decided in favor of the taxpayer. In addition, there are reported judgments of the courts that held that recovery of disputed tax should not be made until it has been reviewed by one independent forum.

Considering the above, particularly the court judgments, and in order to meet the principles of natural justice, it is proposed that the condition of 10% payment of tax demand may be withdrawn and instead automatic stay should be extended up to decision of the first appeal, and a 10% payment of disputed tax demand may be introduced for automatic stay when the appeal is pending before the ATIR.

Rationale

The option of 10% payment for automatic stay is reasonable considering that the first appeal is decided and most of the issues are filtered at that level and it is more convincing for the taxpayer to pay 10% for getting automatic stay when the case is pending before ATIR. It certainly is more likely to reduce the extra-ordinary burden on the ATIR to decide hundreds of stay applications on a daily basis thereby leaving less time to decide the pending appeals.

4.36 LIABILITY FOR PAYMENT OF TAX - SECTION 58

Where any private company is wound up, then following persons are jointly and severally liable for payment of outstanding tax:

1. Director 2. Shareholder, owning not less than ten per cent of the paid-up capital This section neither defines director nor provides the extent to which the outstanding liability could be

recovered from the directors and shareholders. For instance, under the Companies Act, 2017, director could be a nominee director or independent director or an employee director with or without shares. Similarly, whether it would be justified to recover tax exceeding the percentage of shareholding of the shareholders or directors cum shareholders.

It is proposed to insert the following further provisions in this section:

a) Define director to exclude employee director, nominee director and independent director; b) The shareholders and directors cum shareholders owning not less than ten per cent of the paid up capital

shall be liable to payment of outstanding tax not exceeding the percentage of their holding in the company.



Rationale

It is just and equitable to make recoveries of outstanding tax from those who own more than 10% of the paid-up capital to the extent of their ownership in the company.

4.37 DELAYED REFUND – SECTION 67

This section provides for payment of compensation for delayed payment of refund due under section 10, but does not provide for compensation for delayed payment of refund due under Section 66.

It is proposed to amend this section to insert section 66 for payment of delayed refund. Rationale

It seems to be an omission and accordingly the proposed insertion is just and equitable. 4.38 BUSINESS BANK ACCOUNTS - SECTION 73

Explanation to Section 73 of STA defines ‘Business Bank Account’ to mean a bank account utilized by registered person declared to Commissioner through Form STR-1 or change in particulars in registration database.

Currently, the Form STR-1 does not exist online as the eFBR website portal (used for Sales Tax return filing and change in particulars) automatically re-directs to IRIS web portal (used for filing of Income Tax returns). Thus, the change in particulars application is submitted on IRIS portal via “181 (Form of Registration filed for modification -Income Tax)”. This Form is not covered under the Sales Tax Act.

Owing to non-availability of Form STR-1 on eFBR portal, reference to Form STR-1 in Section 73 should be replaced with Form “181 (Form of Registration)” which, at present, is applicable to Income Tax (pursuant to Section 181 of ITO). Moreover, title of said Form be changed to “181-73 - Form of Registration / Modification (Income Tax, Sales Tax and FED)”.

Rationale

It is a glitch to be addressed for the taxpayers facing difficulty in adding business bank account or a change in business bank account.

4.39 INVENTORY RECORD FOR GOODS DESTROYED - RULE 23

Rule 23 of the STR requires that when goods are returned by the buyer being unfit for consumption, the same is required to be destroyed by the supplier after obtaining permission from the Commissioner. Practically speaking, the tax department may not have the capacity and human resource having specialized skills required to decide the application for approval for destruction.

It is proposed to amend the rule to provide for engaging independent verifier (to be appointed by the Commissioner) to work with the tax team to physically inspect the goods and carry out other procedures to decide the application and arrange the destruction of such goods under the supervision of the representatives from the tax department, taxpayer and independent verifier. The rule should also prescribe the qualification of “independent verifier”.

Rationale

Implementation of the above proposal would certainly ease out the process of approval and destruction of goods unfit for consumption.



4.40 UNADJUSTED INPUT TAX - RULE 34 In terms of STR, unadjusted input tax has to be carried forward for a minimum twelve months’ before it may

be applied as refund.

It is proposed to reduce the timeline to three months. Rationale

This will provide an opportunity to the taxpayers to get their refunds processed early to lessen their liquidity issues.

4.41 INITIATION OF RECOVERY ACTION - RULE 71

Rule 71 provides that the proceedings for recovery of tax demand may be initiated after 30 days from the date of order. The date of order is generally misinterpreted as the date mentioned on the order, whereas legally an order is treated as order on the date it is served on the taxpayer. It is so treated for counting 30 days for filing of appeal under section 45B.

It is proposed to amend the rule to substitute the words “date of order” with the words “date of service of the order”.

