TAX NEWS APRIL 23, 2016

1.      Tax evasion: premises of leading shoe maker raided

April 23, 2016

Directorate General of Intelligence and Investigation Inland Revenue (IR) Islamabad has conducted a raid on the leading shoe manufacturer and retailer located at Rawalpindi, confirming suppression of sales to the tune of billions. According to the sources, the intelligence arm of the FBR received intelligence report that a leading shoe manufacturer and retailer having branches all over Pakistan was involved in suppression of its sales and evading taxes in millions of rupees.

The directorate started the probe and reached the conclusion that the information was correct. Hence, the directorate after satisfying the competent court and obtaining permission under the law constituted a team. The team of the directorate led by Junaid Murtaza and Mehdi Hasan Assistant Directors and assisted by Police raid the business premises of the taxpayer.

The team impounded computers and records of the company. Sources reported that initial scrutiny of the records pointed to suppression of sales in billions. The department has unearthed over thirty bank accounts, mostly concealed from the Inland Revenue. Moreover evidence of tax evasion in crores of rupees has also been collected. Whereas the scrutiny is underway, sources reported that FIR against the company is likely to be registered shortly. This is one of the biggest cases of tax evasion unearthed by the department in recent months.

2.      Withdrawal of FED on services: SRB endorses budget proposal floated by SBP

April 23, 2016

Sindh Revenue Board (SRB) has endorsed the budget proposal (2016-17) of State Bank of Pakistan (SBP) to withdraw Federal Excise Duty (FED) on services by the Federal Board of Revenue (FBR) where such services are liable to provincial sales tax to double taxation.

Sources told Business Recorder here on Friday that the SRB has submitted a budget proposal (2016-17) to the FBR pertaining to the withdrawal/exemption of FED on the services liable to provincial sales tax-budget proposal by SBP in relation to FED on banking services liable to provincial sales tax. The SRB has also referred to the budget proposals of the SBP and endorsed the viewpoint of the SBP.

In its budget proposals (2016-17), the SBP had proposed that the issue is related to the anomaly in Federal Excise Duty (FED) under Federal Excise Act, 2005. The right to levy sales tax on services has been delegated to the provinces as per the Constitution (18th Amendment Act 2010). However the FBR has not withdrawn the rights for recovery of FED as yet. Therefore, FBR officers are issuing notices to banks for levy of 16 percent FED on banking services, in addition to sales tax imposed by the respective provinces on the same services. This has affected the banks with the dual responsibility on account of FED and sales tax on services. The matter should be resolved as it is lingering since 2011 and needs amicable resolution, as levying of both taxes will unduly burden the citizens of Pakistan, the SBP added.

According to sources, SRB has requested the FBR to convene a meeting urgently for resolution of the issue in the light of the intent and purposes of the 18th Constitutional Amendment of 2010 in relation to Item No 49 of the Fourth Schedule to the Constitution; article 8 of the 7th NFC Award of 2010; Finance Division (NFC Secretariat) Islamabad's d.o. letter No F.5(5)-NFC/2010-56 dated 26th March, 2010, addressed to the Chairman, FBR; FBR's press release dated July 1, 2011 as available at FATE pages of its website; FBR's acknowledgement and assurance as contained in paragraph 3(i) and 4 of its letter No 1/23-STB/2010(Pt)/72589-R dated 14th May, 2014 and the spirit of the FBR's commitment to avoid double taxation (FED and Provincial sales tax, both) on the services liable to provincial sales tax, as is also manifest vide the amendment made through the Finance Act, 2014, in SL. No 6 of Table II of the First Schedule to the Federal Excise Act, 2005.

The SRB supports the budget proposal made by SBP and reiterates that this issue may be resolved urgently with a view to avoiding discomfort to the taxpayers and double taxation on the services liable to provincial sales tax. The SBR is willing to be involved in consultative process, if so required by FBR, and requests FBR that this issue may be resolved in the forthcoming federal budget on the pattern of the aforesaid amendment as made, through the Federal Budget, 2014, in Sl.No 6 of Table II of the Federal Excise Act, 2005, SRB added.

In the past, the SRB had also informed the FBR that the SRB was not taken into confidence and SRB's viewpoint was also not solicited by FBR while giving its un-warranted verdict regarding the constitutionality and legality of the provisions of the Sindh Sales Tax on Services Act, 2011, legislated by Provincial Assembly of Sindh and enacted by the Sindh Government in terms of the powers conferred and functions assigned by the constitution. The FBR even did not endorse a copy of its aforesaid letter dated 8th January, 2016, to SRB.

