Who Needs to file Income Tax Return?

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You need to file your annual Income Tax Return in Pakistan if you fall within the ambit of any of the following:

  1.   Registered Taxpayers (NTN holders)
  2.   Those charged tax in tax years 2015, 2016
  3.   Welfare Institutions or NPOs (defined in ITO 2001)
  4.   Annual (non-business) income of PKR 400,000 or more
  5.   Annual business income of PKR 300,000 or more
  6.   All companies with financial (accounts) closure of before 31st December 2016
  7.   Owners of 250 sq yards  or more land or flat of any size within    Cantt/Municipal/ICT jurisdiction
  8.   Owners of 500 sq yards  or more land (outside Cantt/Municipal/ICT jurisdiction)
  9.   Flat Owners of 2000 sq ft or more covered area
  10.   Owners of vehicles over 1000cc
  11.   Anyone sent notice(s) to file return

Here are some of the major financial benefits of filing your Income Tax Return

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Resolving the Banking Transactions’ Tax Crisis

The following article has been published in Daily Nation, dated 3rd August 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-08-03/page-9)

(Onlinehttp://nation.com.pk/business/03-Aug-2015/resolving-banking-transactions-tax-crisis)

Resolving the Banking Transactions’ Tax Crisis

Prof Dp

By: Omer Zaheer Meer

As discussed on these pages before the controversial decision of levying a withholding tax on all banking transactions for non-filers (0.3% till September and increasing to 0.6% thereafter) with the underlying aim of broadening the tax base has not been able to gain acceptance in the presence of serious flaws within the taxation system along-with prevalent corrupt practices. Even if one ignores the increase in the inflationary pressures in the economy and the penalization of ordinary salaried class, the reservations of traders alone are sufficient to make this highly controversial. The disagreement on this matter has now reached a dead-lock between traders and the incumbent Government. So exactly what are their reservations and how can they be possibly addressed? Is there any possible solution for the same?

First of all the withholding tax introduced is more of a transactional tax then an income tax. But more importantly the issue at hand is one of a lack of trust in the system. Not only do the traders fear to be targeted unfairly once they bring themselves in the system to avoid the transactional tax, they haven’t seen the remedial procedures effectively providing relief in an event of witch-hunting by FBR either. Many economists are of the view that introducing new taxes to compensate for FBR’s failures is simply not the answer to Pakistan’s economic and tax woes. The reasons for FBR’s failures are numerous ranging from dissatisfaction amongst FBR’s employees to structural inefficiencies in the taxation system. They’re however not the topic for today and will be discussed at another time.

For now the issue of the trust deficit particularly in the business community is discussed. Besides very high rates of both direct and indirect taxes, the harassment by FBR and blockade of due refunds are often used as tactics by FBR officials to meet their targets. This actually puts off many genuine businessmen who would otherwise like to contribute their dues to the society. Therefore they claim to resort to the alternate in doing charity and stressing that they evade getting within the ambit of the formal documentation to avoid the horrible experiences many of their fellow traders have endured in their dealings with the FBR. None of these issues are of a nature which cannot be positively addressed. Infact this writer has repeatedly proposed several structural reforms including the ones addressing these very issues.

For example the policy of volume over rates can be pursued. It’d entail reducing all the taxation rates to single digits making it economically prohibitive to evade due to the higher costs of engaging professionals as well as fulfilling the demands of the corrupt officials within the tax apparatus. The focus will be to broaden the tax base using indirect taxes for this purpose while direct taxes can be applied on a progressive basis, increasing with the income brackets. If tunnel vision can be shunned then the positive potential of this can be envisioned. Currently less than 0.5% of the population files a return. The number has declined over past four years despite all the “efforts” for broadening the tax base. If this number can be increased to several millions with a consequential increase in the tax base and tax payers, one can envision the positive impact on tax collections.

It’ll be interesting for the readers to know that the honorable finance minister Mr. Ishaq Dar himself used to be a proponent of this proposal during his days of serving the Lahore Chamber of Commerce and Industry. Surprisingly, now that he’s in a position to actually enforce this much needed reform, he’s shying away from it. Moreover the effective implementation of the relief mechanisms and laws can help assure the tax payer. The time limits for deciding the disagreements should also be enforced. For a change, the tax officials can be trained to respect the tax payer instead of treating them as an assumed criminal. Such measures can go a long way to win over the trust of the taxpayers in the system.

Even in the past negotiations between traders and Government officials, the issue of the undue nuances caused by FBR to genuine businessmen resulting in most businesses staying out of the system to avoid these troubles has been raised. Similarly promises were made with traders to review the exorbitantly high rates of withholding taxes deducted in advance. Some of these taxes are treated as non-adjustable even in case of a loss. Even those that are considered adjustable are extremely hard to recover as the FBR seems to have an unwritten rule regarding refusing even the genuine refunds to loss-making businesses when they need their cash the most. However the same FBR seems content to issue refunds to or defer recovery of tens of millions from influential parties. Such behavior doesn’t instill the trust in the business community.

The latest on this issue is the breakdown of the negotiations between Government and traders resulting in strikes been called and social media campaigns been setup. The reduced rate of 0.3% till September has also been turned down by the business community for the reasons discussed above. A successful strike was already observed with the traders threatening to go all out towards a civil disobedience. Government on the other hand has ordered investigations into the affairs of top leadership of traders.

