TAX NEWS APRIL 13, 2016

1.      Computer industry bail pleas of three leading vendors rejected

April 13, 2016

Special Judge Customs and Excise Rawalpindi Tuesday while rejecting the bail applications of three leading vendors of computer industry, observed that the tax fraud of more than Rs 1.5 billion is involved in the case where accused caused huge loss to the public exchequer.

It is learnt that the Special Judge Customs and Excise Rawalpindi rejected the bail of these computer vendors and send them to jail on judicial remand. Special Judge Customs have confirmed the viewpoint of the directorate in this mega tax fraud scam. Special judge observed that petitioners Saleem Zawari, Attiq-ur-Rehman and Sheikh Muhammad Yaqoob through the instant petition, have sought post arrest bail in case FIR No 1/2014, dated 18.02.2014 for the offences U/S 33(11), 33(13) read with 2(37), 37-A & 37-B of Sales Tax 1990 registration of P.S I & I (Inland Revenue), Islamabad.

Judge stated that the "petitioners are nominated in the FIR. They have been declared guilty during the course of investigation. Tax fraud of more than Rs 1.5 billion is involved in this case. Allegedly the petitioners caused huge loss to the public exchequer. Bail cannot be granted to the plunderers of national exchequer simply for the reason that the alleged offences do not fall within the prohibitory clause of section 497 Cr. P.C Prima facie, sufficient incriminating evidence is available on record against the petitioners. Deeper appreciation of technicalities is not required at bail stage", judge added. The accused vendors tried their level best to get bail, but the court endorsed the viewpoint of Directorate General of Intelligence and Investigation Inland Revenue (IR) Islamabad.

2.      Third 'Nordic Pakistan Business Summit': heavy customs duties major hurdle to trade growth

April 13, 2016

The North Europe and the North Atlantic Region (Nordic region) business delegation on Tuesday sought Free Trade Agreement (FTA) with Pakistan to facilitate and promote trade. Addressing a joint press conference after the third "Nordic Pakistan Business Summit" companies' representatives stated that heavy custom duties are major impediment in the trade growth. However, the trade volume can be increased manifold by reducing taxes and signing FTA on the pattern signed with China.

Ashley Gold, CEO, Ericsson Pakistan said that telecom sector is heavily taxed as there is 20 percent custom duty on hardware and 10 percent on software on top of that other charges, accumulating high charges which are major impediment to trade. He further said that telecom and IT is intrinsic and basic rules for the country growth. Introduction and availability of new spectrum 2G, 3G and 4G services continuing in the development of poor people and country. It is expected that with the upcoming spectrum more avenues for investment would be unfolded.

Business leaders pointed out that Prime Minister Nawaz Sharif had witnessed 150MW solar power plants MoU on his last visit to Norway. Such agreements are with Nordic companies which would bring about $250 to $300 million investment. If these companies were given relaxation in taxations, they would create employment and bring investment in the country.

Earlier the business delegation comprising representatives of over 40 companies from the Nordic conjoined for the Nordic Pakistan Business Summit. This was the third such summit held after the first two - named Finland-Pakistan Business Summit - were successfully conducted in Islamabad in 2014 and 2015. "This year's business summit was one of the biggest business promotional events ever done in Pakistan," said Wille Eerola, Chairman of the Summit. "The idea was not just to take companies from countries like Finland, Sweden, Norway or Iceland to Pakistan but also to give Pakistani companies the opportunity to enter the very lucrative Nordic market. I believe both sides have the same challenges: Nordic companies do not understand the dynamics and opportunities of the Pakistani market while the Pakistani companies don't understand the purchasing power of the common Nordic market with only 26 million people. This summit is aimed at building that bridge between companies of both regions."

The summit discussed businesses in the sustainable energy, education and healthcare sectors - three of the many areas where experience and knowledge of the Nordic companies can benefit Pakistan. The Nordic region is a world-leader in producing fossil-free energy, eg the consumption of wind energy in Denmark is the highest per person in the world. Moreover, Norway is known of its oil reserves, over 99 percent of the electricity production in mainland Norway is covered by hydropower plants. Of all primary energy consumed in Finland around 25 percent is covered with renewable sources: one of the highest figures among all industrialised nations and the third highest in the EU. The world's largest bio power plant with a capacity of 265MW is also situated in Finland.