Although sales tax on the "services of manufacturing or processing for others on toll basis" is levied in all the 4 provinces of Pakistan, only Sindh Sales Tax on Services Act, 2011, was singled out in FBR's aforesaid letter dated 8th January, 2016. This discriminatory action is a biased and un-warranted attempt to bring the Sindh Assembly, the Sindh Government, the Sindh law and the SRB into public disrepute.

Despite the fact that SRB has always extended its cooperation and co-ordination to FBR, eg by signing the MoU on 13th March, 2014. FBR has not yet taken any concrete/ decisive steps to fulfil its assurance to resolve the outstanding issues (including the issue of toll manufacturing). SRB's cooperation and problem-solving attitude is evident from paragraph "3 Toll Manufacturing" of the minutes of the meeting held on 27th November, 2014, as circulated under FBR's letter C. No 1(1)Chief/Automation & ST/2014/164838-R dated 4th December, 2014. The said minutes will show that it is not SRB but the provinces other than Sindh who did not agree to the proposed resolution. Despite Sindh High Court's judgement in Special Sales Tax Appeal No 64 of 1998 (2006 PTD 1459) declaring such economic activity to be services. SRB is still willing to meet FBR to resolve the outstanding issues on bilateral basis, if FBR so desires, in the spirit of communication dated 14th May, 2014 and 4th December, 2014. The SRB strongly feels that this is against the spirit of moving forward with which the MOU was signed between the Federal Government, FBR and SRB. For the reasons given, the SRB had requested that FBR may consider directing withdrawal of the said letter dated 8th January, 2016, the SRB added.

3.      SECP grants registration to PTAA

April 23, 2016

The Securities and Exchange Commission of Pakistan (SECP) has granted registration under section (u/s) 42 of the Companies Ordinance, 1984 to Pakistan Tax Advisors Association (PTAA). It is learnt on Friday that the licence has been issued by the SECP to the PTAA. The SECP vide letter No A006901 dated 21.04.2016 has granted registration u/s 42 of the Companies Ordinance, 1984 to PTAA.

The SECP said that Pakistan Tax Advisors Association capable of being formed as a public company under the Companies Ordinance, 1984, is being formed with the primary object "to establish, maintain relations and liaison with the Tax practioners in various cities of the country and to offer them membership of the Association' and other objects contained in its Memorandum of Association and it intends to (a) apply its profits and income towards those objects and (b) prohibit the payment of any dividend or profit to its members.

Now, therefore, ,in pursuance of sub-section (1) of section 42 of the Companies Ordinance, 1984, the Commission has granted this license to the said Association and direct that it may be registered as a public company with limited liability and not having a share capital without addition of the words "(Guarantee) Limited" to its name, SECP add. According to sources, the association has been contributing its role in improving tax system in the country since its inception ie September, 2013.

4.      Individual or AoPs before 2000: Could FBR's data be reliable for audit of IT returns?

April 25, 2016

There is general confusion in senior echelons of Federal Board of Revenue (FBR) as to whether their data integrity extends before 2007. This was the conclusion of Business Recorder after repeatedly querying various senior Federal Board of Revenue (FBR) officers as to whether it had retained data that would enable the Board to conduct an audit of income tax returns of an individual or Association of Persons before 2000.

Officials refrained from responding to this specific query and instead repeatedly stated that the FBR can analyse electronically filed tax returns and wealth statements since the introduction of the electronic filing system in 2007 and thereby detect mis-declarations, under-statements or concealment.

When asked whether manually filed returns prior to 2007 were available the official said that electronic income tax return data was available from 2000 but cautioned that it was not reliable. The FBR had hired a private company to feed data from 2000 to 2007, he explained, and admitted that there are errors in the data.

A certain portion of manually maintained income tax returns data prior to 2000 was destroyed during the exercise of 'weeding out of tax records', an exercise undertaken during the tenure of Abdullah Yusuf, who was FBR Chairman from 2006-2008. The manual record was 'weeded out' by arguing that tax record beyond five years was not required under the law. Additionally some of the past records were misplaced during the transfer of tax files from one place to another during the creation of reformed units like Regional Tax Offices and Large Taxpayer Units from 2000 onwards. Rains and fire incidents also destroyed some of the manual records, an official recalled.

In 2011, Former Member Strategic Planning and Statistics (SP&S) FBR Mahmood Alam reportedly informed the Public Accounts Committee (PAC) that the FBR had tried its level best to search records pertaining to 1994-95 in field formations, but some records could not be traced.

