Assessment under section 122(5A) of IT Ordinance: FTO says provisions

allow multiple Amendments

April 26, 2013
SOHAIL SARFRAZ

Giving an order in favour of Federal Board of Revenue (FBR), Federal Tax Ombudsman Dr
Muhammad Shoaib Suddle has observed that the provisions of section 122(5A) of the Income
Tax Ordinance 2001 permit multiple amendments to an assessment in case of concealment.

Sources told Business Recorder here on Thursday that in a recent order passed by FTO it was
ruled, the provisions of Section 122(5A) of the Ordinance permit multiple amendments to an
assessment. This is not a case of ''double jeopardy'' and the passage of an order under Section
122(5A) of the Ordinance on the basis of concealment of sales/turnover is, prima facie, well
within the legal framework and does not suffer from any defect.

The original record is missing and reportedly misplaced, there is no entry in the Return Receipt
Register, Daily Dak Register or Refund Register pertaining to the Complainant. The order under
section 122(5A) is well within the legal framework, Federal Tax Ombudsman (FTO) conveyed
to the tax authorities while disposing of a complaint.

The FTO stated that delegation of authority by the Commissioner IR to the Addl CIR to exercise
revisionary jurisdiction under Section 122(5A) is within legal framework and all authorities
placed in the charge of the Commissioner IR stand empowered to exercise their delegated
authority in accordance with law and no fatal defect of jurisdiction in the case of any authority
has been established by the Complainant.

According to the findings of the FTO in C.No 757/ LHR/IT(563)/1316/2012 issued on Thursday,
complainant, a manufacturer/supplier of commercial billboards, hoardings and signboards and
related services, has been assessed for Tax Year 2009 under Section 122(5A) of the Ordinance
vide order dated 07-08-2012, creating a tax demand of Rs 7,252,701. Besides, a penalty of Rs
7,044,701 under Section 182(2) of the Ordinance was also imposed for concealment of sales.
The Complainant points out that an earlier attempt to invoke the provisions of Section 122(5A)
of the Ordinance for Tax Year 2009 vide Show Cause Notice dated 27.05.2011 was abandoned
when the assessing officer accepted the reply filed by him. That being so the assessment made
under Section 122(5A) of the Ordinance vide order dated 07.08.2012 is nothing more than
brazen victimisation of the Complainant.

The FTO ruled that the complainant''s entire case against the Dept is made out largely on a legal
plane and not a single word has been said against the concealment of sales. The argument is
made that having once dropped proceedings initiated under Section 122(5A) of the Ordinance it
was now legally possible for the Addl Commissioner IR to invoke revisionary jurisdiction a
second time. This was because when the first Show Cause Notice was issued by the predecessor
Additional CIR, the deemed assessment order under Section 120(1) of the Ordinance then in the
field had merged into the 122(5A) proceedings underway at that time. Subsequently, there was
no deemed assessment order in the field for the successor Addl CIR to act upon by invoking
revisionary jurisdiction for a second time.

The argument of the Complainant has been considered and found to be misconceived for the
reason that when the first show cause notice was issued, the Complainant filed a reply that was
accepted by the Addl CIR on the issue of nature of business and he dropped the proceedings
thereby restoring the earlier position (status quo ante). The question of any ''merger'' thus did not
arise. Furthermore, the objective basis for invocation of the provisions of Section 122(5A) of the
Ordinance was quite different on the two occasions. In the first instance, the moot point was the
Complainant''s status as manufacturer. In the second instance, the Addl CIR did so to take
cognisance of suppression/concealment of sales/turnover by the Complainant that rendered the
deemed assessment ''erroneous and prejudicial to the interest of revenue.'' Under the
circumstances, the provisions of Section 122(5A) of the Ordinance permit multiple amendments
to an assessment. This is thus not a case of ''double jeopardy'' and the passage of an order under
Section 122(5A) of the Ordinance on the basis of concealment of sales/turnover is, prima facie,
well within the legal framework and does not suffer from any defect.

The Complainant''s allegation of mala fide against the Dept has also been looked into. According
to the Complainant, the proceedings initiated under Section 122(5A) of the Ordinance are a
reaction to the complaint filed by him before the Hon''ble FTO. Examination of the record
however reveals that the complaint was filed before the FTO on 27.09.2012 whereas the SCN
under Section 122(5A) of the Ordinance was issued much earlier, ie on 27.06.2012. Moreover,
the Dept had good reason to resort to the provisions of Section 122(5A) when on scrutiny of the
tax deduction data under Section 153(1)(b) of the Ordinance for Tax Year 2009, it found out that
the Complainant had suppressed turnover significantly. Thus, it is not evident that the invocation
of revisionary jurisdiction by the Addl CIR was artificially contrived to settle scores with the
Complainant. The Complainant has also raised issues pertaining to delegation of authority by the
Commissioner IR to the Addl CIR to exercise revisionary jurisdiction under Section 122(5A). He
is of the opinion that in the facts and circumstances of the case the Addl CIR did not have
jurisdiction under the law to exercise revisionary jurisdiction in the manner done by him. The
objection raised has been considered and found to be misconceived. All the authorities placed in
the charge of the Commissioner IR stand empowered to exercise their delegated authority in
accordance with law and no fatal defect of jurisdiction in the case of any authority has been
established by the Complainant.

The Complainant''s reference to proceedings relevant to earlier complaint No 2004-L/2008 in

which the Appellate Tribunal ruled in the Complainant''s favour is irrelevant as these were
placed on a different plane altogether. It is obvious that by so doing the Complainant seeks to
derive unwarranted mileage in the current complaint before the FTO. The case law cited has
been considered and is not found to be on all fours with the facts and circumstances relevant to
the complaint currently before the FTO. No maladministration in the matter pertaining to
exercise of revisionary jurisdiction in Tax Year 2009 under Section 122(5A) of the Ordinance is
established, the FTO order added.