"Collaborations between companies of both the regions in the energy sector could go a long way in solving Pakistan's energy crisis. The experience these Nordic companies will bring to Pakistan can help the country establish modern renewable energy production," he said.

Eerola also added that the Nordic region is known for their high ranked public education and healthcare. The expertise imparted to Pakistani companies can help them establish similar standards in healthcare and education in Pakistan. The Nordic region is known for its well reformed education standards, economic competitiveness, quality of life and human development. They boast a very high purchasing power in an area that is home to approximately 26 million people. The GDP of the Nordic region is approx $43 per capita, placing the countries among the top-25 countries in the world by GDP. This lays a splendid platform for Pakistani businesses to establish themselves in the region.

Nordic region is a lucrative economic area that Pakistani companies should consider; simultaneously Pakistan is a huge and developing market where we can help Nordic companies to find new business and the right partners,' Eerola added.

3.      Tax issues: Chairman Senate to be asked to constitute special body

April 13, 2016

Senate Standing Committee on Finance has agreed to the suggestion of former advisors on finance that "legal loopholes" to whiten the black money must be plugged and decided to request the chairman senate to constitute a special committee on tax issues. Former advisor to Prime Minister on Finance Dr Salman Shah and former Principal Economic Advisor to Finance Ministry Sakib Sherani, who are part of a group namely Research & Advocacy for Tax And Allied Reforms (RAFTAR), were invited by Senate Standing Committee on Finance on Tuesday.

While making a presentation to the committee, Shereni informed that committee meeting chaired by Saleem Mandivwala that the country's tax system is on the brink of collapse and people have no trust in tax administration. He added that there is need of urgent measures to build the taxpayers' confidence by making the tax system simple and credible. He said that people are not paying taxes for a number of reasons that range from perception of a corrupt tax administration as well as that tax being paid by them would not be utilised on them.

The meeting was informed that 98 percent of tax industries and services sectors were almost the only taxpayers with around 98 per cent contribution, while there was very nominal contribution by retail, wholesale as well as agriculture sectors. He said that there was need to bring all sources of income in the tax net otherwise country would be unable to undertake development activities. The situation, he stated, has already started choking.

Salman Shah stated that Federal Board of Revenue (FBR) was not working while Sherani said that only 0.24 per cent Pakistanis were income tax filers. He added there are around 450,000 doctors and 500,000 lawyers in the country. However, only 14,000 doctors and 5,000 lawyers are filers. However, member FBR Rahimutullah Wazir did not agree to him and stated that growth in income tax was higher in country compared to Turkey, India as well as Malaysia.

Senator Kamil Ali Agha suggested that the committee should request the Chairman of the Senate to establish a special committee of Senate on taxes issues and his proposal was accepted. The meeting was briefed on the developments as well as recurrent budget of Pakistan Bureau of Statistics (PBS) and was informed that total budget of the PBS was Rs 4 billion whereas Rs 14.5 billion were allocated for conducting the exercise of population censure. Secretary PBS Shahid Hassan Asad told the committee Rs 9.5 billion was released to conduct the population census.

Senator Fateh Muhammad Hassani stated that considerable number of foreign families are also living in the country and suggested that National Database Registration Authority (NADRA) should also be involved in the process for conducting population census. Senator Ilyas Balour said it seems the decision not to conduct the population census was premeditated.

4.      WHT statements: Field offices accused of harassing taxpayers

April 13, 2016

The field offices have started harassing taxpayers through notices, ignoring the assurance given by the Federal Board of Revenue (FBR) for not penalising taxpayers for late/non-filing of withholding statements due to IRIS malfunctioning. In a letter sent to chairman FBR, the Karachi Tax Bar Association (KTBA) said that they had highlighted the issues relating to difficulties being faced by the taxpayers (Withholding Agents) in e-filing of monthly statements through its numerous letters which were on record.