Rationale

This amendment is proposed to prevent misinterpretation and harmonize it with Section 45B of the STA. 4.42 UNDUE RESTRICTIONS OVER EXPORTS TO AFGHANISTAN

As per SRO 190(I)/2002 dated April 2, 2002, zero rating on Exports under section 4 of the STA is not applicable in respect of supply of certain categories of goods, exported by air or via land route to Afghanistan and through Afghanistan to Central Asian Republics. Categories of goods specified in SRO 190(I)/2002 have been reproduced below for ready reference:

Quote (a) items other than PVC and PMC materials (PCT Code 39.01 to 39.14) in the Export Processing Zones or

in manufacturing bonds; (b) exported, other than against irrevocable letters of credit, or advance payment, in convertible foreign

currency; (c) exported without fulfilling the conditions prescribed in paragraphs 8, 12B, entry 9 of the Schedule I and

Schedule IV to the Export Policy and Procedure Order, 2000; and (d) specified in the list below, namely: - (i) cigar, cheroots, cigarillos, and cigarettes of tobacco or of tobacco substitutes; (ii) dyes and chemicals; (iii) yarn all types; (iv) polyester metalized film; (v) ball bearings; (vi) vegetable ghee and cooking oil (if exported from Export Processing Zones or manufacturing

bonds); and (vii) all petroleum products whether imported or produced locally (unless there is a Government to

Government contract done through oil marketing companies only).

Unquote Similar restrictions on exports to Afghanistan and through Afghanistan to Central Asian Republic as specified

in clause (a), (b) and (d) above are also part of the Export Policy Order, 2016 issued vide SRO 344(I)/2016 dated April 18, 2016.



It is proposed to revisit and relax the restrictions on zero rating facility on all items, as per SRO 190(I)/2002 dated April 2, 2002 and SRO 344(I)/2016 dated April 18, 2016 in order to increase overall exports and to prevent other countries like India to capture the market in Afghanistan. The following restrictions may be considered:

(i) restriction on exports via manufacturing bond be removed and only conditions relating to exports against irrevocable letters of credit, or advance payment, in convertible foreign currency should remain intact owing to the fact that goods manufactured through the manufacturing bond facility are subject to strict scrutiny of the Customs authority;

(ii) for export, other than through manufacturing bond, of goods specified in clause “(d)” of SRO 190(I)/2002 as well as items specified in Schedule III of the Exports Policy Order, 2016, exporters should be made liable to comply with the following conditions:

(a) export transactions must be executed against irrevocable letters of credit, or advance payment, in convertible foreign currency;

(b) zero rating be allowed only in case of exports by Manufacturers from Pakistan to manufacturers in Afghanistan;

(c) where the proof that goods exported have reached Afghanistan has been verified on the basis of a copy of import clearance documents by Afghan Customs Authorities; and

(d) exports should only be routed through authorized export land routes i.e. Torkham, Chaman, Ghulam Khan and Qamar Uddin Karez (when it becomes operational).

Rationale

We understand that goods manufactured in manufacturing bonds are subject to strict scrutiny by the Customs authorities from import until the final exports stage in accordance with the procedure given in Customs SRO 450(I)/2001 dated June 18, 2001. Therefore, goods manufactured in the manufacturing bonds are less prone to be used for unscrupulous activities.

We also understand that restrictions under SRO 190(I)/2002 and SRO 344(I)/2016 were imposed to prevent misuse of zero-rating benefits by traders by exporting goods to Afghanistan and thereafter re-importing the same via unlawful means. We believe that a blanket restriction, on all goods manufactured in the manufacturing bond as well as on specific items, instead of bringing the desired results, has dented our Exports market and has also helped the other countries like India, to increase their exports to Afghanistan, which otherwise would have been supplied from Pakistan.

These suggestions, if implemented in true spirit, will not only increase the overall Exports and Foreign Exchange reserves but will also encourage documented sectors thereby resulting in a major barrier for operations of undocumented sector.

4.43 SALES TAX WITHHOLDING – ELEVENTH SCHEDULE

Through SRO 485(1) dated June 30, 2015 amendment was made in the STAWTR, whereby concept of withholding was revamped. Previously, sales tax was deducted at the time of payment and deposited by 15th of the following month. Now, withholding agents are required to deposit the sales tax withheld on accrual basis i.e. by 15th of the month following the month of purchase whether paid or not. However, ST withholding is not required if the supplies are made by an Active Taxpayer to a registered person.

In most of the cases, withholding tax from unregistered persons is being shown in bulk in the return.

It is proposed to consider making following changes in the Schedule: • Require the registered persons to identify the person from whom sales tax is withheld while depositing

the sales tax withholding so that the same could be used for broadening of the tax base.



• A minimum threshold of purchases should be prescribed for sales tax withholding on the lines it is done for income tax under the ITO.

• Withholding should be applicable at the time of payment to avoid unnecessary reconciliation issues. Rationale

In addition to the reasons provided for the change hereinabove, it is unjustified on the part of the government to demand sales tax withholding before the actual payment is made to the unregistered supplier. It amounts to shifting of burden of sales tax on to the registered person until the same is recovered from the supplier.

4.44 DEBIT AND CREDIT NOTES - RULE 14 A OF FEA

Rule 14A allows issuance of debit or credit notes for dutiable goods and making corresponding adjustment in return where the amount mentioned in the tax invoice needs to be modified. However, said facility has not been extended to dutiable services.

It is proposed to amend the rule to extend the application of Rule 14A to excisable services. Rationale

Proposed amendment would facilitate the taxpayer for issuance of debit / credit notes relating to FED on services.

4.45 FED ON FRANCHISE SERVICES

Adjustment of sales tax levied whether under Federal sales tax law or Provincial laws suffered by a taxpayer on acquiring goods or services is not available against specified dutiable goods and services on which FED is not collected in the sales tax mode.

It is proposed that franchise services should be subject to FED in the Sales Tax mode so that same can be claimed as Input Tax.