INCOME TAX SELF ASSESSMENT SCHEME

THE NEWS:
By By Naeem Ahmed 9/24/2007
The major issues of the taxation system and revenue organisation during pre-reform period in
Pakistan were; discretionary powers with tax officials, corruption, narrow tax base, high tax
rates, SRO culture, low share of direct taxes, low buoyancy, heavy reliance on withholding taxes,
delayed refund payments and a non-friendly environment in tax offices. These factors not only
reduced the tax collection but also resulted in the loss of credibility of the tax machinery in
public. Within income tax, the rates for the corporate sector were exceptionally high which not
only discouraged tax compliance but also encouraged tax avoidance and evasion. During the year
1992-93 banking, public and other companies were taxed at the rate of 66 per cent, 44 per cent
and 55 per cent, respectively. Similarly, income tax returns submitted by the taxpayers were
subjected to full assessment resulting into un-manageable litigation process and un-necessary
wastage of precious time of taxpayers. It may be realised that the direct taxes are generally
progressive in nature, help in maintaining the overall proportionality of the taxation system and
equitable distribution of income. The direct taxes also play a key role in ensuring a sustainable
level of economic growth and development. Historically, the share of direct taxes in total tax
collection in most of the advanced countries has been higher than indirect taxes. But, in Pakistan,
the share of direct taxes in total federal taxes has been historically low.In this backdrop there was
a need to address these issues in a manner that the taxation system becomes less complicated and
cumbersome. In year 2000, the government constituted a Task Force on Reform of Tax
Administration, which presented its report in April 2001. The focus of the reform report was to
raise tax revenues through simplified tax laws and procedures and a congenial business
environment and to regain the taxpayers’ confidence in revenue organisation. The old Income
Tax Ordinance, 1979 has been replaced with the Income Tax Ordinance, 2001. The fundamental
change introduced from July 2002 was the introduction of a regime of Universal Self-
Assessment Scheme (USAS) in income tax. The objective of USAS was to facilitate the
taxpayers, to minimise the contact between taxpayers and tax collectors and to enhance income
tax revenue through increased confidence of tax payers in the system. On the other hand, the
introduction of USAS had also put great responsibility on the shoulders of the taxpayers to
respond positively by assessing their own income and to pay tax, due on them, honestly. The
new law is in accordance with the international practices in all developed countries around the
world and a first such experience in this part of the world, which has curtailed the most abused
discretionary powers of the taxation officers. Some of the salient features of the Income Tax
Ordinance, 2001 are: (1) The taxpayers themselves assess their income and determine their tax
liability. (2) The powers of the taxation officer to make the assessment and impose tax have been
reduced to a large extent.(3) All income tax returns are accepted without any conditions of
compulsory enhancement of tax liability over previous year to qualify for acceptance. (4) A
certain percentage of returns filed are selected for tax audit on the basis of risk assessment to
verify the accuracy and correctness of income tax returns.(5) Rates of tax for the banking and
private companies to be gradually brought down to 35 per cent by the year 2007.Impact on
income tax revenue and compliance:There are three major components of income tax in
Pakistan, namely: the collection on demand, voluntary payments, and withholding taxes. The
collection on demand includes arrear demand and current demand, voluntary payments include;
payments with returns and advance payments. Whereas, withholding taxes are collected from
more than 20 sources - the major sources are salaries, bank interest, contracts, imports, exports,
electricity and telephone bills. Until the recent past, there was heavy reliance on withholding
taxes and collection on demand, contributing nearly 70 per cent of the total income tax collection
(Graph-1). However, the introduction of USAS in 2002 has proved to be a success in the income
tax regime, as it has shifted the focus from enforced collection to voluntary compliance with the
result that the voluntary payments (VP) have emerged as a major source of income tax revenue.
(see graph) In absolute terms, the collection on account of VP was Rs50.1 billion in 2002-03
which has increased to Rs165.6 billion in 2006-07. In other words, a growth of 207 per cent has
been recorded during this period. During the same period, even though withholding taxes grew
by 98 per cent, the overall contribution of WHT in income tax fell quite rapidly. The acceptance
of USAS and new system can be further validated through the analysis of income tax returns
during the last few years. (see table) It is evident that the income tax filers have increased
remarkably, after the introduction of USAS. The new system has been helpful, not only in
improving taxpayers’ confidence in the system; the revenue collection has recorded a notable
growth of 78 per cent. Particularly, the response from the corporate sector and AOP has been
very encouraging. More than 50 per cent growth in the number of returns filed has been recorded
in the categories of corporate and AOP during the last four years. Moreover, during the year
2006-07, an unprecedented growth of 48 per cent has been recorded in the net income tax
collection. This remarkable performance of the direct taxes enabled the CBR to achieve the
rather ambitious target of Rs835 billion.To conclude, it is indeed very inspiring to observe that
the government has gone out of way to commit itself to bring about qualitative changes in CBR.
The reform program being undertaken in CBR through investment in technology, infrastructure
and human resources has been designed to make the organisation efficient and transparent. The
initial assessment is that reform objectives are being achieved and there is a definite change in
the way the new taxation regime is evolving. The revenue collection is increasing significantly, a
business friendly environment has been created and tax laws have been simplified. The USAS
has been welcomed by the taxpayers by responding positively up to a large extent. The taxpayers
are now visiting CBR field formations without any hesitation and fear. There is an unflinching
resolve to pursue the reform process relentlessly with the hoe that the new approach of the
revenue organisation will pave the way for further revenue generation, investment, economic
growth, poverty reduction, and a dawn of new economic era in the country.— The author is
Second Secretary, CBRTABLE-1: INCOME TAX RETURNS ANALYSISNo. of Returns
ReceivedTaxpayers 2003-04 2006-07 Growth (%)Corporate cases 10,318 15,481 50.0AOPs
22,133 34,735 56.9Salaried individuals 431,583 76,465 -82.3Non-salaried individuals 498,690
655,876 31.5Statements 54,741 1,029,794 1781.2Total returns received 1,017,465 1,812,351
78.1
A retrogressive taxation system
October 23, 2006
By Sabihuddin Ghausi