It said that the matter had also been taken up with the Member (IR Policy), FBR at the meeting held at KTBA office as well. Subsequently, it was unanimously agreed that the penalties should not be imposed due to the malfunctioning of IRIS system which was causing undue harassment and mistrust between the taxpayers and taxmen.

However, it has been observed that various field officers are still issuing notices to the taxpayers for late/non-filing of withholding statements. The KTBA stated that field officers had completely ignored the fact that malfunctioning of IRIS system was the major cause for late filings or non-filing of statements. Keeping the issue in view, the KTBA has therefore requested the chairman FBR to direct its field officers for not issuing penalty notices which was not only oppressive in nature but actually causing serious harassment amongst the taxpayers.

The bar also suggested the FBR to allow exemption of penalties and default surcharge under section 183 of the ordinance or extend the due date of filing the eight (08) monthlies for the months of July 2015 to February 2016 for up to March 31, 2016 under section 214A of the Income Tax Ordinance 2001.

5.      Budget proposals: Ferguson lays stress on removing ambiguities in tax laws

April 13, 2016

A F Ferguson & Co, member firm of PricewaterhouseCoopers Network, has submitted budget proposals (2016-17) to the Federal Board of Revenue (FBR) calling for utilising withholding tax data and non-filers information for broadening the tax base, delete section 111 (4)(a) regarding foreign exchange remitted from outside Pakistan, amendments to banking schedule of Income Tax Ordinance 2001 and changes in withholding tax regime.

According to the budget proposals (2016-17) of A F Ferguson & Co, received at the FBR House here on Tuesday, the proposals would help remove ambiguities in tax laws, improve compliance, document economy, increase revenue collection of the FBR, document economy, increase foreign investment, simplify tax laws and facilitate taxpayers particularly corporate sector.

Section 111 (4)(a) - Foreign exchange remitted from outside Pakistan: Under the provisions of sub-section (4)(a) of section 111 relating to unexplained income or assets, a person receiving a remittance of foreign exchange from outside Pakistan is not required to offer any explanation about the nature and source of such remittance. The only condition is that remittance should be received through normal banking channels that is encashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect.

The proposed change is that the section 111(4)(a) to be deleted. This promotes inflow of foreign exchange remittances towards the country; however, the same provision is being largely misused to incorporate the untaxed income. Moreover, the provision is also refraining persons from being enrolled/ included in the tax net and making true and fair declaration of income.

Existing provision: Section 113 - Minimum Tax: Minimum tax is currently payable at 1% on the turnover from sources that are not taxable under Final Tax Regime (FTR). Minimum Tax applies irrespective of the amount of tax paid (albeit under FTR) in case there is a taxable loss from activities not covered under FTR or the tax payable is less than 1% of turnover from non FTR sources. Minimum tax is not applicable where there is gross loss before inadmissible expenses and tax depreciation.

Proposed change is that the original concept of comparison of tax liability with minimum tax on turnover from all sources as was applicable up to Tax Year 2008 before repeal of section 113 through Finance Act 2009 be restored. Accordingly, the definition of turnover as provided in section 113(3) be amended. The rate of minimum tax should be brought down to 0.50%

This dual taxation under minimum tax and FTR regime is against the basic principle on the basis of which minimum tax was introduced in law which was to make every taxpayer contribute some tax to the exchequer. The current rate of 1% is too high considering the environment in which the businesses are operating ie law and order, power shortages. Etc. To avoid interpretation issues. .The term 'gross loss' be defined.

Section 152- Power to Grant Exemption: Subsequent to the amendments in the Ordinance vide the Finance Act, 2012, the provisions of withholding tax (WHT) with respect to non-residents operating in Pakistan through Permanent Establishments (PEs) are now separately grouped and consolidated in sub-section (2A) of section 152 of the Income Tax Ordinance, 2001. Previously, the WHT provisions applicable to non-resident PEs were governed under section 153.

Sub-section (4) of section 153 expressly empowers the Commissioner Inland Revenue (CIR) to issue Exemption Certificate (EC) in cases where the underlying payment is not chargeable to tax due to various reasons (such as no tax payable due to brought forward assessed losses). No such provision, however, now exist in section 152. Accordingly, the Federal Board of Revenue has denied EC to a number of non-resident taxpayers, in cases where such non-residents were not chargeable to tax owing to excess tax deductions, availability of refunds, advance payment of taxes, etc.

