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Saturday, October 1, 2011

Income Tax Ordinance 2001

Saturday, October 1, 2011 - 6 Comments

Question: Elaborate the income tax ordinance 2001, and discuss deductibility of bad debts.

Income Tax Ordinance, 2001
Another Commission constituted by the government submitted its report in May 2001. The commission suggested that Income Tax Ordinance, 1979, should be replaced by Income Tax Ordinance, 2001, which is claimed to be simple and less complicated. This new Income Tax Ordinance was promulgated on 13th September 2001 and it has become effective from 1st July 2002, Before promulgation necessary changes have been made through Finance Ordinance 2002. The assessments of tax year 2003 onwards are finalized under Income Tax Ordinance, so this book is completely based on the new Ordinance. The Central Board of Revenue has claimed that the new Ordinance is a justifiable, pragmatic easy to understand and in accordance with the global environments.
The government claims that by introduction of this Ordinance truly revolutionary changes have been brought in the income tax law and these changes are aimed at simplifying its application and enabling taxpayers to comply with its provisions.
The new law has abolished the role of “assessing officer” who used to determine the income of taxpayer and compute his tax liability. These responsibilities have now been entrusted to taxpayer himself.
It has also been claimed that under the new Ordinance the self assessment procedure will be more meaningful and many conditions which were necessary for such an assessment have been withdrawn. It will be universal in the true sense of the word, as all classes of taxpayers, without any exception will be entitled to the use of the scheme. The new concept is a removal of one of the most pervasive distortion of income tax system. This change is likely to bring modernity and progress in the system.
The government is also hopeful that the new law will obtain uniformity of tax rates and tax treatment, encourage voluntary compliance and ensure an effective dispute resolution.
In spite of all these claims it has been observed that the new Ordinance will need lot of changes and additions to become a workable law in our society. Actually a lot of changes have already been made through Finance Order, 2002, as well as subsequent Finance Acts. With these hopes and observations the “Income Tax Ordinance, 2001” has been enforced and all income tax returns for income earned from 1st July 2002 onward are being taxed under this law.

Tax Administration Reforms Programme
The Government of Pakistan has started a Tax Administration Reforms Programme with the help of International Monetary Fund. The basic objectives of the programme are to bring cultural, operational and structural changes in the taxation system. The Central Board of Revenue has planned to replace the existing divisional structure of income tax with a functional structure. Three Large Taxpayers Units have been established at Karachi, Lahore and Islamabad. In the big cities Medium Taxpayers Units have also been established. Ultimately it is planned that all Medium Taxpayers Units will be converted into Regional Tax Offices. In total fourteen Regional Tax Offices will be established which will be responsible for collection of all domestic taxes, i.e. income tax, sales tax and excise. Under this programme, twenty three Taxpayers Facilitation Centres have been opened whereas twenty-nine more such Centres are planned to be started. The Programme is expected to be completed by 2008. It will be only then that an assessment of the achievements of the programme will be possible.
In order to properly implement the Tax Administration Reforms Programme the Central Board of Revenue is being transformed into Federal Board of Revenue (FBR). The Federal Board of Revenue Act, 2007, has empowered the tax officials to formulate policy for performance management awards, incentive packages, golden handshake scheme and integrated management policy for the tax machinery. It will also provide powers to implement a complete human resource policy, power to assess, identify, create, decrease and reduce or designate various posts. The FBR Act empowers the Board to make rules for maintaining discipline in the organization. It also ensures complete autonomy of the Board to run its day to day affairs in an efficient manner. The implementation process of the FBR Act, 2007, is likely to be completed in six months.
Income Tax Authorities except that through this implementation the tax base will be broadened and the tax collection in the country will be enhanced.

Scope of Income Tax Laws
We shall discuss the scope of Income Tax Laws from two different angles:
1. The territorial limits to which the Income Tax Ordinance applies.
2. The components of Income Tax Law in our country.