Alternatively, considering that franchise is also subject to sales tax in provinces, it is proposed to delete franchise services from FEA and shift it to ICT (Tax on Services) Ordinance, 2001 along with the revised definition of franchise as proposed above.

Rationale

The implementation of the proposal would put to rest ongoing tax controversies. 4.46 INPUT TAX ADJUSTMENT AGAINST FED

Adjustment of sales tax, whether under Federal sales tax law or Provincial laws, suffered by a taxpayer on acquiring goods or services is not available against specified dutiable goods and services on which FED is not collected in the sales tax mode.

It is proposed to declare all the services listed in the First Schedule to the FEA be classified as services on which FED is payable in the Sales Tax mode so that same can be claimed as Input Tax.

Rationale

This would reduce the cost and improve the cash flow of the taxpayer.



4.47 REVISION OF RETURN UNDER THE FEA

In case of any omission or wrong declaration in the return, the registered person is required to obtain approval from the Commissioner Inland Revenue for revising the return.

It is proposed to amend the provisions to allow the registered person to revise the return without the approval of Commissioner if the same is done within a period of 60 days from the date of filing of return subject to payment of default surcharge where the tax due under the revised return is increased.

Rationale

Following implementation of STRIVE, the risk of revision without approval of Commissioner being misused is minimal. This will also address the unreasonable delays observed in getting Commissioner’s approval for revision. The proposal is also in line with the provisions applicable to revision under the STA.

4.48 EXEMPTION FROM FED WHERE PROVINCES HAVE INTRODUCED TAX ON SERVICES

Although a Note is inserted at the end of Table II relating to excisable services which provides that excise duty shall not apply to services on which sales tax is levied by the Provinces under the provincial sales tax on services laws.

It is proposed to revise the schedules of excisable services by omitting the list of all excisable services which are subject to provincial sales tax.

Rationale

This will eliminate the risk of double taxation. 4.49 DISCRIMINATORY TREATMENT BETWEEN DTRE / EOU / MANUFACTURING BOND

SCHEMES

At present, local sales to Duty and Tax Remission for Export [DTRE] license holder has been provided the benefit of sales tax zero rating, however, local supplies to Export Oriented Units [EOUs] / manufacturing bond is chargeable to sales tax @ 17%, which is an apparent anomaly between the DTRE and EOUs/ Manufacturing Bond (rules as per SRO 450 dated June 18, 2001). Moreover, local supplier of items being imported by EOU / Manufacturing Bond are unable to supply their materials owing to the fact that persons operating under EOU / Manufacturing Bond prefer to import goods, as local purchase would attract 17% sales tax.

It is proposed to allow zero rating of sales tax to EOUs /Manufacturing Bond on local purchase of goods to address the discriminatory treatment to them as compared to DTRE.

Rationale

Zero rating is proposed considering the fact that material / goods being purchased by DTRE and EOU / Manufacturing Bond are used for the purposes of exports and are subject to strict scrutiny.

4.50 ANNEXURE H - FASTER SYSTEM FOR SALES TAX REFUND PROCESSING

From July 1, 2019, FBR has implemented systems for expeditious processing of sales tax refunds, for which taxpayers are required to file Annexure H of the sales tax return. However, the registered persons have been facing following challenges in filing of Annexure H:



a) Annexure H is required to be filed within 120 days from the date of filing of the sales tax return. This condition should be removed and registered persons be allowed to file Annexure H as and when considered feasible by him.

b) At present, opening balance of input tax on raw material / other items is allowed to be entered in Annexure H for the tax period July 2019 only. If a taxpayer fails to file Annexure H for July 2019 within the due date or extended date, then he will never be able to file Annexure H for any of the subsequent tax periods. This is against the natural justice and fair play.

c) Annexure H filed by the taxpayer is rejected by the system without highlighting any discrepancy or communicating the discrepancy to the taxpayer.

d) In case any taxpayer does not want to carry out cumbersome exercise of filing Annexure H on a monthly basis, then such taxpayers should also be given an option to file Annexure H on an annual basis covering the data from July to June each year.

e) Due to lack of clarity and clear cut guidelines from FBR, the taxpayers are matching Annexure-H with Annexure-F which appear inconsistent with the Scheme of Stock Statement and Stock Statement maintained as per accounting records, for the Purchases actually claimed in the Sales Tax return (i.e. Current year + prior month purchases) are being reported, instead of Purchases for the month only.

Due to above, Stock Statement is not matched with taxpayer stock records / audited financial statements.

It is strongly recommended that FBR should resolve the abovementioned issues expeditiously. Rationale

Unless the above shortcomings are addressed the objective of faster processing of sales tax refund cannot be achieved.



5. HARMONIZATION OF TAX LAWS


Under the Constitution of Pakistan, levying sales tax on services is in the domain of Provinces. Accordingly, Harmonization should not be interpreted as centralization, rather it should be seen strictly from the perspective of bringing uniformity in the sales tax legislations of the Provinces and ICT and their application. The purpose of these proposals is to initiate a process of creating common standards across the Provinces and ICT. It does not mean to encroach upon the powers of enacting laws and regulations from the Provinces. Since most of the major service providers operate across the country, the need for increased harmonization of provincial and ICT sales tax on services laws have become imminent. The principal areas which are conflicting or raise serious cause of concern are: jurisdiction, incidence of tax, admissibility of common input, reverse charge mechanism, inconsistent rate of tax, uneven penalty and default surcharge, inter-province transactions, tax controversies, etc. The Institute has picked up the following areas to propose changes in laws to achieve Harmonization:

5.1 INTEGRATION OF TAXATION AUTHORITIES FOR ONE-WINDOW SOLUTION

We strongly recommend integration of federal and provincial revenue authorities across the country in such a way that provides one window solution to the taxpayers without undermining the existence and independence of each authority. One window solution should, inter alia, achieve the following:

a) filing of a single return for federal and provincial sales tax; b) introduction of common online software/application like STRIVE at federal and provincial levels; and c) enable inter-adjustment of refunds across revenue authorities.