DOES Pakistan’s taxation system promote or retard manufacturing growth? Is it industry-friendly? And
one final question: Is the tax burden fairly distributed?An attempt was made to find answers to these
questions from trade leaders and business executives, a former senator and a senior official responsible
for the promotion of industrial development.The taxation system is not fair in the sense that it does not
raise revenues proportionate to the incomes generated by different sectors of the economy. This was
the virtual consensus. More than 60 per cent of the revenue is contributed by the manufacturing whose
share in the GDP has remained stagnant for decades at around 17/18 per cent.The services sector that
includes retail and wholesale trading, transport, construction, real estate, and stock trade is either
under-taxed or spared of taxation altogether. Yet, it is the biggest sector comprising 50 per of the
economy. Then comes agriculture with 23-24 per cent of the GDP that generates only 1.2 per cent of tax
revenue.“We will try to change this taxation system to make it business and manufacture-friendly, bring
equity and justice and create a system where any one who works more would earn more’’, says Taj
Hyder, a former PPP Senator now engaged in organising weekly study circles of his party workers to
debate the current socio-economic and political issues.The former Senator is convinced that the
taxation system is hurting industry, impeding business growth and virtually ignores those who are
creative and hard working.Businessmen did not mince words when calling the taxation structure,
‘retrogressive, exploitative, inflationary and expansionary’’ that alienates a section of society by creating
in them a feeling of being discriminated against, while “others’’ are treated as favourites.However, there
are business leaders and multinational executives who feel convinced that the government has started
responding to their difficulties and is gradually drawing up a business-friendly taxation
structure.‘Pakistan’s taxation structure manifests deep mistrust between the government and the
businessmen’’ observed a business leader while pointing out to the load of withholding and presumptive
tax that constitute almost 90 per cent of the tax—income tax.“You pay 1.5 per cent of your export
proceeds, no matter you earn profit or suffer loss’’ he said , adding that “six per cent withholding tax on
import is a final tax settlement’’. These and many other such taxes are levied because businessmen
want to avoid hassles in tax assessment and tax collectors find it convenient to meet their collection
targets. However, the real victims of this system are millions of consumers who have to bear the
inflationary impact of these levies, which are treated as indirect taxes by business.‘ The government
mainly focuses on revenues and employment generation remains a secondary goal when it comes to
taxing industry’’, Majyd Aziz, President of Karachi Chamber of Commerce and Industry said.Mr Ameen
Bandukda, chairman of SITE Association of Industry, is more vocal in declaring the taxation system as
“anti-industry”. He refers to the unending problems of the biggest sector—textiles as an example. He
advocates revamping of the taxation structure before it is too late.The slump in the exports in the first
quarter of this fiscal year is the direct outcome of the taxation which pushed up production cost to a
level “where our exports are gradually becoming uncompetitive and foreign products are flooding the
domestic market’’, said another businessman.Mohammad Idrees, Textile Commissioner who has been
an industrial development officer his whole life, identifies the taxation system as one of the many
factors responsible for the plight of the textile industry. There are other factors that hurt industries such
as outdated management practices, flawed production and marketing techniques and lack of prudent
decision making by the businessmen.The taxation system is business friendly, says Qazi Sajid, Chief
Executive, German chemical company who is also on the board of a dozen companies. He also sees a lot
of improvement in tax system over the last few years which has resulted in “virtual end of direct
contact’’ between the tax payer and the tax collector.“My company and others where I am on the board
now files our tax returns on internet and that’s all’. There is virtually no hassle in getting refund of extra
advance taxation.“No excise inspector is there now in our factory without whose signature, in the past,
we could not move our production outside the factory gate’’, he said.Qazi refuses to believe that
taxation has impeded the growth of manufacturing and production. The large-scale production touched
the record highest of 18 per cent about a year ago and still maintains a reasonable growth rate.‘The
industry consumes almost Rs5 billion worth of chemicals as against hardly Rs1 billion a few years ago.
Growing appetite for chemicals consumption, he said, is one indicator of industrial growth.Ameen
Dadabhoy, a ruling party Senator, concedes that agriculture, stock exchange, real estate, retail,
wholesale trade, construction and landed gentry are virtually outside the tax net and it causes a heart-
burning.“I tried hard to bring all these sections of society under the tax net while participating on the
Senate Finance Committee’s deliberations. He reiterates his intention to continue to strive in this
direction.Engineer M.A. Jabbar, a former FPCCI vice president, wonders as to how the government can
tax at import or at production stage when no business transaction has taken place.. “World over, you
are allowed to install your manufacturing facility, buy inputs, produce goods and after these goods are
sold in the market, the government taxes you on your income’’.Imagine the plight of the common men
from whom the government collected Rs3.5 trillion in six years (1999-00 to 2005-06) by implementing
the World Bank and IMF sponsored reforms and compare this collection with Rs1.9 trillion in the entire
decade of 90’s. Now President Musharraf has announced that his government’s intends to collect Rs1
trillion in 2007-08.Tax recovery went up by roughly 11 per cent every year in the last six years, but the
tax-to-GDP ratio remained dismally low— at 10 per cent of the GDP. What does this mean? It means
that tax is not being recovered from all sectors of the economy.While a large section of population is
being over-taxed, an entire class of elite has been given a free hand to speculate in trading on easy bank
loans and earn tax-free income.A crippling tax burden on a few sectors is leading to expansion of black
economy and is reducing social acceptability of the tax system. It is time to develop a tax structure
based on equity that would increase revenues and spur economic growth.
About FTO
The Government of Pakistan, established the Federal Ombudsman in 1983 in accordance with
the requirements of the Constitution of the country. The Provinces followed suit and established
Provincial Ombudsmen. Thus Pakistan joined the international club of countries having the
office of Ombudsmanship as a critical component of welfare states with adequate focus on
service delivery at national and sub-national levels. Sectoral needs lead the government to
establish the office of specialized Ombudsmen for Tax administration, Insurance and Banking
sectors.

