Budget Proposal 2007 on Income Tax The Income

Budget Proposal 2007 on Income Tax The Income Tax Bar Association, Karachi April 17, 2007 l Presented by: l Ali A. Rahim Director l

TAX REFORMS F Bigger the Tax Base-Lesser the Rates – It is now well settled through studies that bigger the tax base is, the lesser the rates of tax can be Further, efforts be made to bring more people into tax base q Establishment of Research and Development Department under the auspicious of CBR in corroboration with Business Community, Professionals, Tax Advisors and other Stake holders: Area of Studies-Examples - Ø Ø Ø Undocumented economy Double Taxation Agreements E-Commerce Economic and Tax Factors Contribution by different Sectors According to percentage of G. D. P. (Contd…) 2

TAX REFORMS q Further, encouragement and Incentives to be provided for Savings and Investment q New provision to be introduced for Tax Credit for investments made in National Saving Schemes and quoted and unquoted mutual funds to give incentives for savings which will create investment and employment q It is proposed that tax should be imposed on all segments of the society. Exemptions and concessions to certain classes of income or classes of persons be abolished. (Contd…) 3

TAX REFORMS q Islamic Banking & Insurance Issues regarding withholding of Taxes and taxation to be examined to promote Islamic mode of Banking & Insurance q SME It is proposed that reduced rates be Extended for Small Company and Medium Enterprise (SME) 4

IRRITANTS q For automation and facilitation Common Tax Identification (CTI) number to be introduced for Companies and Firms and CNIC for Individuals. q Efforts to be made for effective legislation of Regulations which require mandatory incorporation of the above on all the documents executed in any form at any stage. e. g. (a) (b) (c) (d) (e) (f) Transfer of Properties Transfer of Shares Transfer of Vehicles any model or cc Bank Documents Travel Documents Large Expenditures (Contd…) 5

IRRITANTS q Return forms have remained constant and thus are now user friendly. However, frequent changes of quarterly and monthly statements are an irritant. These should also be designed on permanent basis and while designing such forms, the literacy rate, socio economic and judicious norms should be considered rationally. q Quarterly statements to be reintroduced instead of monthly. q Filing of monthly or quarterly statements should only be done in one zone. (Contd…) 6

IRRITANTS q Employers should be allowed to deduct tax after giving adjustments for investment rebates, donations, medical expenditure etc. q e-filing of returns and statements should not be made mandatory. q Jurisdiction for monitoring of tax on deductions made. q Selection of cases for audit. 7

PERMANENT ESTABLISHMENT Section 2(41) ISSUE The perusal of the definition shows that under Sub section (d) and (f) any services or any substantial equipment installed or other assets or property capable of activities giving rise to income has been included PROPOSAL Since, the industrial growth has been promised by the government. It would be appropriate that a minimum period of suitable time be included in Sub section (d) and (f) as was done in Sub section (3) A. Minimum period, therefore, for Sub sections is suggested to also be 90 days. RATIONALE To correspond the provisions with treaty provisions 8

ROYALTY Section 2(54) (g) & 37(5) 9

ORDINANCE TO OVERRIDE OTHER LAWS ISSUE Section 3 & 54 Ordinance to Override other laws 10

ROYALTY & FEE FOR TECHNICAL SERVICES Section 6 & Rules 18 & 19 of the Income Tax Rules, 1982 11

INCOME FROM PROPERTY Section 15(2) (Contd…) 12

INCOME FROM PROPERTY Section 15(2) RATIONALE Under the provisions of section 39 (1)(d), ground rent has been specially dealt with arising out of the land alone. Since the word “or” has been used in definition clause in between land building, it is suggested that according to the rules of interpretation, it connotes disjunctive consideration. It seems the intention of legislature is that if an amount is received or receivable by the owner of land/building, such amount would be treated as rent. As such, rent of land is being specially and separately dealt with under Section 39 13

BAD DEBTS ISSUE Section 29(1)(b) Allowability of bad debts in a tax year PROPOSAL It (b) of Sub section (1) of the section 29 may be rephrased as under : “ 29(1)(b) the debt or the part of the debt is written-off in the accounts of the person in the tax year or in any previous tax year or assessment year; and” RATIONALE Facilitation 14

ACCRUAL BASIS OF ACCOUNTING Section 34(5) 15

STOCK IN TRADE Section 35 16

INCOME FROM OTHER SOURCES Section 39(3) (Contd…) 17

INCOME FROM OTHER SOURCES Section 39(3) ISSUE The world is moving very fast. The concept of paper money is being replaced by Plastic money. The normal banking practices are now absorbing concept of Electronic Banking. One may receive loan, gift or advance through other mode of transfers PROPOSAL (a) It is, therefore, suggested that the condition of holding an N. T. N. should be abolished. Since all bank accounts have CNIC's (b) Advance Rent received be included Sub section subject reasonable and (4) just to restrictions to further increase documentation of the economy. 18

FAIR MARKET VALUE ISSUE Section 68 Discretion of the Commissioner 19

NON-RECOGNITION RULES Section 79(1) 20

NON-RECOGNITION RULES Section 79(2) 21

INVESTMENT IN SHARES ISSUE Section 62 Increase in investment rebate. PROPOSAL increased to Rs. 500, 000/RATIONALE To encourage investment 22

EXTENSION OF TIME FOR FURNISHING RETURN & OTHER STATEMENTS ISSUE Section 119(2) Application to the Commissioner. 23