Proposed change: Considering the above, it is proposed that provisions parallel to subsection (4) of section 153 be inserted in section 152, and this anomaly is removed from the law. This treatment is discriminatory to non-resident companies, since the resident companies are being issued EC under the provisions of section 153(4).

Section 153 - Minimum tax for providing or rendering of services: Clause (b) of the proviso to sub-section (3) of section 153 of the Ordinance specifies that the tax deductible on payment for rendering or providing of services is minimum tax for all the taxpayers.

However, section 153(3)(b)(i) allows facility to carry forward minimum tax in excess of tax payable under Division II of Part I of the First Schedule for adjustment in subsequent years only to the 12 sectors specified. The carry forward facility should be available to all the taxpayers which are liable to such minimum tax.

Clause (94) of Part IV of the Second schedule inter alia provides for reduction of minimum tax to 2% of relevant turnover in case of a taxpayer company from 12 specified service sectors if the taxpayer company files a written undertaking to present accounts of tax year 2016 for the tax audit by the Commissioner. This facility should be extended to all companies engage in any service sector and Professional Firms prohibited from incorporation by any law or regulations of bodies governing the Profession for tax years 2016 and onwards.

Proposed change: The carry forward of minimum tax under section 153(3)(b)(i) be allowed to all taxpayers engaged in providing or rendering of services by deleting reference of clause (94) in section 153(3)(b)(i). The benefit of reduction in the rate of minimum tax of 2% of relevant turnover as given in clause (94) of Part IV of the Second Schedule be extended to all companies and Professional Firms prohibited from incorporation by any law or the rules of the body regulating the profession on filing of irrevocable annual undertaking to present their accounts for tax audit by the Commissioner for tax years 2016 and onwards. The above provision can be made part of 153(3)(b)(iii) and accordingly clause (94) of Part IV of the Second Schedule may be deleted.

The rationale for change is to provide level playing field to all sectors and persons who are engaged in providing or rendering of services. Section 170 - Refunds: This section deals with filing of application for issuance of refund. Section 170(2)(c) specifies that refund application is to be made within two years of the later of:

(i)                 The date on which the Commissioner has issued the assessment order for the tax year to which the refund application relates; and;

(ii)              the date on which the tax was paid.

Clause (c) (prescribing time limit to file refund application) be deleted. Proposed change: It is also proposed that a proviso be added after Sub-section (4) as under:

"Provided that if no order is passed within the time specified in this Sub-section, the application shall be deemed to have been accepted and all provision of this Ordinance shall have effect accordingly"

Sub-section (5) of section 170 is not in conformity with section 127, therefore, it is proposed that necessary amendments be made. The rationale behind the proposal is the good governance and to fill up lacunas.

Section 206A - Advance rulings: Only a non-resident taxpayer can apply for advance ruling regarding the application of the Ordinance to a transaction proposed or entered into by the non-resident taxpayer.

Proposed change: The option of applying for advance ruling should also be available to any person.

Advance Ruling Committee needs to be established. The ruling issued by the Committee be binding on the tax payer and FBR. The taxpayer/FBR should have a right of appeal against the ruling. Advance Ruling Committee should be independent to FBR, it added. The rationale behind the change is to facilitate residents of Pakistan in obtaining advance Ruling Before undertaking any major transaction and to avoid uncertainty in term of tax implication.

Section 214A - Condonation of time limit: The Federal Board of Revenue is empowered to condone the time or period specified under any of the provisions of the Ordinance 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 provisions of section 214A, prior to amendment made through Finance Act, 2012 implied that this power cannot be used detrimental to a taxpayer. However, by virtue of the amendment made through Finance Act, 2012 it has been specifically provided that the 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.

This amendment is highly prejudicial to the interest of taxpayers and indirectly gives a blanket power to the Federal Board of Revenue to override the statutory time limit or period of any act or thing to be done by the Income Tax Authorities. It is proposed that the explanation to section 214A be deleted. To restore the provisions of section 214A as existed prior to the amendment made by Finance Act, 2012.