The Office of the Federal Tax Ombudsman was established in year 2000.

Legislations
 The Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000
 Investigation and Disposal of Complaints Regulations, 2001

Charter and Functions

The core function of Federal Tax Ombudsman revolves around:

"Disposal of complaints of tax maladministration promptly, justly, fairly, independently

investigated, and to rectify any injustice done to a taxpayer by actions of the tax employees of
Federal Board of Revenue (FBR)/Revenue Division, Government of Pakistan."

The Ombudsman’s institution in Pakistan is not that compete with the courts, or act as a further
body to which those unsuccessful in the courts can appeal

The charging provisions, which relate to the levy or charge of the tax, which usually state that
tax is to be levied on what property, goods or income and in what manner and at what rate .

Tax Structure: Tax Base, Tax Rate,

Proportional, Regressive, and Progressive
Taxation
To calculate most taxes, it is necessary to know the tax base and the tax rate. The tax base is the
amount to which a tax rate is applied. The tax rate is the percentage of the tax base that must be
paid in taxes. So if the tax base equals $100 and the tax rate is 9%, then the tax will be $9 (=100
× 0.09). Proportional taxes apply the same tax rate to any income level, or for any size tax base.
So if Bill earns $50,000 and Jane earns $100,000, and the tax rate is 10%, then Bill will owe
$5,000 in taxes while Jane will owe $10,000. Many state income taxes and almost all sales taxes
are proportional taxes. Social Security and Medicare taxes are also proportional since the same
tax rate is applied to any earned income up to the Social Security limit, which, for 2011, is
$106,800. The Medicare tax is a proportional tax that applies to all earned income and is equal to
2.9%, as of 2011.

A regressive tax is one that is inversely proportional to income — the lower the income, the
higher the tax in relation to income. Most regressive taxes are assessed on products and services
in which the tax is a percentage of the cost of the product or service. Hence, when paying the tax,
a poor person pays as much as the wealthy person. The most common forms of regressive taxes
are sales taxes and value added taxes (VAT). The inequitable effects of a regressive tax is often
mitigated by payments to the poor and by exempting essential products and services, such as
food, from the regressive tax.

A progressive tax applies a higher tax rate to higher incomes. So if the tax rate on $50,000 is
10% and 20% for $100,000, then, continuing the above example, Bill still owes $5,000 in taxes
while Jane will have to pay $20,000 in taxes. However, almost all progressive taxes are
structured as a marginal tax, which means that the progressive tax rate is only applied to that
part of the income which is greater than a certain amount. The portion of the tax base that is
subject to a particular tax rate, is known as a tax bracket, which always has lower and upper
limits, except for the top tax bracket, which has no upper limit. The following tax brackets apply
for 2013 and thereafter: 10%, 15%, 25%, 28%, 33%, 35%, 39.6%. The 39.6% bracket was added
in 2013. To see the current rates published by the IRS, scroll down to the bottom of the current
tax table from the instructions for Form 1040.

Continuing the above example, if the 20% tax rate is only applied to that portion of the income
between $50,000 and $100,000, then Jane would owe $5000 on the first $50,000 of income and
$10,000 on the 2nd $50,000 of income, resulting in a total tax liability of $15,000.

Classification Of Taxes, Their Advantages And Disadvantages

Basically, tax can be classified into two broad categories:

1. Direct Tax

2. Indirect Tax

1. Direct Tax

A direct tax is a tax paid by a person on whom it is legally imposed. In direct tax, the person paying and
bearing tax is the same. It is the tax on income and property. Examples of direct taxes are:

* Income Tax

* Vehicle Tax

* Expenditure Tax

* property Tax

* Interest Tax

* Gift Tax etc.

Advantages Of Direct Tax

* Direct tax is equitable as it is imposed on person as per the property or income.

* Time, procedure and amount of tax paid to be paid is known with certainty.

* Direct tax is elastic. The government can change tax rate with the change in the level of property or
income.

* Direct tax enhances the consciousness of the citizens. Taxpayers feel burden of tax and so they can
insist the government to spend their contributions for the welfare of the community.

Disadvantages Of Direct Tax

* Direct tax gives mental pinch to the taxpayers as they have to curtail their income to pay to the
government.

* Taxpayers feel inconvenience as the government impose tax progressively.

* Tendency to evade tax may increase to avoid tax burden.

* It is expensive for the government to collect tax individually.

2. Indirect Tax

An indirect tax is a tax imposed on one person but partly or wholly paid by another. In indirect tax, the
person paying and bearing tax is different. It is the tax on consumption or expenditures. Examples of
indirect taxes are:

* VAT

*Entertainment Tax

* Excise Duty

* Sales Tax

* Hotel Tax

* Import And Export Duty etc.

Advantages Of Indirect Tax

* Indirect tax is convenient as the taxpayer does not have to pay a lump sum amount for tax.

* There is mass participation. Each and every person getting goods or services has to pay tax.

* There is a less chance of tax evasion as the taxpayers pay the tax collected from consumers.

* The government can check on the consumption of harmful goods by imposing higher taxes.

Disadvantages Of Indirect Tax

* Indirect tax is uncertain. As demand fluctuates, tax will also fluctuate.

* It is regretful as the tax burden to the rich and poor is same.

* Indirect tax has bad effect on consumption, production and employment. Higher taxes will reduce all
of them.

* Most of the taxes are included in the price of goods or services. As result, taxpayers do not know how
much tax they are paying to the government.

Advantages and disadvantages of Direct Taxes Advantages of Direct Taxes Direct and indirect
taxes have advantages of their own. Direct taxes have some merits and so have the indirect taxes.
Direct taxes have the following advantages in their favor: — 1. Equitable. The burden of direct
taxes cannot be shifted. Hence, equality of sacrifice can be attained through progression. Of
course, the very low incomes can be exempted.

Advantages and disadvantages of Direct Taxes

Advantages of Direct Taxes

Direct and indirect taxes have advantages of their own. Direct taxes have some merits and so
have the indirect taxes. Direct taxes have the following advantages in their favor: —

1. Equitable. The burden of direct taxes cannot be shifted. Hence, equality of sacrifice can be
attained through progression. Of course, the very low incomes can be exempted. This cannot be
achieved by taxes on commodities which fall with equal force on the rich and the poor. The tax
raises the price of the commodity and the price of a commodity is the same for every person, rich
or poor.