The FBR is practically not allowing refunds for Provincial sales tax, owing to settlement disputes / claims pending with the Provincial Tax Authorities. Further, unnecessary notices are issued against input tax claims on account of non-verification of Provincial sales tax in FBR’s system. This issue needs to be taken up with the Provincial sales tax authorities for its resolution at the earliest.

5.2 SETTING UP OF INDEPENDENT REVENUE POLICY BOARD

An Independent Revenue Policy Board should be set up. This should be headed by a Chairman appointed by the Federal Government, and one member each to be appointed by each Provincial Government. The Broad should be mandated to carry out, inter alia, the following functions:

a) To ensure uniformity in tax policies and procedures across the country. b) To ensure uniformity in tax rates across the country. c) To ensure uniformity in categorization of services and their tariff codes for use across the country. 5.3 INCONSISTENT CONCEPT OF REVERSE CHARGE IN PROVINCES

The concept of reverse charge is used in many countries to exempt the exporters of services from registering themselves in the country of the importer.

The Provincial Sales Tax Statues in Pakistan also have Reverse Charge provisions under which inter-province services are subject to collection of tax from the recipient of service. Since the inter-province transactions are not zero-rated or exempt in the jurisdiction of origin, such transactions are also taxed in the province of the service provider.

It is strongly recommended that the reverse charge should be restricted to such cases where service provider is located outside Pakistan. Further, tax paid under the reverse charge mechanism should be allowed as an input tax.



5.4 EXPORT OF SERVICES

Zero rating of export of services to foreign countries is not provided in the provincial statutes on the lines it is provided for export of goods under the Federal Sales Tax Act. In Punjab, zero rating is allowed subject to stringent conditions, and in Sindh, it is allowed merely to Accountants & Auditors and Software Consultants.

It is strongly recommended that zero rating of export of services should be allowed by all provinces and ICT in order to promote export of services in the international market, and the laws in this respect be harmonized with the Federal Sales Tax Act.

5.5 TIME LIMITATION FOR CLAIMING INPUT TAX

Presently, the time to claim input tax credit is not uniform in all provinces. Whilst it is four months in the Punjab, it is six months in other provinces. Such time limitation is insufficient considering the business requirements of major service providers.

It is strongly recommended that the time period for claiming input tax credit be consistent across the provinces and the same be increased to one year with an option to claim refund or carry forward for further period with the approval of designated revenue authorities.

5.6 SALES TAX WITHHOLDING

Except for Punjab, other Provinces require withholding of sales tax for registered / active taxpayers as well. This results in unwarranted administrative and operational issues.

It is strongly recommended that sales tax withholding be exempted in all provinces where the service provider is registered with the revenue authorities. Where a service is provided by an unregistered person to the registered service recipient, the liability to pay the tax practically falls upon the person receiving the service in almost all cases. The whole amount of sales tax is required to be withheld from the payment made to the unregistered person. It is suggested that the rate of withholding tax for unregistered service providers may be reduced to 1% in line with the Federal Sales Tax Rules.

5.7 CLASSIFICATION OF TAXABLE SERVICES RULES

The provincial and ICT tax laws are silent on the following:

(i) classification of services that apparently fall under two or more category of taxable services simultaneously; and

(ii) classification of multiple or composite services.

For example, supply chain management or distribution (including delivery) services inserted through Finance Act, 2016 are also covered under business support services as ‘Managing distribution and logistics’. Renting of immovable property services through Finance Act, 2015 are also covered under business support services as ‘Infrastructural support services’.

It is proposed to introduce classification of services rules. The Classification rules play a vital role and are generally crucial in the following situations:

• Applicability of different tax rates, or where one of the possible headings is not taxable. • Availability of exemption when one of the possible headings is exempt from tax. • Determination of date from which the tax is to be levied where a service falls under two headings, one

attracts tax from an earlier date.

This will provide clarity and reduce unnecessary litigation.



6 PROVINCIAL SALES TAX ON SERVICES HIGHLY SIGNIFICANT COMMON ISSUES 6.1 TIME LIMIT TO CLAIM INPUT TAX BEFORE COMMENCEMENT OF BUSINESS - SECTION

15A(1)(I) OF SSTSA; SECTION 16(1) OF PSTSA; SECTION 16B(1)(I) OF BSTSA; RULE 44(I)(IX) OF KPK RULES

Currently, input tax is not allowed on goods or services procured or received by a registered person during a period exceeding six months prior to date of commencement of the provision of taxable services by him.

It is proposed that in case of large projects, where the installation and commissioning into service takes longer, the time limit for claiming input tax be allowed from the date of commencement of project to the date of commissioning into service.

Rationale

Bar on admissibility of input tax borne by the taxpayer prior to six months preceding the commencement of provision of taxable services is not justifiable in case of large projects having longer set up time with no visibility of subsequent taxation of their services.