236 G. Advance tax on sales to distributors, dealers and wholesalers: Every manufacturers, or commercial importer of electronics, sugar, cement, iron and steel products, fertilisers, motorcycles, pesticides, cigarettes, glass, textiles, beverages, paint or foam sector at the time of sale to distributors, dealers and wholesalers are required to collect advance tax at the rate of 0.1% of the gross amount of sales

236 H. Advance tax on sales to retailers: Every manufactures, distributor, dealer, wholesaler or commercial importer of electronics, sugar, cement, iron and steel products, motorcycles, pesticides, cigarettes, glass, textiles, beverages, paint or foam sector at the time of sale to retailers and every distributor or dealer to another wholesalers in respect of the said sectors, shall collect advance tax at the rate of 0.5% of the gross amount of sales.

The proposed change is that the sections 236G and 236H be suitably amended to provide for tax collection only in those cases where the buyer is not registered either in income tax or sales tax. Sales tax/income tax registered persons are already in tax net therefore, they should be excluded from the ambit of section 236G and 236H.

Other Proposals revealed that the return forms are always finalised by the end of September - Section 114. Monthly statements are required to be e-filed - Section 165. Jurisdiction for monitoring of tax on deductions be is not clear and monitoring is done by the tax department each year.

The First proviso to sub-section (1) of section 177 specifies that the Commissioner shall communicate reason for calling information. Certain Commissioners are considering this Proviso as powers for selecting any person for the audit. Further, an explanation has been added in sections 177 and 214C providing that the powers of the Commissioner under section 177 are independent of powers of the FBR under section 214C.

The proposed change is that return forms should be finalised by the first week of July each year. Quarterly statements should be reintroduced instead of monthly statements. Jurisdiction for monitoring of tax on deductions be clearly made and these should be checked once in three years.

The first proviso be substituted with the following: For conducting the audit, Commissioner may call for records or documents including books of accounts of the taxpayer selected under section 214C. The explanations given in sub-section 10 of section 177 and in sub-section 3 of section 214C be deleted. The rationale behind the proposal is that Unnecessary delay in filing the return To remove the hassle of the tax payer for each month and minimise burden on E-Portal.

To reduce hassle of the tax payer of providing information for all the years. To avoid litigation and to bring confidence in the minds of taxpayers that tax audits will be conducted on specified basis and in transparent manner and only those cases will be audited by the field officers which were selected for audit by the Board under section 214C.

Broadening of Tax Base: Utilisation of Withholding taxes data. The FBR has already distinguished between filer and non-filer vide Finance Act 2014. In that perspective a higher rate of withholding taxes has also been prescribed for non-filers. Data available with Other Authorities/Facilities: There are various Authorities/Facilities in Pakistan [like housing societies etc] from which data can be obtained to identify owner of properties. In that way potential cases can be identified in respect of the owner of the property.

Proposed change is that proper exercise should be carried out by tax administrative authorities to gather the data from the banks and other authorities to identify the cases where the higher rate of withholding taxes (non-filers) has been applied by deducting / collecting authority. Data sharing should be done within the various Authorities/Facilities in order to identify the potential tax payers. It is suggested that sales tax data should be monitored with the purview of any untaxed sector in relation to income tax. Utilisation of Sales tax data: Complete harmony of the sales tax team with income tax team is required to monitor any potential tax leakage in the economy.

Valuation of Property: There is a general tendency to under value the property to save transfer duties, etc. Proposed change is that data revealed in the Sales tax withholding statements should also be made a basis for tapping into the untaxed section of the economy. Federal Government in co-ordination with the Provincial Governments need to agree a valuation mechanism for properties in various categories which need to be revised at level every year through independent credible valuers. These values may be relaxed for existing owners on a cut-off date for the purpose of determining subsequent gains.

Exemption from tax of fees earned for services rendered outside Pakistan - Clause (131): Clause (131) grants exemption from tax to a company and any other taxpayer, inter alia, of any income derived by way of fee for technical services rendered outside Pakistan to a foreign enterprise under an agreement in this behalf provided the income is received in Pakistan in accordance with the law for regulating payments and dealings in foreign exchange.