2. Economical. Their cost of collection is low. They are mostly collected "at the source". For
instance, the income tax is deducted from an officer's pay every month. This saves expense. The
employer acts as an honorary tax collector. This means great economy.

3. Certain. In the case of a direct tax, the payers know how much is due from them and when.
The authorities also know the amount of revenue they can expect. There is certainty on both
sides. Certainty minimizes corruption on the part of the collecting officials.

4. Elastic. If the State suddenly stands in need of more funds in an emergency, direct taxes can
well serve the purpose. The yield from income tax or death duties can be easily increased by
raising their rate. People cannot stop dying for fear of paying death duties.

5. Productive. Another virtue of direct taxes is that they are very productive. As a community
grows in numbers and prosperity, the return from direct taxes expands automatically. The direct
taxes yield large revenue to the State.

6. A Means of Developing Civic Sense. In the case of a direct tax, a person knows that he is
paying a tax; he feels conscious of his rights. He claims the right to know how the Government
uses his money and approves or criticizes it. Civic sense is thus developed. He behaves as a
responsible citizen.
Disadvantages of Direct Taxes

1 .Inconvenient. The great disadvantage of a direct tax is that it pinches the payer. He 'squeaks'
when a lump sum is taken out of his pocket. The direct taxes are thus very inconvenient to pay.
Nobody can help feeling the pinch.

2. Evadable. The assessee can submit a false return of income and thus evade the tax. That is
why a direct tax is "a tax on honesty". There is a lot of evasion. Many of those who should be
paying taxes go scot-free by concealing their incomes.

3.Arbitrary. If taxes are progressive, the rate of progression has to be fixed arbitrarily; and if
proportional, 4hey fall more heavily on the poor. Thus, both are bad. The rate of taxes depends
upon the whim of the Finance Minister. This is arbitrary.

4. If the taxes are too heavy, they discourage saving and investment. In that, case the country will
suffer economically.

Important Direct and Indirect Taxes

Direct Taxes

Income Tax

Income Tax is paid by an individual based on his/her taxable income in a given financial year.
Under the Income Tax Act, the term ‘individual’ also includes Hindu Undivided Families
(HUFs), Co-operative Societies, Trusts and any artificial judicial person. Taxable income refers
to total income minus applicable deductions and exemptions.

Tax is payable if the taxable is above the minimum taxable limit and is paid as per the differing
rates announced for each tax slab for the financial year.

Corporation Tax

Corporation Tax is paid by Companies and Businesses operating in India on the income earned
worldwide in a given financial year. The rates of taxation vary based on whether the company is
incorporated in India or abroad.

Wealth Tax

Wealth tax is applicable on individuals, HUFs or companies on the value of their assets in a
given financial year on the date of valuation. It is taxed at the rate of 1% of the net wealth of any
assesse exceeding Rs 30,00,000.

‘Net wealth’ here includes, unproductive assets like cash in hand above Rs 50,000, second
residential property not rented out, cars, gold jewellery or bullion, boats, yachts, aircrafts or
urban land. It does not include productive assets like commercial property, stocks, bonds, fixed
deposits, mutual funds etc.

Capital Gains Tax

The profits made on sale of property are taxable under Capital Gains Tax. Property here includes
stocks, bonds, residential property, precious metals etc. It is taxed at two different rates based on
how long the property was owned by the taxpayer – Short Term Capital Gains Tax and Long
Term Capital Gains Tax. This deciding period of ownership varies greatly for different classes of
property.

Indirect Taxes

Sales Tax

Sales Tax is charged on the sale of movable goods. It is collected by the Central Government in
case of inter-state sales (Central Sales Tax or CST) and by the State Government for intra-state
sales (Value Added Tax or VAT). The rates of taxation vary depending on the product type.

Service Tax

Service tax is applicable on all services provided in India except a specified negative list of
services that are exempt. It is paid by the service provider to the government who in turn collects
it from the end user by the service provider at the time of provision of such service.

Excise Duty

Excise duty is applicable on the manufacture of goods sold in India. Once goods are
manufactured, it is originally paid by the manufacturer directly to the Central Government.
When the goods change hands from the manufacturer to the buyer, this tax is bundled by the
manufacturer along with the cost of goods and passed on to the buyer.

Transfer price

Price charged by individual entities for goods or services supplied to one another in multi-
department, multi-office, or multinational firms. Transfer price policy is generally aimed at (1)
evaluating financial performance of different business units (profit centers) of a conglomerate,
and/or to (2) shift earnings from a high tax jurisdiction to a low-tax one. Tax authorities usually
frown upon transfer pricing aimed at tax avoidance and insist that each internal part of the firm
deals with the other on 'arm's length' (market price) basis. Also called transfer cost.
No Taxation Without Representation

Reverend Jonathan Mayhew

“No taxation without representation” refers to the slogan from 1750s and 1760s that encapsulates
the prime grievance of the Thirteen Colonies. It is actually part of a sermon given by Jonathan
Mayhew in 1750. It was also one of the causes of the American Revolution. The lack of
representation in the British Parliament was a clearly a violation of the rights of the colonists.
Thus, taxation and all other laws that affected the colonists directly and indirectly were not
constitutional at all. During the American Revolution, there were only a few British citizens that
were represented and they were not even a part of the colonies. The phrase summarizes the
sentiments that caused the English Civil War, as told by John Hampden. He said in the ship
money case who said that an “English King has no right to demand and an English subject has no
right to refuse.”

Tax, tax, tax

The British Parliament controlled colonial trade and implemented the taxing of imports and
exports since 1660. This historic right was deprived to the Americans by the time the 1760s
came. Under the English Bill of rights, the imposition of taxes without consent of the Parliament
was utterly forbidden. Since colonists were devoid of representation in the Parliament, this was
in violation of the rights of the colonists. In the end, the British Parliament insisted on the fact
that the colonists had virtual representation.

