(a) In recent past, the Government
of Pakistan has taken various measures to broaden the tax
base of the Country. In this regard, reference can be made
to the survey conducted in the year 2000 and requirement
of filing of return of total income for the persons who
own immovable property with a land area of 250 square yards
or more located in the areas falling in the limits of Metropolitan/
Municipal Corporation, a Cantonment Board or Islamabad Capital
territory. The responsibility has also been vested on the
owner of any flat, motor vehicle (other then motorcycle)
in Pakistan, subscriber of telephone including mobile phone,
undertaking of foreign travels (other then travels by a
non-resident person or any travel for the purpose of Hajj,
Umra and Ziarat), members of Club where the monthly subscription
exceeds Rs.500 or admission fee exceeds Rs. 25,000. It will
be also recalled that few years back, returns were also
required to be filed by such persons and experience shows
that people had filed such returns. However, despite such
measures, the Government has not been able to broaden the
tax base.
Proposal
It is, therefore, in above circumstances
suggested that uniform policy should be formulated with
active media coverage so that tax base can be broadened.
The said formulation of rules and regulations should ensure
the follow-up of such returns and statements.
(b) The frequent changes made in the
return form is an irritant which has caused hurdles in expansion
of Tax base.
Proposal
The return forms should be designed on permanent
basis and while designing such forms, the literacy rate,
socio economic and judicious norms should be considered
rationally.
(c) It is also our considered opinion
that, the tax should be imposed on real income of a taxpayer,
which factor will substantially enhance and increase the
Tax base of the country.
(d) 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.
(e) It is proposed that meaningful
measures be taken to check the parallel economy prevailing
in our country. It is proposed that where-ever, there is
a requirement of mentioning NIC number, the mention of NTN
be made mandatory.
Section 2, Clause (1A)
AMALGAMATION
Section 2, Sub-section (1A) deals with amalgamation, which
is restricted to one or more banking companies or non-banking
financial institutions in either case being a public limited
company or a company incorporated under any law other then
the Companies Ordinance, 1984 for the time being in force.
We are living in a new era of globalization and consolidation.
Recently corporate mergers have been witnessed globally
and Pakistan is not an exception. Merger partakes revival
of sick units and growth of economy, to encourage mergers
and to facilitate such transactions, a need has arisen to
amend the existing income tax law.
Proposal
It is, therefore, suggested that:
(a) Public Limited Companies be included within
the fold of definition of amalgamation.
(b) A fair interpretation of the definition
of “amalgamation” shows that to fall within the
definition of term expression “amalgamation” a
banking company can only be merged with one or more banking
companies and not with a non-banking financial institution
and vice versa. It is our humble opinion that intention
while bringing in the concept of amalgamation within the
Income Tax Ordinance, 2001 was to provide for merger of
a banking company with another banking company or with a
non-banking financial institutions and vice versa. It is,
therefore, suggested that appropriate changes may be made
to clarify the intention of the legislature.
(c) The time frame given under Sub-Clause
(c) of Clause (1A) has been provided on or before 30th day
of June, 2004. In our considered opinion, the time frame
may be extended to the end of financial year June, 2006.
Section 2 Clause(5A)
ASSESSMENT YEAR
Under Section 2, the definition of “assessment year”
has been used by the legislation by reference which although
has no illegal flaw. However, to consolidate Income Tax
Ordinance, 2001,
Proposal
It is suggested that the definition of term
“assessment year” be reproduced in Clause (5A)
of section 2.
Section 2, Clauses 41( c ) and (f)
PERMANENT ESTABLISHMENT
It must be appreciated that the demand of
bringing in definition of the term “permanent establishment”
in the statute has been taken cognizance of which has been
given under Clause 41 of section 2. The perusal of the definition
shows that under Sub-Clause (c), a building site, a construction,
assembly or installation of project or supervisory activities
connected with such sites or projects have been included
in the definition of term expression “permanent establishment”.
Similarly, under Sub-Clause (f) in substituting equipment
installed or other assets or property capable of activities
giving rise to income has been included. These two clauses,
therefore, suggest that existence of any of the above elements
at any time during the tax year will fall within the meaning
of the expression “permanent establishment”. Under
the Treaties of Avoidance of Double Taxation normally such
a site, construction, project is considered to be permanent
establishment, if such site or project continues for specific
period of time. It is a trite law that the provisions of
tax Treaty over-rides any law of time in force as per the
provisions of sub-section (2) of section 107 of the Income
Tax Ordinance, 2001. Practically speaking , the contractors
or their employees come to Pakistan for a short period of
time for the purpose of assembling/installation of projects
or supervisory activities which under the present definition
would fall within the definition of permanent establishment
with significant tax implications. Visualizing such tax
implications normally the non-resident seeks a tax free
contract, which correspondingly increases the cost of local
project.
Proposal
Since, the industrial growth has been promised by the present
government. It would be appreciated that a minimum period
of suitable time be included in Sub-Clauses (c) and (f)
accordingly. Minimum period, therefore, for such clauses
is suggested to be 6-months.
Section 2 Clause 54(g).
ROYALTY
Under the Income Tax Ordinance, 1979, the disposal of any
property or right with reference to royalty fell within
the definition of term “capital assets”. Under
clause 54(g) of section 2, consideration for the disposal
of any property or right referred to in sub-clauses (a)
through (e) are included within the definition of term royalty.
If the definition of the capital assets as contained in
sub-section (5) of section 37 is read, the disposal of any
property or right falls under the purview of subsection
(5) of section 37. Therefore, in the Income Tax Ordinance,
2001, the disposal of any property or right falls within
scope of two different sections.
Proposal
It is, therefore, suggested that clause (g) by deleted,
which is overlapping the section 37(5). In our considered
opinion, even otherwise, it does not come within the definition
of royalty as understood commonly in business parlance.
Section 3.
ORDINANCE TO OVERRIDE OTHER LAWS
It will be recalled that when the Income Tax Ordinance,
2001 was promulgated, through section 3 new concept of curtailment
and making the exemptions non operative of such concessions
and the exemptions which were available in other laws was
introduced. Such concept was introduced by the usage of
non-obstinate clause. However, through an amendment made
in Section 54, a proviso was inserted which saved the exemptions
provided in any other law and in force on the commencement
of the Income Tax Ordinance, 2001.
Proposal
In our opinion Section 3 and amendment made through proviso
to Section 54 are complementary to each other. It is therefore,
proposed that either Section 3 be deleted or in the alternate,
the proviso inserted in Section 54 be shifted and annexed
with Section 3.
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