1. Extent of Income Tax Ordinance, 2001
The Income Tax Ordinance, 2001, applies to the whole of Pakistan. The definition of word “Pakistan” has been provided in the Article 1(2) of the Constitution of Pakistan 1973. The following territories have been included therein:
(a)        Provinces of Balochistan, North-West Frontier Province, Punjab and Sindh.
(b)        Federal Capital.
(c)        Federally Administered Tribal Areas.
(d)        States and territories as may be included in Pakistan, whether by accession or otherwise.

Under Article 246 of the Constitution
(a)        Tribal Areas means the areas in Pakistan which, immediately before the commencing day, were Tribal Areas, and includes:
1. The Tribal Areas of Balochistan and North-West Frontier Province; and
2. The former States of Amb, Chitral, Dir and Swat.
(b)        Provincially Administered Tribal Areas means:
1. The districts of Chitral, Dir and Swat (which includes Kalam), Malakand protected area, the Tribal Area adjoining Hazara district and the former State of Amb; and
2. Zob district, Loralai district (excluding Bhuke Tehsil), Dalbandin Tehsil of Chagai district and Marri and Bugti Tribal territories of Sibi district.
(c)        Federally Administered Tribal Areas include:
1. Tribal Areas adjoining Peshawar district
2. Tribal Areas adjoining Kohat district
3. Tribal Areas adjoining Bannu district
4. Tribal Areas adjoining Dera Ismail Khan district
5. Bajaur in Malakand Agency
6. Mohamand Agency
7. Khyber Agency
8. Kurram Agency
9. North Waziristan Agency
10. South Waziristan Agency
Subject to the Constitution, the executive authority of the Federation shall extend to the Federally Administered Tribal Areas and the executive authority of a Province shall extend to the Provincially Administered Tribal Areas therein.
No Act of Parliament shall apply to any Federally Administered Tribal Areas or to any part thereof, unless the President so directs and no Act of Parliament or a Provincial Assembly shall apply to Provincially Administered Tribal Areas, or to any part thereof, unless the Governor of the Province in which the Tribal Area is situated, with the approval of the President, so directs, and in giving such a direction with respect to any law, the President or, as the case may be, the Governor may direct that the law shall, in the application to a Tribal Area, or to a specified part thereof, have effect subject to such exceptions and modifications as may be specified in the direction.
The President may, at any time, by order direct that the whole or any part of a Tribal Area shall cease to be a Tribal Area, and such order may contain such incidental and consequential provisions as appear to the President to be necessary and proper. But before making any order, the President shall ascertain, in such manner as he considers appropriate, the views of the people of the Tribal Area concerned as represented in tribal jirga.
2.         Components of Income Tax Law
The following are the constituents of Income Tax Law in Pakistan:
(a)        Income Tax Ordinance, 2001 (as amended)
(b)        Rules framed by the Board
(c)        Notifications, Circulars and Orders
(d)        Income Tax Case Law
(e)        Finance Acts or Ordinances

(a)        Income Tax Ordinance, 2001 (as Amended)
It is the basic constituent of income tax law in our country. On its basis, the whole taxation structure of the country is founded. The whole procedure of taxation including matters regarding payment of tax, collection of tax, penalties, assessment, refund, appeals etc. has been provided in the Ordinance. It consists of thirteen chapters. Each chapter deals with a particular subject and has been divided into parts. Many parts are further subdivided into divisions. There are 240 sections of the new Ordinance as compared to 167 sections of Income Tax Ordinance, 1979 (repealed). The Ordinance also contains seven schedules. Schedules are also treated as part of the Ordinance. The changes in the Income Tax Ordinance, 2001, are brought about by the Finance Ordinance or Finance Act every year. Such changes are of a payment nature.
(b)        Income Tax Rules
The Federal Board of Revenue, which is the highest income tax executive authority in Pakistan, makes rules from time to time which are meant for the guidance of its officers as well as the tax payers. The Central Board of Revenue has been assigned this power under section 237 of the “Income Tax Ordinance, 2001”. These rules are notified in the official gazette. Such rules have the same force as the sections in Income Tax Ordinance itself and are implemented in the same manner.
Since 1924, CBR has framed a number of rules regarding rates of depreciation, registration of firms, submission of returns, forms of appeals, etc. which are treated as a part of income tax law. The latest rules “Income Tax Rules, 2002” have been issued to meet the requirements of Finance Ordinance, 2001. During 2007, Federal Board of Revenue will replace CBR and perform all its functions.
(c)        Income Tax Case Law
In the interpretation of tax laws, the possibility of different types of disputes is evident. When such a dispute arises, the aggrieved party presents its case to a court of law, which decides the case and provides correct interpretation of the law. Such decisions of the courts are known as Income Tax case law and reference to such decisions is subsequently made in order to get necessary guidance. Thousands of cases, regarding the interpretation of tax laws and the definitions of terms, used in the Ordinance, have been decided by the courts. These are also a very important component of income tax law in Pakistan.
(d)        Finance Acts or Ordinances
In order to meet the budgetary requirements and other social and economic needs of the country an annual law known as Finance Act or Ordinance is promulgated every year. It usually prescribes the maximum income which is not liable to tax. Changes in the Income Tax Ordinance, 2001, itself are also brought about through this legislation. Rates of tax applicable for the next financial year are also specified. The principles of taxation and computation of tax are also laid down by the Finance Act or Ordinance. These changes are made in order to bring the law in line with the changing economic environments of the country. The Finance Act or Ordinance contains provisions of general character which are of permanent operation and it forms part of the general law of taxation.