Pitt the Elder was a famous Briton and North American like Joseph Galloway who debated and
spread plans to create imperial structure or federal representative of the British government. This
involved taxation powers that included American, Irish, West Indian and British Members of
Parliament. The ideas seriously underwent debates and discussions from different sides of the
Atlantic. However, there was no formal demand that was sent to Westminster in the end.

Virtual Representation?

Representation was very limited in Britain with only 3% of men that were allowed with the
utmost controlled being done by the local gentry. The British Government then said that colonist
had virtual representation to their advantage. No taxation without representation meant that the
government had to pass all taxes. This is according to English history. The representation used to
be land until it became virtual representation. Samuel Johnson trashed the plea of colonists who
had no vote to be unrepresented. According to him: “They are represented by the same virtual
representation as the greater part of England.”

The virtual representation theory was lambasted in Britain by Charles Pratt, 1st Earl of Camden
and William Pit, Earl of Chatham, his ally. The colonists also rejected it as a whole saying that it
was hid political corruption and was unidentifiable with the beliefs of the republicans. There is
not representation if a man is not allowed to vote.

In the Parliament’s first speeches, Lord Camden trashed the proposal to mollify the crown when
the Stamp Act was repealed. When the “no taxation without representation” was first affirmed,
Camden received the ire of PM Greenville, Chief Justice James Mansfield, 1st Earl of
Northington and Robert Henley.

Essentially the British Parliament had no right to impose tax on the Americans.

NO taxation without representation is a cardinal principle—accepted by every civilized nation—

and embodied in Article 77 of the 1973 Constitution. It is perpetually violated—an act that
remains unnoticed at public level. The members of parliament do not act within the four corners
of supreme law. They have delegated their power to levy taxes to the federal government or the
Federal Board of Revenue (FBR).

Highlighting this vital issue, Human Rights Commission of Pakistan (HRCP), in a meeting, held
on July 27 in Islamabad recommended a constitutional amendment making it mandatory for the
FBR 'to take prior approval from the Parliament before issuing any taxation related amendments,
SROs, notifications and changes in tax laws”.

It appears that HRCP is not aware of correct position of law. Article 162 debars the parliament to
grant tax exemptions or concessions without the prior approval of the President of Pakistan. The
power to issue Statutory Regulatory Orders (SROs) has been delegated unconstitutionally to an
executive authority. How can the parliament delegate a power which it cannot exercise itself
without the prior sanction of the President?

Authority to levy taxes or extend any kind of exemption vested in the federal government [used
through FBR] under delegation of power is gross violation of Article 77 read with Article 162 of
the Constitution that says

“Prior sanction of the President is required for bills affecting taxation in which provinces are
interested - No bill or amendment which imposes or varies a tax or duty the whole or part of the
net proceeds whereof is assigned to any province, or which varies the meaning of the expression
“agricultural income” as defined for the purposes of the enactments relating to income-tax, or
which affects the principles on which under any of the foregoing provisions of this Chapter,
moneys are or may be distributable to provinces, shall be introduced or moved in the National
Assembly except with the previous sanction of the President.”

Since 1973 every finance bill was presented in the National Assembly in utter violation of
Article 162 but nobody ever agitated this issue. Notwithstanding the fact that correct
constitutional position as far as taxes are concerned was not known to the HRCP, its
recommendation that parliament should oversee sub-ordinate legislation, such as rules made
under enactments deserve immediate attention of all—especially the legislators.
Tax system is one of the fundamental elements of a constitutional democracy. The important
questions such as who is to be taxed, how much and for what purposes, are essentially political
questions. These kinds of questions are always resolved through a political process. How tax
obligations are to be imposed, administered and enforced are constitutional questions. The
imposition, administration and enforcement of taxes raise problems about the rule of law, proper
division of powers, and the role of judiciary and so on.

The implementation of the rule of law determines the failure or success of a society. In the tax
context, it means that taxes shall be imposed through a proper consultation method, through
parliamentary process, rather than through administrative discretion. Article 77 says that no tax
shall be levied for the purposes of the Federation except by or under the authority of the Act of
Parliament.

Thus excessive use of administrative discretion and delegation of legislative authority to

executive has rendered the entire tax system of the country unconstitutional.

The so-called wizards sitting in the FBR have been playing havoc with the tax laws by issuing
infamous SROs and administrative instructions—granting exemptions or modifying the same,
even levying taxes in the garb of rule-making powers.

Tax administrative authorities should be given powers to deal with tax evasion and avoidance,
but unfettered administrative discretion to alter the law passed by the parliament is to negate the
principles contained in Article 77 and 162 of the Constitution.

Tax system and tax laws should be framed and enacted through a democratic process and once
they are passed should be properly implemented through tax administration. All the segments of
society should adhere to the rule that nobody is above the law. In Pakistan tax laws are meant
only to fleece the poor for the luxuries of the rich. The privileged classes pay no taxes on their
colossal incomes and wealth.

Comprehensive Essay on Tax Reforms in Pakistan

Introduction:

Taxation has always been a vital part of any modern society. From time immemorial, we have
seen governments taxing their citizens in order to finance their expenditure and for other
constructive purposes. The tax structure of any country plays pivotal role in the country’s
economic development. Revenue collection is not the sole purpose of tax system but it is also a
tool that is utilized to reinforce or eliminate activities and pursuits that are determined by the
legal system.

Tax is described as follows:-

“A tax is a compulsory payment levied by the government on individuals or companies to meet

the expenditure which is required for public welfare”.
Canons of Taxation:

Adam Smith in his book “The Wealth of Nations” came up with some standard characteristics
that any country’s tax laws must possess in order to be perceived fair in the eyes of the citizens
of that country. Those characteristics were:

I. Ability to Pay:

Any person should be liable to pay that amount of tax which he is capable of paying. No person
should be subjected to more burden than he can bear.

II. Convenience:

The time and place of paying taxes should be extremely convenient so that the taxpayer should
not have any undue difficulty in paying the tax that he is liable to pay.