Another senior tax official, who remained Member Information Technology FBR and CEO Pakistan Revenue Automation Limited (PRAL), said that tax payment data of the late 1980s is available with FBR from random balloting done to select cases for audit on recorded computer reels (an obsolete technology no longer in use). However another senior FBR official told this correspondent that this data is not reliable. Prior to 2000, the manual record of taxpayers is available in the field formations and we can search the same in the RTOs, he added.

A senior tax official said that if data is not reliable then it is junk and cannot be used for analysis and verifications.

Another official of the FBR told Business Recorder that only income tax registration data and not returns is available in electronic format for 2000 and before.

Another senior tax official said that the availability of manual data prior to 2000 varies from one Regional Tax Office (RTO) to another. In some small RTOs the data is available in contrast to RTOs in urban areas like Lahore, Karachi, Islamabad etc.

Under income tax law, the taxpayers are required to maintain record for last six years and tax department can re-open cases for the last five completed tax years. However, there is no legal bar on the FBR from analysing electronic data maintained for the last nine years. Analysis of the tax returns can be done for specific individuals, if required, sources added.

The FBR continues to maintain its National Data Warehouse where all records from 2007 (and not reliable from 2000) are available. These include income tax returns, wealth statements, sales tax returns, imports, exports, sales and purchase data of taxpayers as their own declarations is available upon the click of a button. The FBR has used the National Data Warehouse for broadening of tax base in the recent past, wherein all the third party data sources were used to enrich the data warehouse which includes but is not limited to the motor vehicle owners (sellers & buyers), immovable property owners (sellers and buyers), bank account holders, travel abroad, electricity consumers, Sui southern and northern, mobile and landline consumers, national revenue survey-2000 and company incorporation.

The FBR through its data warehouse is in a position to view the profile of every registered and non-registered taxpayer which links each and every piece of information to an individual including the details of companies, AOPs and businesses in his name with percentage of shares of the person as well as those of his/her relatives working as partners, directors and shareholders.

5.      Dar says Super Tax to stay for another year

April 24, 2016

Finance Minister Ishaq Dar Saturday said that Super Tax imposed on rich individuals, Association of Persons (AoPs) and companies having over Rs 500 million would be extended for another year. Addressing to a pre-budget seminar here, the Finance Minister said, "Super Tax will continue for another year to eradicate terrorism." He said it is not necessary that devolution of exchange rate helps exports and suggested exporters to explore some other option to increase the country''s export. He said 10,000 MW electricity would be put in the system by March 2018 as 25,000 energy projects are being implemented.

The Finance Minister said there should be no debate in the issue of Panama Leaks as the matter lies with the superior judiciary and urged the political parties to have a common economic agenda for continuation of economic stability. "We should be committed towards development agenda," the Finance Minister added. He said the government would utilise Rs 600 billion Public Sector Development Programme (PSDP) against budgetary allocation of Rs 700 billion for the current fiscal year. After achieving economic stability, the government focus would be on growth to create employment opportunities.

Dar said Large Scale Manufacturing (LSM) is doing well; however, there may be some issues in achieving estimated growth of agriculture sector. Dar said the government is striving to provide some relief to farmers through implementation of prime minister''s agriculture package of Rs 341 billion. He said 10 percent fiscal space has been devolved to the provinces in the last NFC Award along with responsibilities including ministry of food and agriculture. Dar stated that agriculture sector credit has been increased to Rs 600 billion in the current fiscal year and directed the State Bank of Pakistan to achieve the disbursement target of credit to the agriculture sector. He said China Pakistan Economic Corridor (CPEC) is a game changer for the country and regional progress and recounted for raising the country''s foreign exchange reserves to $15.8 billion from $2.8 billion in 2015.

He said tax revenue target of Rs 3,100 billion has been set for the current fiscal year and remittances have registered an increase of 17 percent over the last few years and are going to cross $18 billion mark from $13.9 billion in 2013. Dar promised that outstanding circular debt and refund to exporters would be settled and will be cleared by July 2016. He said good governance, accountability and transparency are the party''s manifesto and no one can prove any corruption in projects implemented during the last 32 months. He said the government is committed to eliminating corruption, improve governance and bring about transparency.

Dar said Pakistan has the potential to become world leader and many other countries including Italy, Qatar and Saudi Arabia are looking towards making investment in the country. The government has provided Rs 230 billion for operation in North Waziristan and reconstruction and rehabilitation of displaced persons, he maintained.