6.2 INPUT TAX ADJUSTMENTS - SECTION 15A OF SSTSA; SECTION 16B OF PSTSA; RULE 27(5)

OF BSTSR 2018 & SECTION 32 OF THE KSTSA

A registered service provider has been prevented from claiming or deducting input tax paid on the goods or services including but not limited to goods and services subject to tax at fixed or specific rate, sales tax paid on building material, office equipment, and further tax or value addition tax levied under the STA’90.

It is proposed that the aforesaid provisions relating to input tax adjustment should be harmonized and revamped.

Rationale

This will bring harmony between the federal and provincial tax laws. 6.3 VALUE ADDITION TAX AT IMPORT STAGE - SECTION 15A(1)(K) OF SSTSA; SECTION

16B(1)(R) OF PSTSA; RULE 44(1)(IV) OF KPK RULES & SECTION 16B(1)(D) OF BSTSA

The existing law provisions restrict or disallow the input tax claim of value addition tax paid on import of goods (used for rendering of services) under the Federal Sales Tax Act or Sales Tax paid on taxable goods in excess of the standard rate applicable in provinces.

Whilst we consider that harmonization of sales tax laws across provinces is more likely to address the above issues, meanwhile, it is proposed to amend the existing provisions as follows:

a) lift the restrictions on adjustment of input tax to the extent of standard rate; and b) withdraw the provision restricting admissibility of minimum value addition tax paid on goods at import

stage where the goods are consumed or used in the process of rendering of services. Rationale

It is unjust to put a restriction on input tax as it is against the generally accepted VAT principles.



6.4 ADJUSTMENT OF INPUT TAX ON CAPITAL GOODS, MACHINERY AND FIXED ASSETS - SECTION 15B OF SSTSA & SECTION 16C OF PSTSA

Adjustment of input tax on acquisition of capital goods, machinery and fixed assets is available in twelve equal monthly installments.

It is proposed to delete the provision and align it with the provision of STA’90 which allows full adjustment of input tax in the month of acquisition.

Rationale

It is necessary to achieve harmonization of input tax adjustment provisions both under the federal and provincial sales tax laws. In addition, it is also just and equitable from liquidity point of view to allow adjustment in the tax period in which the capital goods are acquired.

6.5 JOINT AND SEVERAL LIABILITY OF REGISTERED PERSONS IN SUPPLY CHAIN WHERE

TAX IS UNPAID - SECTION 18 OF SSTSA; SECTION 19 OF PSTSA; SECTION 35 OF KSTSA; SECTION 19 OF BSTSA

The Provincial Statutes stipulate that where a registered person, receiving a taxable service from another registered person, is in the knowledge of, or has reasonable grounds to suspect, that some or all of the tax payable in respect of that taxable service or any previous or subsequent taxable service provided would go unpaid, both the recipient and provider of the taxable service shall be jointly and severally liable for payment of such unpaid tax.

It is proposed that the provision should be aligned with Section 8A of STA’90 where the burden of proof that the service provider and service recipient acted in connivance rests upon the tax authorities.

Rationale

This will bring harmony between the federal and provincial sales tax laws. This would also restrain the assessing officer from using the power imprudently without carrying out proper enquiry.

6.6 TIME LIMITATION FOR ASSESSMENT & RETENTION OF RECORDS - SECTIONS 24(2) &

32(1) OF PSTA; SECTIONS 23 & 27(1) OF SSTA; SECTION 40 & 48 OF KPSTA & SECTION 24 & 32 OF BSTA

The period for retention of records and time limitation for assessment of tax are not aligned and consistent under the Provincial Sales Tax laws, as tabulated below:

It is proposed that the time period for retention of records and assessment of tax should be rationalized and fixed at 6 years in all provinces as applicable under the STA’90 and ITO’2001.

Sales Tax Law Records Retention Period Time limitation for assessmentSindh Sales Tax 10 years 8 yearsPunjab Sales Tax 8 years 8 yearsKPK Sales Tax 5 years 5 yearsBaluchistan Sales Tax 10 years 8 years



Rationale

Longer period of retention and assessment is not only burdensome, but also contrary to the timeline provided under the federal laws.

6.7 ASSESSMENT OF TAX - SECTION 23(5) OF SSTSA; SECTION 24(1) & (5) OF PSTSA, SECTION

24 (5) OF BSTSA & SECTION 40(5) OF KSTSA

Currently, the law provides that any assessment order can be amended by directly issuing a show cause notice by the tax officer on the basis of any subsequent information, etc.

It is proposed to shift the power of amendment of an assessment order to the Commissioner or with the approval of Commissioner or Board, as the case may be, with the condition that an enquiry shall be carried out based on possession of some definite information (which should be explicitly mentioned in the notice) and a show cause notice should be issued only when there is a substantial reason available that warrants reopening or amendment of the assessment order.

Rationale

This is necessary to introduce transparency in the system and provide justice to the taxpayer as it was held by the Honorable Sindh High Court.

6.8 CERTIFICATE BY THE AUDITORS - SECTION 26(5) OF SSTSA; SECTION 31(5) OF PSSTA;

SECTION 48(5) OF KSTSA; SECTION 31(5) OF BSTSA

The registered service providers, whose accounts are subject to audit under the Companies Act 2017, are required to submit a copy of the annual audited accounts along with a certificate by the auditors certifying the payment of the tax due and any deficiency in the tax paid by the registered person.