History of Sales Tax Act

History of Sales Tax Act
Sales tax was imposed in Canada in 1920 and is still in force with some modifications. In United States, Federal Government has never sured officially this tax as sales tax. Actually it was an assortment of commodity tax both at manufacture and retail levels and it was introduced in 1930. Great Britain introduced purchase tax in 1940. Before the partition of subcontinent, India Sales Tax was regarded under the item of 48 of the provincial legislative in the seventh schedule to the Government of India Act, 1930. Pakistan adopted General Tax Act which was earned by the provincial government in the Punjab.
Federal Government in 1948 took over the sales tax and an addition was made to the federal legislative list an item No. 54B. Pakistan General Sales Tax Act, 1948 came into force on the 1st day of April 1948, which was based on the multiple point tax system.
In 1950, a sales tax enquiry committee was appointed to examine and report on the administration, incidence, general structure and leakage of sales tax revenue. The committee made various recommendations including the adoption of the single point tax system and the collection of tax in respect of imported goods at the import stage along with customs duty.
The present Sales Tax Act was introduced in the federal legislature on the 30th day of March 1951 to give effect to the recommendations of the committee. After discussions and debates in Parliament the bill was passed by the legislature and was given consent by the time Governor General on the 20th day of April 1951.
Sales Tax could not be charged on importation and exportation of commodities but on only consumption, this was further improved by the presidential order, Taxation of Sales and Purchase Order, 1960, on the 30th day of June 1960, according to which the power to impose taxes on the sales, purchases, consumption, importation, exportation, manufacture and production of goods was conferred since 31st day of March 1948. The preamble of the Act was amended by inserting the words “importation and exportation, production, and manufacture” after the word “sale”. Sales tax when levied was fixed at 10% but increased to 12.5% from 1st July 1961 and again further increased to 15% from 1st July 1964. A surcharge of 25% of the sales tax was levied on the sales of taxable manufactured goods by the Finance Supplementary Act, 1965 which was done to meet defence requirements. However, the Defence Surcharge and Rehabilitation Tax were abolished by the Finance Ordinance, 1972. The Federal Government has the powers to enhance the general limit or general rates of sales tax or reduce such rates by a notification published in the official gazette.

Sales Tax Act 1990
By virtue of Finance Ordinance, 1990, the Sales Tax Act, 1951 has been completely substituted by a new Act known as Sales Tax (Amendment) Act, 1990. This complete change has been made in order to update the Act so that it should be able to meet country’s economy. Moreover, government has tried to simplify the rules regarding sales tax for the benefit of assessees and collection authorities. The 16 chapters of repealed act have now been replaced by 10 new chapters. The new Act became effective on 1st July 1990.
The Act prescribed a Value Added Tax (VAT) type system in which the value added component at each stage of business transaction could be taxed. The sales tax is chargeable from a registered person at import and sale of taxable manufactured goods. Tax credit or input tax is allowed when the registered person keeps proper record of claim regarding tax invoice and bill of entry. The goods meant for export were zero-rated. The tax paid on raw materials and other goods purchased in the course of business are deducted automatically while determining the tax liability. The new system is based on self-assessment/clearance procedure and payment of tax.