IV. Economy in Collection:

The costs that shall be incurred in collecting the taxes should be minimized in order to allow the
government to collect as much net revenue as it can.

V. Certainty:

The tax laws of a country should not be complicated and the tax collector must not have the
power to charge an extra tax or reduce any person’s tax liability.

Taxation system of Pakistan:

Like other countries there are two types of tax prevailing in Pakistan. One is Direct tax and other
is Indirect Tax.

It is argued that a direct tax is one that cannot be shifted by the tax payer to someone else,
whereas an indirect tax can be.

A direct tax is primarily on income and is collected directly from taxpayers. And indirect taxes
include sales taxes and a well defined mechanism is formulated to deal and collect indirectly etc.

Current Economic Situation in Pakistan:

It can be said that a flawed tax system of Pakistan is a primary reason for the persistent budget
deficits that Pakistan has to face every year. Apart from the fact, the government is adopting a
non serious attitude in reducing the losses of the public sector enterprises such as PIA, Pakistan
Railways and Pakistan Steel Mills. Moreover, Pakistan is borrowing from international financial
institutions is also a direct consequence of its failure to collect significant amounts in tax
revenue. Hence, if Pakistan is able to increase its tax revenue significantly, she shall definitely be
able to avoid borrowing from institutions such as WB and IMF that impose tough conditions.
Tax-to-GDP Ratio of Pakistan

Tax Reforms in Pakistan:

Some reforms are being presented that can help in the improvement of the tax system in
Pakistan. These reforms would have long lasting impacts on the existing tax system of Pakistan.

Formation of Intelligence Tax Bureau:

There is an immediate need for a Tax Intelligence institution. This should have substantial
powers to inspect financial data from anywhere. It must be embellished with latest and modern
technology and highly professional team. They should have proper job security and
independence as well.

They would be able to perform certain tasks:

 Monitor the online transaction between banks to companies, companies to companies and
customer to company and dealing with foreign financial institutions.
 Intercept the financial dealings of companies with local dealers, clients and agents.
 Major task of this to reduce the money laundering across globe.
 Getting financial data of Pakistani citizens from foreign countries.
 Make check over officials who directly deals with the collection and assessment of tax.
 Data Provision of those persons who evade tax and its basic purpose should be to expand
the numbers of taxpayers.

Through this kind of bureau, a transparent tax system can be established. It will increase the
number of taxpayers and boost the performance of tax official as well. Corruption in tax
collection can also be reduced while having a public complaint department where they receive
complaints from the public about corruption and they will secretly investigate the matter.

Reformation of Legal procedures:

In Pakistan, no one ever convicted or sent to prison on the matter of tax evasion. There is a
direct need to impose strict legal implications upon those people who evade tax at high level.
The inland Revenue commissioner should be given legal power or Government can give
instructions to the police to act on the advice of the commissioner.

It is commonly observed that in FBR every single and common letter or document needs
signature of the Commissioner, Additional commissioner, Deputy Commissioner and Assistant
commissioner. This results in the wastage of much time and makes system and performance
weak of FBR as well. Substantial rights and powers should be given at every level. However,
critical matter should be approved by more than two officers including the Commissioner.

Savings Tax: A savings tax can also be proposed that will tax the savings of people in bank
accounts. Such a tax will discourage people from keeping their money idle in bank accounts and
instead encourage them to invest all that money in productive ventures in order to generate
employment opportunities in Pakistan. Furthermore, the government can launch financial
instruments as an alternative investment. All the funds derived by the government through such
instruments can be used to finance national infrastructure programs such as dams, bridges and
schools etc. Such a savings tax will ultimately lead to an increase in aggregate investment and
consumption and allow Pakistan to extract itself from the recession into which it has fallen over
the past several years.

Agricultural Tax:

The most important and perhaps the biggest flaw present in the tax laws of Pakistan is that
agriculture which accounts for around 25% of the GDP and provides employment to around 40%
of the total labor force is contributing not even a single penny to the national exchequer. Big
landlords that earn millions from agriculture are not taxed in any way and those people who earn
any other miscellaneous income also try to label that as agricultural income just to evade tax.
Hence, if we want Pakistan to curtail its persistent budget deficit, we will have to collect taxes
from all the different sectors of the economy. As far as the details concerning such an
agricultural tax is concerned, we can tax it similar to business income where all the expenses
incurred in order to derive that income are allowed as deductions. For agricultural income,
expenses such as cultivation and harvesting of crops can be allowed as deductions from
agricultural income. Small farmers and those people who indulge in agriculture on a subsistence
level can be exempted from such a tax.

Another point to be noted over here is that some people in Pakistan have this misconception that
any agricultural tax would lead to an increase in food inflation. However, it should be clear to all
of us that the tax which is being proposed will be imposed on the profits that people earn from
agriculture. This agricultural tax will not be imposed on the agricultural produce as what happens
in a sales tax. Hence, to create false fears of food inflation just to exempt big landlords from
paying taxes would be highly inequitable and unless Pakistan decides to tax all those segments of
the society which can afford to pay their due share of taxes, Pakistan will continue to face the
problem of budget deficits and ever mounting public debt.

Capital Gains Tax:

During the past decade, hundreds of people became millionaires and even billionaires in Pakistan
by investing in the stock market and in the real estate. The boom in the stock and the real estate
markets came and went, but those people who earned abnormal profits by investing in both these
markets were not taxed to the extent that they should have been. Even now one can see that
people who hold shares of listed companies for more than a year are completely exempt from
paying even a single penny in tax. It can be argued that the government wants to encourage
people to invest for the long term in the stock market. However, providing a complete exemption
is clearly not logical and economically feasible in such economically trying times for the
Pakistani government.It would be a logical proposition to advise the government to start taxing
stock market investments where the holding period is greater than a year and furthermore, the
government should increase the tax rate on short term and speculative investment in the stock
market which only makes the market more volatile. All these measures are extremely crucial in
an environment in which the government is facing a fiscal squeeze and every single penny of tax
collected by the government is extremely important. Similarly, investment in the real estate
should also be taxed so that all those people who can afford to invest in such properties pay their
due share of tax.