It is proposed to either delete the requirement of auditor’s certificate certifying the payment of tax due and deficiency therein; or substitute it with a provision authorizing the revenue authorities to demand from the taxpayer a certificate from an independent auditor in accordance with the scope and the format to be prescribed in consultation with the Institute of Chartered Accountants of Pakistan.

Rationale

With the current scope of statutory audit, the auditor is not obliged to certify the payment of the sales tax due and any deficiency therein. There are provisions available in the sales tax laws which allow the revenue authorities to appoint independent auditors to conduct sales tax audit.

6.9 RETURN REVISION - SECTION 35(6) OF PSTSA; SECTION 30(6) OF KSTSA; SECTION 35(6) OF

SSTSA & SECTION 35(6) OF BSTSA

Currently, no time limit is provided for passing of an order on an application filed by the taxpayers seeking approval for filing of revised return. This causes delay in passing of the revision order and delay in filing of subsequent returns, and removal of name of taxpayers from the list of active taxpayers.

It is proposed to fix a timeline for passing of revision order from the date of filing of application for revision of return. It is also proposed that where revision is sought for more than one tax period, a combined revision order should be passed for all the tax periods.

Rationale

Fixation of timeline for passing of revision order greatly helps in preventing delays in filing of subsequent returns, or where subsequent returns are filed without taking effect of revision, more revision order would be required to update the return for each subsequent tax period.



6.10 OBLIGATION TO PRODUCE DOCUMENTS AND PROVIDE INFORMATION - SECTION 52(1) OF SSTSA; SECTION 57OF PSTSA, SECTION 57(1) OF BSTSA & SECTION 73 OF KSTSA

The tax officer is empowered to solicit any information or record from any person without specifying any reason and without specifying the reference of any case being investigated by him.

It is proposed that the scope of above referred sections should be restricted to specific parties and transactions already identified by the tax authorities.

Rationale

This will put a restriction on fishing enquiries and unnecessary probe into the tax affairs of a person. 6.11 TAX EXEMPTIONS OR ZERO RATING FOR CHARITY

Currently, the provincial sales tax statutes do not have any provision to allow zero-rating or concession or exemption from payment of sales tax to persons engaged in running charity, social welfare organizations, trusts, hospitals, schools and similar charitable organizations. Under the STA’90, sales tax exemption is available on agricultural produce, medicines and medical equipment, food, machinery supplied to social welfare organizations and hospitals.

In line with the Federal Government’s policy to zero-rate or exempt government and non-government organizations from the Federal Sales Tax, the services provided or rendered to such organizations should also be zero-rated or exempted under the provincial sales tax laws.

Rationale

This will remove inequality in provincial sales tax laws and enable the social sector to spend more on the social welfare activities instead of spending on the taxes.

6.12 E-HEARING AT THE LEVEL OF COMMISSIONER APPEALS / APPELLATE TRIBUNAL

The facility for e-hearing of appeals is currently available under the Sales Tax laws in Punjab and Baluchistan, and Sindh (only for Hyderabad and Sukkur regions). The KP Sales Tax does not have provisions for e-hearing facility for the taxpayers.

Considering that major service providers operate across the country and their tax affairs are generally managed from one location, preferably from the head office, it is proposed to set up facilities for e-hearing of appeals before the Commissioner Appeals and Appellate Tribunal by all revenue authorities collectively in all major cities in the Country.

Rationale

This will not only make the appeal process efficient and less costly, but also greatly help in deciding appeals expeditiously.

6.13 MINIMUM THRESHOLD FOR REGISTRATION

Currently, the provincial sales tax laws do not prescribe minimum taxable threshold for small service providers. This issue is partly addressed by issuing Notifications by Sindh, but other provinces are not aligned on this issue. For instance, constructions services, workshop for electric or electronic equipment and automobile washing services where annual turnover does not exceed Rs 4 Million in a financial year and auto-workshop services whose turnover does not exceed Rs 3.6 Million in a financial year, are exempt from the chargeability of Sindh Sales Tax.



It is proposed to introduce a uniform minimum taxable threshold for small service providers by all provinces within the statute, rather than through Notifications.

Rationale

This is necessary to provide relief to small service providers across the provinces, and to achieve harmonization.

6.14 SALES TAX ON SERVICES RELATING TO E-COMMERCE / E-BUSINESS OR DIGITAL

ECONOMY

e-commerce or e-business is getting momentum and such activities are conducted throughout Pakistan using a digital platform located either outside Pakistan or in one of the provinces in Pakistan, but taxation of their services may not be fully captured. A question also arises with reference to determination of place of such businesses, its jurisdiction and allocation of revenue.

It is proposed that the provincial revenue authorities should get together and agree to the following steps for introducing provisions for taxation of services under e-commerce or e-business:

a) a detailed mechanism for capturing such services in the tax net by the province in which digital platform is located for services provided from within Pakistan and through banks and financial institutions for services rendered from digital platform located outside Pakistan;

b) fair allocation of tax so collected among the provinces based on a formula; and c) filing of a single return by the service providers located in Pakistan. Rationale Unless the Provinces agree to be together on capturing such services and the distribution formula based on a

single return filed by the service providers, the services provided through digital platform from within and outside Pakistan may largely remain untaxed.