EXTENSION OF TIME FOR FURNISHING RETURN & OTHER STATEMENTS Section 119(6) 24

DISPOSAL OF APPEALS BY APPELLATE TRIBUNAL Section 132(2) ISSUE Appeal can be dismissed in default PROPOSAL It is, proposed that said Sub section (2) may accordingly be amended in the following manner – “The Appellate Tribunal shall afford an opportunity of being heard to the parties and in case of failure to attend the appeal by the person filing the appeal, the Tribunal may proceed exparte to decide the appeal on the basis of the available record” (Contd…) 25

DISPOSAL OF APPEALS BY APPELLATE TRIBUNAL Section 132(2) RATIONALE In fiscal laws, and more particularly law governing Income tax, it has been the practice to decide the matters on merits, as ITAT is the last fact finding authority and by virtue of Sub section (1) of Section 132, the decision of the Appellate Tribunal on an appeal shall be final In our considered opinion, the language used in Sub section (2) is defective and needs suitable amendment as it cannot be presumed that legislature intended to cause injustice 26

ALTERNATE DISPUTE RESOLUTION ISSUE Section 134 A Read with Rule 231(6) Time limit of 30 days for disposal PROPOSAL Period for disposal of application by ADR Committee to be extended from 30 to 60 days RATIONALE Broadening the time limit for effective decision making 27

ALTERNATE DISPUTE RESOLUTION ISSUE Section 134 A Read with Rule 231(15) - Time limit for decision by CBR - Rejection of recommendation by CBR 28

ADVANCE TAX Section 147 Appropriate amendment be made to adjust - Unadjusted amount of tax of one quarter to another within the same Tax year 29

EXEMPTION OR LOWER RATE CERTIFICATE ISSUE Section 159 Grant of an exemption or lower rate certificate PROPOSAL inserted after the words “ the Commissioner shall” in sub Section (1) The right of appeal be provided to challenge the refusal of application before the Commissioner of Income Tax (Appeals) RATIONALE No time frame prescribed 30

STATEMENT REGARDING IMMOVABLE PROPERTIES ISSUE Section 165 In the Repealed Ordinances, under the provisions of Section 143 A every Registering officer, Revenue officer or other officer appointed to register any documents relating to property (other than agricultural land) under the Registration Act, 1908 was required to furnish a statement regarding the properties the value of which was not less than Rs. 50, 000/- registered with him during the preceding financial year PROPOSAL recommended is under the provision Itbrought that in be Income Tax Ordinance, 2001. 31

REFUNDS Section 170 ISSUE Refund Applications and Order thereon PROPOSAL It is, proposed that following amendment be made In clause (b) of sub section 2 word “and” be deleted and Clause (c) (prescribing time limit to file Refund Application) be deleted Without Prejudice: In case no order is passed by the Commissioner on the said Application, It is, proposed that a provisio be added after Sub section (4) as under: (Contd…) 32

REFUNDS “Sub Section (4) Section 170 Provided that if no order is passed within the time specified in this sub section, the application shall be deemed to have been accepted and all the provision of this Ordinance shall have effect accordingly Without Prejudice to above Sub Section (5) is not in conformity with Section 127, therefore, it is proposed that necessary amendments be made RATIONALE Good governance and to fill up lacunas 33

PENALTY FOR NON-PAYMENT OF TAX Section 183 34

ADVANCE RULING ISSUE Section 206 A Advance Ruling provisions to Non Residents is amendment PROPOSAL Appropriate extended the scope to other resident taxpayers. 35

TAX WITHHOLDING ON CASH WITHDRAWAL – INCREASE IN THRESHOLD ISSUE Section 231 A Cash Withdrawal from Banks – Tax withholding PROPOSAL 50, 000/- Exemption to be extended to Salaried Class RATIONALE Relief to Salaried Class 36

INCOME TAX PRACTIONER ISSUE Section 223(2)(f) Appearance before tax authorities. 37

ADVANCE – TAX ON TELEPHONE ISSUE Section 236 Advance Tax on Telephones PROPOSAL amicably resolved RATIONALE Facilitation and resolving Disputes 38

RATE OF TAX - NON SALARY First Schedule Part-I Division 1 ISSUE Exemption limit PROPOSAL Exemption should be increased to Rs. 200, 000/- RATIONALE Relief to taxpayers 39

RATE OF TAX - SALARY ISSUE First Schedule Part-I Division 1 A Exemption limit Applicable rate of tax PROPOSAL Exemption should be increased to Rs. 250, 000/It is proposed that the slabs should be readjusted to provide relief to taxpayers. RATIONALE Relief to the salaried class 40

RATE OF TAX – QUOTED COMPANIES ISSUE First Schedule Part-I Division 1 I Applicable rate of tax PROPOSAL companies be reduced to 30% from 35% 41

EXEMPTION – COMPUTER TRAINING INSTITUTES Clause 93 -Part-I Second Schedule ISSUE Computer Training Institutions (Expired June 2005). PROPOSAL Period of Exemption be extended upto June 2010. RATIONALE To promote Computer literacy 42

MINOR CORRECTIVE AMENDMENTS Deduction of Tax at Source v Clause (36 A) of Part IV of Second Schedule to be made as Part of Clause (59) of Part IV of Second Schedule Charges – Rule 230 v Due to availability of returns and statements through internet Rule 230 to be deleted National Tax Number – Section 181 read with Rule 83 v Substitution of Word Card with Certificate 43

Thank You 44