8. Introduction of Electronic Cash Registers

Some years ago an effort was made to introduce Electronic Cash Registers at every retail outlet
in the country but the government backed away from implementation of the universally accepted
system when the retailers agitated.

Recommendation

-Registration of retail outlets and electronic cash registers should be made mandatory at all retail
outlets without any turnover thresholds, which gives rise to tax evasion also

Corruption:

All the above mentioned reforms will surely increase the tax revenue being collected by the
Pakistani tax machinery. However, the problem and menace of corruption if not eliminated will
lay to waste all the efforts of any party or institution to increase the tax revenue of Pakistan.
Corruption is the reason due to which a hefty portion of our tax revenue is wasted away and is
not spent on social development and national infrastructure projects. Hence, in order to ensure
that all the measures that have been cited above must also be complimented with some other
ancillary measures in order to make sure that no hurdle is put in the path of the greater tax
collection in Pakistan. Some of those measures can be:

I. Firstly, the customs department which is heavily involved in the under-invoicing and incorrect
declarations should be revamped at war footings.

II. Besides this competent and dedicated personnel should be hired. Most importantly the hearing
should be made solely on merit, so that deserving and clean people could serve the country.

III. Furthermore, the people who make up the tax machinery should be held accountable and
their performance should be monitored regularly. An intelligence division should be made within
the Directorate Intelligence and Investigation, in order to keep check on the employees.

IV. Moving on, any abuse of authority if observed should be punished suitably. In order to come
with the proper environment in which everyone does his own work and do it properly the senior
management should set an example for the juniors.

V. Plus to generate honesty and reward hard work in the tax machinery, anyone who is doing
good work should be given incentives plus anyone who uncovers any major tax evasion or scam
should be given 25% of the detected amount.
Hence, measures like these can lead to the creation of a control environment in the tax machinery
of Pakistan that will ultimately lead to the increase in tax revenue being collected and a lot less
money being wasted due to corruption.

Furthermore, in today’s environment it is crucial for the FBR to conduct strong audits in order to
ensure that the tax returns filed by the taxpayers on self – assessment basis are accurate and
complete and these returns do not in any way understate the income of the taxpayer.

In order to facilitate the taxpayers a new scheme was introduced in the income tax ordinance
called the universal self-assessment scheme (USAS). The scheme was that the taxpayer had to
assess their income and file it honestly.

This scheme basically was introduced to minimize the contact between the taxpayers and the tax
collector. Also the tax collector could not assess the income tax filed by the taxpayer, hence
slashing the power of audit.

The results of such scheme were catastrophic, the documentation and increase in revenue which
started to take place in the nineties, faded away with this scheme. That is why strong audits are
extremely necessary for the negative aspects of USA to be eradicated.

Reduction in Non – Developmental Expenditure:

Non – developmental expenditure that eats up the most of the funds that Pakistan is able to
generate include the defence expenditure and the unnecessary and lavish expenditure that our
politicians waste on their luxurious lifestyles.

Hence, it would be useless to implement tax reforms if all that money is to be wasted on such
non – developmental expenditure. It could be argued that in such tense times, it would not be
advisable for Pakistan to reduce its defence expenditure. However, some tough decisions will
have to be taken in order to reduce the budget deficit of Pakistan. Even the American military
has decided to cut its defence expenditure considering the weak state of America’s economy.

Elimination of Black Economy:

Finally, another big problem that Pakistan is facing, which is a big cause of lower tax collection
is a lack of documentation. As the government does not have sufficient data on the incomes of
people, it is obvious that it finds it really difficult to tax them as well.

However, there is also a solution to this problem. If the government could get serious in making
the tax system work properly, NADRA has its solutions in a single click. As Nadra issues the
CNIC and that CNIC include a unique ID number.

Nowadays, nothing is possible without the use of CNIC. Suppose if you are going to open a bank
account, you will require your CNIC. If you are spending something from your credit card, it
includes your CNIC and moreover if you are buying an airline ticket, you require a CNIC.
Nowadays, about everything requires a CNIC. If the government wants, with just a single click,
you could easily track, who is doing what, how many bank accounts does he have and how many
of them are actually declared, what is being earned and what is being spent.

If the government wants, any information can be collected from the CNIC. Hence, such a
measure if taken by the government can resolve the problem of documentation in Pakistan’s
economy and result in more tax being collected as the government will have at its disposal the
record of the income and expenditure of its taxpayers.

Conclusion:

The entire discussion in this working paper and the research that was done to prepare this
document was ultimately meant to arrive at a set of reforms which if implemented would
definitely lead to increased tax collection in Pakistan and a smaller or even a balanced budget for
Pakistan. All this would help Pakistan to avoid going back for lending purposes to the IMF and
WB.

Finally, I would like to say that in today’s recessionary times when even the developed countries
of the world are finding it really difficult to extract their economies out of their recession; it
would be illogical of us to expect these countries to continue to provide aid to Pakistan.

It is time that we should stand on our own feet and stop expecting aid and help from the so called
“Friends of Democratic Pakistan”. Only self – reliance would help us revitalizing our own
economy and competing with the rest of the world.

Tax avoidance involves arrangement of a transaction in order to obtain a tax advantage, benefit,
or reduction in a manner unintended by the tax law. It is an unacceptable manipulation of the
law which is unlike legitimate tax mitigation. Mitigation involves use of the tax law to achieve
anticipated tax advantages embedded in tax provisions. Tax avoidance is also to be
distinguished from tax evasion. Evasion involves outright fraud, concealment, or
misrepresentation in order to defeat application of the tax laws."

Tax mitigation and tax evasion, standing analytically before and after tax avoidance, have no
statutory definitions. ... New Zealand courts and practitioners prefer not to use the term
"mitigation." Instead, they employ circumlocutions like "permissible tax minimisation" [which]
indeed encapsulates the meaning of tax mitigation, which is to reduce one's tax in a manner that
not only complies with the letter of the law but that is consistent with the policy behind the
legislation."