6.15 SALES TAX AT REDUCED RATE & ITS ADMISSIBILITY AS INPUT TAX

Currently, certain services are chargeable to Sales Tax at a reduced rate subject to certain restrictions, limitations and conditions (including inadmissibility of related input tax credit / adjustment), and in some cases option is also provided to pay tax at standard rate. Similarly, where reduced rate is applied on services, there is a restriction on adjustment of such input tax by the person procuring it.

It is proposed that- a) an option for general rate taxation be extended to all services subject to reduced rate taxation; and b) services procured at reduced rate of sales tax should be available as adjustable input tax if the recipient of

service is liable to sales tax at normal rate on his services. Rationale

It is just and equitable, and in line with the true spirit of VAT.

6.16 BROADENING OF TAX BASE

Information collected for potential unregistered taxpayers operating in the economy is not being systematically channelized. The existing provisions of law has not provided any mechanism for systematic utilization of such information to broaden the tax net. This can be a regressive tool in the longer run where only existing registered person would be subject of revenue target and enforcement of law.



It is proposed that a proper mechanism be introduced in law to bring in the tax net the potential unregistered persons whose information is available in the shape of NTN/CNIC through withholding provisions.

Rationale This step would help greatly in broadening of the tax net and reducing the disparity in the economy. 6.17 AUTOMATIC STAY FOR RECOVERY OF TAX ARREARS - SECTION 70 OF PSTSA; SECTION

66 OF SSTSA & SECTION 73 OF BSTSA

The current law requires for deposit of 25% of the disputed demand for automatic stay against recovery of the remaining 75% until the appeal is decided by the Appellate Commissioner. However, it does not provide any mechanism for refund of the tax deposited if the demand is extinguished or curtailed to below 25%.

It is proposed to delete this condition and allow automatic stay without any payment of disputed tax until the appeal is decided by an independent appellate authority as it is ruled by the Honorable Lahore and Sindh High Courts. Alternatively, the condition for payment of disputed tax demand should be relaxed to 10% for automatic stay against recovery of balance tax demand till the decision of the Appellate Tribunal.

Rationale

The payment of 25% causes grave hardships to the taxpayers and it is contrary to legal judgments where it is held that the disputed tax demand should not be recovered unless it has been reviewed at least by one independent forum (LHC WP 232241 of 2018 & SHC CP D-5476 of 2017).

6.18 REFUND OF EXCESS INPUT TAX - RULE 23B OF SSTA; RULE 29 OF BSTSA; SECTION 32 OF

KPSTA & SECTION 16 OF PSTSA

The existing law does not cater for refunds arising from the following situations:

a) excess input tax not adjusted against tax liabilities of twelve consecutive months; and b) tax withheld in excess of net tax liability for the relevant tax period and remained unadjusted against tax

liabilities of twelve consecutive months. It is proposed to align the refund related provisions with those applicable in case of sales tax on goods under

the STA’90. Rationale

This amendment is necessary for adoption of VAT best practices and harmonization of sales tax laws.

SINDH SALES TAX ON SERVICES 6.19 DELEGATION OF POWERS - SECTION 36(1)(A)

The Board is empowered to appoint a Deputy Commissioner to exercise the powers of Commissioner (Appeals). It is proposed to delete this provision.

Rationale

It undermines the quasi-judicial function and weakens the judicial process when a junior ranked officer is allowed to assume the powers of a quasi-judicial authority.



6.20 H.S CODES/ TARIFF HEADINGS TO VARIOUS SERVICES IN FIRST SCHEDULE

Several categories of services mentioned in the First Schedule are without H. S Code/ Tariff Headings. It is proposed that proper coding should be done for such services.

Rationale

It is necessary to avoid confusions on the part of assessing authorities and the registered persons. PUNJAB SALES TAX ON SERVICES 6.21 TAXATION THROUGH REPRESENTATION

The Tax Administration heavily relies on notifications issued for enforcement of law, but they are not formally placed before the Provincial Assembly as per requirements of section 5(3) of the PSTSA. Further, certain reduced rate notifications are issued on yearly basis instead of amending the governing law.

It is proposed that the notifications issued should be tabled before the assembly as required under section 5(3) of the PSTSA. Further, instead of repeating notifications each year, the governing law should be amended to cater for the purpose to be obtained through notifications.

Rationale

The indiscriminate use of power for issue of notifications without sanction of the assembly is highly unreasonable and it compromises transparency.

6.22 BAR ON INPUT TAX ADJUSTMENT UNDER REVERSE CHARGE MECHANISM - RULE 6 OF

PUNJAB SALES TAX ON SERVICES (ADJUSTMENT OF TAX) RULES, 2012

No input tax adjustment / credit is allowed in respect of tax required to be charged, deducted or paid on the basis of principles of origin and reverse charge under section 4 of the Act. The person liable to pay tax is required to deposit the whole amount of due tax without any deduction, adjustment or credit. It is proposed to delete this provision.

Rationale

It is against the VAT principles and not in line with other service tax laws.

6.23 RESTRICTION ON INPUT TAX ON FRANCHISE SERVICES - RULE 61 OF PSTSPR

No tax adjustment / credit is allowed to franchisor or franchisee, in case where tax has been deducted / paid / deposited under franchise services. It is proposed to delete this provision.

Rationale

It is against the VAT principles and not in line with other service tax laws.

KHYBER PAKHTUNKHWA SALES TAX ON SERVICES 6.24 PROCEDURE FOR ELECTRONIC INVOICING, MAINTENANCE OF RECORDS ETC.