Salient Features of VAT Type System
1. Administrative structure changed from geographical jurisdiction to functional division.
2. Introduction of combined return-cum-payment challan form.
3. Filing of return-cum-payment challan in the bank.
4. Simplified record keeping i.e. a register for sales and a register for purchases and issuance of tax invoices.
5. No posting of sales tax officials on the business premises.
6. No authentication of documents by the Sales Tax officials.
7. No checking of taxable goods during transportation.
8. No seizure of goods during transportation or otherwise.

Extract of the Budget Highlights 2002—2003
1. Sales tax exemptions withdrawn on supplies of vegetable ghee and cooking oil.
2. Immunity from further tax granted on vegetable ghee, cooking oil and fertilizers.
3. Tax rate on imported vegetable oils increased from 15% to 20%. Similarly, tax rate on five other items (Talc, Solvent Oil (non-composite), Calcium Carbonate, Maleic Anhydride and Acrylic Tops) increased to 20%.
4. Zero-rating facility (complete exemption of sales tax) granted on the locally manufactured plant and machinery supplied to petroleum and gas sector E&P companies including OGDC, their contractors and sub-contractors.
5. Input tax adjustment allowed on electricity bills showing registration number and address of a registered person.
6. The scope of tax repayment extended to both imported and domestic inputs used in exportables.
7. The institution of Collector (Appeals) revived to hear appeals against orders passed by officers up to Deputy Collector.
8. An alternate dispute resolution system developed involving participation from private sector for settlement of disputes of taxpayers.
9. Classification of sales tax exemptions made in line with new version of H. S. Code.
10. A statutory provision created for relaxation of expired time limitations in genuine cases.
11. A system of inter-collectorate transfer of registrations evolved.
12. Legal framework developed for establishment and operation of Large Taxpayers Unit (LTU) with effect from 1st day of July 2002.
13. Federal Government authorized to allow input tax adjustment in case of determination of past tax liabilities.
14. Collectors empowered to allow adjustment instead of cash refund of un-utilized input tax in subsequent tax period.
15. Ambiguities in the definitions of “input tax”, “registered person” and “enrolled person” removed.
16. 72 new branches of National Bank of Pakistan designated for payment of sales tax.
17. Ambiguities in the recovery related statutory provisions removed and recovery procedure streamlined.

Extract of the Budget Highlights 2003—2004
1. Under SRO 500(i) 2003, dated 7th June 2003, reduction/waiver off the past liabilities of sales tax to already registered persons has been granted and non-registered persons have been provided incentives to come in the tax met by 31st August 2003. No audit shall be conducted of the persons availing benefit of this notification.
2. In order to encourage retailers to come in the tax net, limit for turnover tax for them has been enhanced from Rs. 5 million to 20 million. Necessary amendments in the Act as well as in the rules have been made accordingly.
3. New entry No. 60 has been added in the Sixth Schedule to grant exemption on supply of fixed assets against which the input tax adjustment is not available under a notification issued in terms of clause (b) of sub-section (1) of section 8 of the Sales Tax Act, 1990.
4. There was no concept of filing of revised return in the Sales Tax Act, 1990. Amendment in sections 26, 26A and 26AA of the Sales Tax Act, 1990, has been made which allows the registered/enrolled persons and retailers to file revised return on payment of evaded amount of tax, additional tax and penalty. However, full or partial exemption from payment of penalty in certain cases has also been granted. Show cause notice shall also stand abated on payment of tax and penalty.
5. The present provisions of law do not allow sales tax registered persons to deduct the amount of sales tax paid on purchases during any preceding tax period which could not be taken into account for the purposes of deduction of total amount of input tax during that period for any reason. Consequently, a large number of refund claims were arising whose disposal was inordinately delayed. Therefore, section 7 has been amended to allow adjustment of input tax of preceding three months.
6. Section 33 has been amended to reduce the penalty for late filing of return for the first fifteen days of the due date.

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