Reforms bring more miseries to taxpayers

KARACHI: The introduction of the Tax Laws (Third Amendment) Ordinance, 2021 has proved to be the final nail in the coffin, as the tall claims by Finance and Revenue Minister Shaukat Tarin, who is a banker by profession, after presenting the Federal Budget 2021/22, negated all his statements.

Tarin had claimed that the FBR has a record of 7.2 million transactions, while another 15 million details are with the National Database Registration Authority.

Similarly, on several occasions, he said, the demands of the International Monetary Fund (IMF) have not been accepted on the pretext that the government would take coercive measures for revenue generation in the Federal Budget 2021/22.

The new ordinance was promulgated through a presidential order on September 15, 2021 just after two-and-a-half months of the budget announcement through the Finance Act, 2021.

Experts believe the changes in the tax laws can be brought through the Finance Act, 2021, which was implemented on July 1, 2021; however, it is obvious the government might not want to take unpopular decision at that time

The business community and the people were celebrating the government’s initiative to withdraw a number of withholding taxes to ease off the unnecessary burden, which the government authorities had admitted that were not necessary, as the Federal Board of Revenue (FBR) had sufficient data of transactions for broadening the tax base.

In the Federal Budget 2021/22, around 12 provisions related to the withholding tax were deleted from the Income Tax Ordinance, 2001. The revenue board said the withholding tax provisions had been deleted in an effort to augment ease of business and simplify the tax laws. The omitted provisions were mainly belonged to the banking system, i.e., tax deduction on cash withdrawal, deposits or online transactions.

“This high number of provisions adds to complexity and creates undue burden of compliance on different withholding agents. It also impacts the country’s rating on the ease of doing business index,” the FBR said.

These provisions have been withdrawn, while compromising on the huge amount of revenue; however, the tax authorities argued that the withholding provisions were aimed at broadening the tax base and not for the revenue generation.

As the finance minister time and again pointed out large databank regarding potential taxpayers; however, the new tax laws carried special provisions targeting persons having taxable income but not filing annual income tax returns.

Through the Tax Laws (Third Amendment) Ordinance, 2021 a new sub-section to Section 235 has been introduced, imposing additional advance tax on electricity consumption by domestic consumers. The sub-section clearly mentioned that the additional advance tax to be collected from professionals not appearing on the Active Taxpayers List (ATL) and operating from residential premises having domestic connections from electricity distribution companies.

“For the purpose of the sub-section, the professionals included accountants, lawyers, doctors, dentists, health professionals, engineers, architects, IT professionals, tutors, trainers and other persons engaged in the provision of services.”

The additional advance tax has been imposed from 5 per cent to 35 per cent on monthly electricity bills between Rs10,000 and Rs75,000.

The recipe of the new provision is simple, the government is intending to bring a large number of people into the tax net, besides generating substantial revenues. There is nothing wrong with introducing such a provision but when the tax authorities have large data of potential taxpayers then this effort seems useless. Further, who will identify professionals working from home?

In the past, the revenue board had made it mandatory for the power distribution companies to obtain data of electricity consumers. But it is also a fact that most of the electricity is being used by those consumers who do not have power connections in their names.

Further, the power utilities also have poor system to identify the consumers. The K-Electric, the utility company responsible to distribute electricity to the financial and commercial hub of the country, in its financial report for the year ended June 30, 2020 had applied for tariff adjustment of around Rs7.49 billion against bad debts/write-offs of those consumers that were not identifiable.

“There are a number of locations/premises, which were removed as a result of anti-encroachment drives by the government authorities, whereas, in a number of other cases, the premises to which the electricity was supplied is no more traceable due to the change in either the mapping of the area, including unleased area, demolition of the original premises, structural changes, including division of single premises into many to the original premises and discontinuation/demolition of a single bulk PMT [pad-mounted transformer] connection,” according to the K-Electric.

This is self-explanatory why such a provision has been introduced. Another important amendment introduced to the Income Tax Ordinance, 2001 through Tax Laws (Third Amendment) Ordinance, 2021 under which discretionary powers have been given to the commissioner Inland Revenue.