No procedure or software have been prescribed by the Authority under Section 48 (4) of the Act for electronic invoicing or billing, maintenance of records, filing of tax returns, and for any other matter by a registered person or class of such persons.



It is proposed that the Authority must prescribe the procedure or software for electronic invoicing, billing, filing of returns, etc.

Rationale

It is necessary for uniform application of standard procedures by the taxpayer. 6.25 SPECIAL PROCEDURAL RULES ON APPOINTMENT OF ELECTRONIC INTERMEDIARY

As per section 93 (6) of the Act, the Authority may prescribe rules for the conduct and transaction of business of e-intermediaries, however no such rules have been prescribed to date.

It is proposed that the Authority should issue special procedure/ rules regarding appointment, and suspension and cancellation of appointment of e-intermediary.

Rationale

It is necessary to put in place the procedures for compliance. 6.26 DEFINITION OF TAXABLE SERVICES

Unlike Sales Tax laws relating to Sindh and Punjab, the definitions of taxable services given under KP Act are limited to certain services only.

It is suggested that the definition in respect of all the taxable services should be introduced which should also be aligned with the definitions given under other Provincial Sales Tax laws.

Rationale

It is necessary for harmonization of definitions across the provinces.

ISLAMABAD SALES TAX ON SERVICES 6.27 ENACTMENT OF INDEPENDENT SALES TAX ON SERVICES LAW

The scope of Islamabad Capital Territory (tax on services) Ordinance, 2001 (ICT STO) was expanded by substituting the Schedule of services on the lines it is done by the Provinces. However, nothing was done to make it a totally independent legislation. It continued to rely on the provisions of the Sales Tax Act, 1990 for their application as if it is a sales tax levied under the STA’90. Since the ICT STO is enforced by the FBR through its enforcement team in the field offices, who are responsible for enforcement of STA’90, they invariably apply the provisions of STA’90 as if the entire law was applicable for charging and recovering sales tax on services. The indiscriminate application of STA’90 creates confusion and controversy. Classic example was charging of sales tax on the income of regulatory authorities by declaring the fees collected for compliance by those regulated under the laws as taxable services. No distinction was drawn between a service and regulatory function, which is the function of State carried out under the Act of Parliament. This was sorted out by inserting a new section in the ICT STO. Similar issue came up for taxation on export of IT software and IT enabled services in the absence of definitions within the ICT STO. This became a point of dispute, which culminated in favor of the taxpayer at the Tribunal.

After having extended the scope of ICT STO to bring in the ambit of tax almost all kinds of services that are taxable under the Provincial Sales Tax Laws, it has become extremely necessary to convert it into a full-fledged independent law on the lines it is done by the Provinces, and while doing so, cognizance should



be taken of the fact that these laws are to be harmonized with the provincial sales tax laws and the rules framed thereunder.

Another step that should be taken is to move a limited category of the services, that remained subject to payment of excise duty, from the FEA’2005 to ICT STO to achieve harmonization, and to prevent double taxation of those services under the FEA’2005.

Rationale

Mutatis Mutandis application of the provisions of the Sales Tax Act, 1990 (which applies to goods) related to certain matters including any other allied and ancillary matters related thereto, without identifying the sections, rules, orders, notifications, etc. promotes ambiguity and makes it difficult for both the taxpayers and the tax collectors to follow the law. Following expansion of the list of services in the Schedule of Services, ICT STO has become a very active law and cannot be applied properly an effectively if they continue to be enforced through the unclear application of STA’90.



Muhammad Awais, FCA Chairman & Council Member

Coordination Task Force

Ashfaq Yousuf Tola, FCA Council MemberRana Muhammad Usman Khan, FCA Council MemberIftikhar Taj, FCA Council MemberMuhammad Ali Latif, FCA Council MemberSyed Tariq Jamil, FCA Convener - Task Force on Direct TaxationAsif Siddiq Kasbati, FCA Convener - Task Force on Indirect TaxationAsif Haroon, FCA Convener - Task Force on Provincial Sales Tax on ServicesHaidar Ali Patel, FCA Convener - Task Force on Taxation of Non-ResidentsKhalid Mahmood, FCA Convener - Task Force on Broadening of Tax BaseM.Z. Moin Mohajir, FCA Convener - Task Force on Ease of Doing BusinessKamran Iqbal Butt, FCA Convener - Task Force on Harmonization of Tax Laws

Other Members on the Committee

Ahmed Jabbar, FCA Muhammad Faisal Yaqub, ACAAmer Javed Ahmad, FCA Muhammad Furqan, ACAEjaz Hussain Rathore, FCA Muhammad Furqan, ACAFaisal Iqbal Khawaja, FCA Muhammad Tahir Usman, ACAHabib Fakhruddin, FCA Nasir Gulzar, FCAHuma Sodher, FCA Nouman Razaq Khan, FCAKashif Maqbool Sehgal, FCA Saad Bin Khalid, ACALaeeq Ahmed Rana, FCA Sadia Nazeer, FCAMansoor Zaighum, FCA Shahbaz Raza, FCAMirza Taqi ud din Ahmed, FCA Shameer M. Haroon, ACAMohammad Younas Ghazi, FCA Shaukat Hussain, ACAMubasher Ahmed, FCA Syed Athar Hussain Zaidi, FCAMuhammad Akram, FCA Waqar Zafar Ahmed, FCA

COMMITTEE ON FISCAL LAWS (COFL) 2019-2020

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