The proposed change is that the sub-clause (a) after the words "consideration of technical services" the words "outside Pakistan" be deleted and after the words "foreign enterprise" the words "not having any Permanent Establishment in Pakistan" be inserted.

Sub-clause (b): After the words "by way of technical services rendered" the words "outside Pakistan" be deleted and after the words "foreign enterprise" the words "not having any Permanent Establishment in Pakistan" be inserted.

The rationale behind the change is that Such services are now rendered online through the internet thereby obviating the physical presence of the taxpayer in a foreign country. In fact, clause (131) nowhere specifies that the Pakistan taxpayer is required to be physically present outside Pakistan to render the service. The rendering of technical services online through the internet is not only convenient for the foreign enterprise but also results in substantial savings of foreign exchange which would necessarily have to be expended if the services were rendered by the taxpayer physically outside Pakistan. The presence of the taxpayer outside Pakistan is not the intention of the statute since technical services rendered online through the internet fulfil the necessary and essential conditions of (a) the services being rendered to a foreign enterprise and (b) the income emanating from such services being received in Pakistan in foreign exchange. Therefore, the words "outside Pakistan" in sub clauses (a) and (b) are redundant. The fear is that unless these words are removed the tax authorities could take a narrow interpretation of requiring the physical presence of the taxpayer outside Pakistan thus resulting in unnecessary litigation and a disincentive for taxpayers.

Sub-rule (17) of Rule 13N of the Income Tax Rules, 2002: Under the Eighth Schedule to the Ordinance, capital gains tax is being collected by National Clearing Company of Pakistan Limited (NCCPL) from those taxpayers to whom section 100B of the Ordinance applies.

Till June 30, 2014, Foreign Institutional Investors (FIIs), inter alia, were excluded from the application of Eighth Schedule under section 100B of the Ordinance. Pursuant to the amendment made through the Finance Act 2014, effective from July 1, 2014, FIIs were brought into the ambit of section 100B of the Ordinance resulting in application of Eighth Schedule also to FIIs. The said change in mechanism resulted in NCCPL collecting tax also from those FIIs to whom tax exemption is available under a tax treaty. The tax so collected by NCCPL is deposited into the Government Treasury which results in a refundable position. Collection of tax by NCCPL despite tax exemption available under a treaty and no action by the concerned Commissioner on opt-out request filed by the FII is unjustified and results in unnecessary cash outflow by FIIs.

The proposed change is that the provisions of sub-rule (17) of Rule 13N be amended to specify that in case of FIIs which are exempt from capital gains tax in Pakistan, the opt out requests filed by those FIIs will be approved by the Commissioner only after ensuring that the FII claiming tax exemption under a tax treaty is tax resident of that country. In case the opt out request is not acceded to, the Commissioner shall give reasons in writing.

Non-action by the Commissioners Inland Revenue to process the opt-out requests filed by FIIs which are entitled to claim tax exemption under a tax treaty results in NCCPL collecting capital gains tax for which exemption is claimed by FIIs in their tax returns. This unnecessary cash out flow of FIIs which are already exempt under a tax treaty should be avoided by getting their opt-out requests processed by the concerned Commissioner Inland Revenue after necessary verification.

Option for Final Tax Section 6 read with Rule 19 of the Income Tax Rules, 2002: Every non-resident person who receives Pakistan-sourced Fee for Technical Services (FTS) is taxable on an net income basis where such the services giving rise to such FTS are rendered through a Permanent Establishment (PE) in Pakistan of such non-resident person. Such FTS, however, is also assessable under Final Tax Regime (FTR) on gross receipts basis if the non-resident opts for such taxation by filing a written declaration of option within 15 days of the commencement of contract.

The proposal is that the option for FTR taxation for FTS should be granted by the Legislature through an amendment in Part IV of the Second Schedule, as similar option for FTR is already provided to non-resident contractors through clause 41 of Part IV of the Second Schedule.