A new Section 114B has been inserted to the Income Tax Ordinance, 2001 related to the powers of the tax authorities to enforce filing of returns. The tax officers have been empowered to disable mobile phone connections and discontinue electricity and gas connections of those persons who are not on the Active Taxpayers List.

The ATL contains names of all those persons who filed their annual income tax returns by due date as prescribed under the law or extended by the FBR. It means it will not carry those persons who filed the return after due date until paying certain default surcharge.

Invoking the new provision, the commissioner can take harsh action against persons who filed their return after the due date. The appearance of the name in the ATL also guarantees the benefits of lower withholding tax rates under various provisions.

Further, Section 114 of the Income Tax Ordinance, 2001 explained the mandatory requirement of filing annual returns of income for persons/entities. It is obvious that the persons having taxable income are required to file their annual declaration of income and assets. But there are several other categories where persons even don’t having below taxable income, yet it is mandatory for them to file annual returns. The persons own houses, cars or membership of any association are required to file their returns.

It has been witnessed in the past that many people filed their declaration of income and assets just to appear on the ATL to make transactions at the lower withholding tax rates.

It is evident that a large number of the total returns filed have declared zero income. Finance Minister Shaukat Tarin in a meeting with the office-bearers of the Karachi Chamber of Commerce and Industry (KCCI) on September 19, 2021 said that around one million return filers of the 2.9 million declared zero income.

However, after withdrawal of the withholding tax provision related to the banking system many people would not bother to file their annual returns, despite mandatory requirement.

The Tax Laws (Third Amendment), 2021 is even harsher on the sale tax side. A new section 14A to the Sales Tax Act, 1990, has been introduced to empower the FBR to discontinue gas and electricity connections of all those businesses, which are not sales tax registered.

The Section 14 of the Sales Tax Act, 1990 explained that every person engaged in making taxable supplies in Pakistan, including zero-rated supplies, are required to get sales tax registration. The businesses required to get sales tax registration included a manufacturer who is not running a cottage industry; a retailer who is liable to pay sales tax under the act or rules made; thereunder, excluding such retailer required to pay sales tax through his electricity bill; an importer; an exporter who intends to obtain sales tax refund against his zero-rated supplies; a wholesaler, dealer or distributor; and a person who is required, under any other federal or provincial law, to be registered for the purpose of any duty or tax collected or paid, as if it were a levy of sales tax to be collected under the act.

Presently, only a few hundred thousands are registered for the sales tax. Further, people are not come into the sales tax registration due to cumbersome procedures and massive corruption in the tax department. A large number of industrial and commercial businesses having electricity connections were not registered for the sales tax.

In the past, the revenue board had taken such measures to bring retailers and wholesalers into the tax net but all in vain after strong protests.

Last but not the least, the finance minister at the time of presenting the budget had claimed that the government had not bowed before the IMF demand to provide relief to the masses. It is surprising that just before the IMF meeting on the loan programme, the new ordinance has been promulgated.

Pakistan and the IMF is scheduled to meet on the sixth review of the loan programme from September 29, 2021.

The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has expressed fears of agitation against the newly-introduced ordinance that is promulgated without taking the stakeholders in confidence, a statement said.

FPCCI president Mian Nasser Hyatt Maggo termed the new ordinance a conspiracy against the government and conflicting to the finance minister’s vision of due consultation with all the stakeholders before announcing any taxation measures.

He also expressed his fears that this may lead to agitation for being grossly unfair.

Maggo condemned the human rights defying sweeping powers to the Federal Board of Revenue (FBR) and enabling it to disconnect mobile phones, electricity and gas connections of the non-filers of income tax returns.

It also empowers the National Accountability Bureau (NAB) to open income tax cases as old as 20 years through accessing tax records through the National Database Registration Authority (Nadra), he added. The new amendment is called “The Tax Laws (Third Amendment) Ordinance 2021.”

Maggo said that it was the FPCCI’s proposal to disconnect the connections of commercial and industrial non-filers; but, this ordinance does not take due and fair procedure of separation of executive and adjudication into account.

The ordinance vaguely mentions under-assessed income tax filers and provides blanket discretionary powers to the income tax officers, he added.

Pointing towards the challenges posed by the mandatory online and digital payments, the FPCCI chief said: “Our economy runs on the sales made on post-dated cheques and credit is usually for two months and the businesses cannot comply with this condition in the new ordinance.”

The ordinance contains budgetary measures and these cannot be taken without due consultation with the stakeholders and the ordinance had already come into force from September 15, 2021, he said, adding that the FPCCI considers this anti-business and unfair.

Khawaja Shahzeb Akram, senior vice president of the FPCCI, said that the conspicuous excesses are being permitted to the revenue board under the amendment; and that it will only open the door to even more corruption in the taxation system and result in an overwhelming increase in harassment of the business community.

The FPCCI’s deputy chief said in the rest of the world, the governments are giving tax breaks and incentives to the Small and Medium Enterprises (SMEs) to ward off the losses caused by the Covid-19; and, in Pakistan, the government is trying to reinvent the wheel and strangulate the business, industry and trade community.

Haji Ghulam Ali, a former president of the FPCCI and a former senator, as well, expressed shock over the amendment and its potential to be misused against the opponents.

The NAB and FBR had already created a fearful and discouraging environment and introducing further harsh piece of legislation will destroy the economy irreversibly, he said, adding that reopening the dead income tax cases of up to 20 years will not bring any more revenue in the government’s kitty.

The FPCCI categorically demanded holding the ordinance in abeyance; until and unless all the stakeholders are consulted.

The FPCCI remains committed and available for dialogue and discussion for the reforms in the taxation system and broadening the tax base.

It reiterates that the taxation system can only be effectively reformed if all the stakeholders are taken onboard.

KCCI president M Shariq Vohra said that the Tax Laws (Third Amendment) Ordinance, 2021 has caused quite a stir among the taxpayers, particularly the business and industrial community.

The panic caused by the measures being enforced through the ordinance is a prime example as to why the government needs to take all the stakeholders onboard before making such decisions.

By allowing the Federal Board of Revenue (FBR) to be able to identify possible tax evasions using data sources such as Nadra and utility companies, the government may be leaving a lot of room for errors.

Even before the passing of the ordinance, if a taxpayer was wrongfully scrutinised by the FBR, he at times had to suffer a lot in the process of proving his innocence. However, after the ordinance, if a person who has been paying his tax obligations diligently is somehow wrongfully highlighted, he will be under tremendous pressure and be at risk of losing his utility connection, mobile phone network, etc, which is nothing short of torture.

In a recent meeting, in which representatives of the Karachi Chamber of Commerce and Industry (KCCI) and Businessmen Group (BMG) met with Minister for Finance and Revenue Shaukat Tarin, the business community has been assured that all concerns will be addressed and victimisation will be avoided.

Tarin has said that the ordinance will only work against non-filers and under-filers who file zero tax. It is understandable that the government is in dire need to expand the tax base and the KCCI fully supports that objective. However, the content of the ordinance may allow room for harassment and corruption.

The KCCI will; thus, represent the interests of the business and industrial community to ensure that this ordinance does not become a source for additional burden or harassment of the community.

KTBA president Zeeshan Merchant said: “In my personal view, the Third Income Tax Amendment Ordinance issued by the government has given unbridled powers to the tax machinery.”

This is not only going to create unrest among the taxpayers but also create fear among those who are either not obliged to be registered with the Federal Board of Revenue (FBR) under the law.

This, on the one hand, has given powers to the FBR to exchange information of taxpayers with National Database Reg-istration Authority (Nadra) and, on the other, Nadra is also going to provide the details of expenses and indicative in-come of persons to the revenue board who will than share the same with the persons and ask them to file return.

What is also notable is now the FBR has the powers to cut your electricity, gas and mobile connections and on top of everything those professionals who are working from home and are not filing tax returns would be taxed through electricity bills ranging from 5 per cent to 35 per cent.

On paper, these measures look good from the FBR standpoint; however, the information sought from Nadra was al-ways there with the FBR in one form, or the other, and there is nothing new. In the past also tall claims have been made regarding definite information on high net-worth individuals yet no concrete measures were taken. One fears that the fate of information provided by Nadra would be the same.

What is intriguing though is how Nadra and FBR would determine if any professional is earning income working from home?

To sum-up, it’s an effort made not only to document but to collect tax from those who are not paying, but the tax ma-chinery and the old mindset of tax collectors remains the same with a few exceptions!