The rationale for the change is that the intention of the lawmaker appears to allow the non-resident persons having a PE in Pakistan to be taxed under section 6 read with section 8. According to the rules of interpretation, the Rules, being subservient to the statute, cannot override the main statute. Consequently, the option for FTR given to non-residents is not proper from a legal perspective despite of usage of the words "Subject to the Ordinance" in the beginning of section 6.

Sub-rule (17) of Rule 13N of the Income Tax Rules, 2002: Under the Eighth Schedule to the Ordinance, capital gains tax is being collected by National Clearing Company of Pakistan Limited (NCCPL) from those taxpayers to whom section 100B of the Ordinance applies.

Till June 30, 2014, Foreign Institutional Investors (FIIs), inter alia, were excluded from the application of Eighth Schedule under section 100B of the Ordinance. Pursuant to the amendment made through the Finance Act 2014, effective from July 1, 2014, FIIs were brought into the ambit of section 100B of the Ordinance resulting in application of Eighth Schedule also to FIIs.

The above change in mechanism resulted in NCCPL collecting tax also from those FIIs to whom tax exemption is available under a tax treaty. The tax so collected by NCCPL is deposited into the Government Treasury which results in a refundable position. Collection of tax by NCCPL despite tax exemption available under a treaty and no action by the concerned Commissioner on opt-out request filed by the FII is unjustified and results in unnecessary cash outflow by FIIs.

The proposal is that the provisions of sub-rule (17) of Rule 13N be amended to specify that in case of FIIs which are exempt from capital gains tax in Pakistan, the opt out requests filed by those FIIs will be approved by the Commissioner only after ensuring that the FII claiming tax exemption under a tax treaty is tax resident of that country. In case the opt-out request is not acceded to, the Commissioner shall give reasons in writing.

The rationale behind the proposal is that the non-action by the Commissioners Inland Revenue to process the opt-out requests filed by FIIs which are entitled to claim tax exemption under a tax treaty results in NCCPL collecting capital gains tax for which exemption is claimed by FIIs in their tax returns. This unnecessary cash out flow of FIIs which are already exempt under a tax treaty should be avoided by getting their opt-out requests processed by the concerned Commissioner Inland Revenue after necessary verification.

Section 109 - Anti-avoidance -recharacterisation of income and deductions: This section empowers the Commissioner to disregard a genuine, legal and verifiable transaction only for the reason that it "does not have substantial economic effect". The Commissioner is also empowered to recharacterise a transaction where "the form of the transaction does not reflect the substance".

The proposed change is that a committee should be constituted which comprise of two Commissioners headed by the Chief Commissioner of the respective jurisdiction for dealing with case of recharacterisation of income and deductions under section 109 of the Ordinance.

It said that the section 109 is bad law as it flouts the maxim of natural justice which is implied in all laws. It is the inherent right of a taxpayer to be made aware of his liabilities and all anti-avoidance legislation must be targeted to specific issues which should be clearly spelled out in the tax statute. Tax provisions such as section 109 lead to disrespect for the tax law and is a disincentive for foreign investment.

Moreover, power in the hands of the Commissioner to recharacterise a transaction tantamount to imputing an ulterior motive on the taxpayer and taxing the subject by inference or by analogy.

All tax statutes have anti-avoidance provisions but such provisions are targeted to specific issues. Schemes for avoidance of tax can legally be neutralised in the Ordinance by appropriate legislation such as sections 90 (transfer of assets), 91 (income of a minor child), 108 (transactions between associates), section 112 (security transactions) etc. All taxpayers are aware of this specific anti-avoidance legislation whereas section 109 gives legal sanction to the assessing officer to interpret any transaction according to his own whim and fancy. Thus with the constitution of the Committee the grievance of mala fide intention of the assessing officer will be eliminated.

6.      CDA's bank accounts attached, over Rs 70 million recovered

April 13, 2016

Regional Tax Office (RTO) Islamabad has attached the bank accounts of Capital Development Authority (CDA) and recovered an amount of over Rs 70 million. It is reliably learnt that the bank accounts of the authority have been attached on non-payment of admissible taxes. The campaign of attachment of the bank accounts of the defaulted units is underway across the country, they added.