Possible ramifications of this standoff can be damaging for the national economy and the issue needs to be resolved amicably. One possible solution can involve doing away with this transactional tax and reducing the withholding and sales tax rates immediately pending a review of other structural reforms in return for voluntary registration of a minimum number of businessmen. There are many other possible proposals to this effect too. The ball is now in Governments’ court to decide whether it is serious about introducing reforms to win over the tax payer and broaden the tax base or if it simply believes in coercive measures which may seem beneficial in meeting short-term targets but will surely cause damage in the longer-term.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

Minimum & Banking Transactions’ Tax

The following article has been published in Daily Nation, dated 27th July 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-07-27/page-9)

(Onlinehttp://nation.com.pk/business/27-Jul-2015/minimum-banking-transactions-tax)

Minimum & Banking Transactions’ Tax

By: Omer Zaheer Meer

With the stated aims of supporting the entrepreneurship culture, facilitating businesses and increasing the numbers within the ambit of formally documented economy, one would expect steps by policymakers to incentivize the masses to this effect. Notwithstanding several positive developments, some recent steps have actually served in contradiction of the above aims of the incumbent Government.

Before diving into the specifics let’s briefly discuss some important building blocks. First of all, most of the modern economies have moved away from been solely or greatly based upon agriculture or manufacturing to a greater focus on service sector, then be it financial, IT, educational, telecommunication or other services within this sector. Even those with a large base of agriculture or manufacturing have modernized to include service industry as a significant part of their overall GDP. It is therefore essential for a successful modern economy to promote service sector with the underlying GDP growth and employment opportunities acting as prime motivators. Similarly in a country like ours where, as per some studies, the black monies and illegal economy outweigh the documented formal one, reforms are required to incentivize people to come within the ambit of documented economy.

With the above been clarified let us move onto some extremely important issues with serious ramifications for our economy. First up a minimum tax on service companies has been levied from fiscal year 2015-16. But what does a minimum tax mean? For our tax dilettante readers, it means that the advance tax paid by service companies will not be refunded in the event of them ending up in losses at the financial year end. This is not only unjust but would have serious negative implications for the service sector growth. Moreover it also has the potential to entice this sector towards “creative accounting” to avoid paying any more taxes then the minimum they have to since they will not be getting any refunds due to them in the past in their hour of need.

This “creative accounting” argument was actually floated as an initial reason for attempting to introduce the minimum tax on service sector several years ago under pressure from international lenders. This was done in a controversial manner despite an existing section of the Income Tax Ordinance 2001 already dealing with the minimum tax on companies. The matter led to serious misgivings from the tax payers and after long heated debates the last finance bill included a proposal to restore the original position before the controversial insertion in section 153. The original position was that any tax paid in advance was adjustable against the final tax liability. Unfortunately at the last moment the policy makers again succumbed to certain pressures and instead introduced the minimum tax. In doing so the long term impact on tax net and GDP growth was ignored in favor of the short term cash accumulation to meet annual targets.

Several responsible officials have shared in private that this amendment was based on the underlying assertion that all mobile companies, a sub-sector within the service industry, were preparing falsified accounting records to avoid due tax and thereby causing losses to the national exchequer. Even if we accept the notion, this observation was based upon a sub-sector only and it was therefore inherently unjustified to “punish” an entire sector for that. Moreover this was equal to declaring that since some- murderers are able to deceive with the judicial system therefore all accused from now on would have a body part amputated as a presumed minimum punishment. Not very just, is it?

Instead an overhaul of the system with effective implementation along-with introduction of stringent penal clauses would have served the purpose more effectively. Last but not the least, even the existing audit provision, if implemented properly was sufficient to deal with the problem. We therefore propose and expect the policy makers to review this matter positively with a strategic view of expanding the GDP and broadening the tax-base rather than diminishing it. Volume over margin is the way forward for a progressive taxation regime.

Next up is perhaps the most controversial issue of the imposition of advance tax on banking transactions by non-filers. After a lot of uproar from the business community, the negotiations with finance ministry officials resulted in the concession that the levy of 0.6 percent withholding tax was reduced to 0.3 percent till end of September 2015. Any non-filers after that date would be liable to the rate of 0.6 percent again. However, a section of business community has rejected this and is planning to force a change by strikes and protests.

While the underlying aim seems fairly positive in that the non-filers are incentivized to come within the ambit of documented economy, there are certain qualifications to that. Firstly many individuals particularly salaried ones get their tax deducted at source and as such do not file income tax returns. This is despite them paying more than their due shares of taxes if all the indirect taxes on their consumption are taken into account. A lack of awareness and the bureaucratic difficulties within our taxation apparatus are the biggest reason for this trend. Secondly the lack of trust in the authorities and Governments by the business community is a big barrier.

Some of the concerns leading to the lack of trust are seemingly genuine and warrant corrective actions. A case in point is the undue relief given to influential tax payers while the ordinary one having to waste material resources in order to get their genuine rights like refunds due to them. Moreover the undue nuances caused to even genuine businessmen by certain elements within the taxation apparatus cements the belief that it’s beneficial to stay out of the system to avoid these troubles. Moreover taxing every transaction over Rs. 50,000 at 0.6%, when aggregated, takes the total cost to inexplicable levels making it attractive to avoid banking channels for those not bound to. The crux is that trying to impose a reform like taxing banking transactions without addressing the inherent limitations and problems of the taxation system may not be the most effective way to address the issue of widening the tax-net and should be re-considered.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

Finance Act 2015-16: Dissecting major reforms – I

The following article has been published in Daily Nation, dated 13th July 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-07-13/page-9)

(Onlinehttp://nation.com.pk/business/13-Jul-2015/finance-act-2015-16-dissecting-major-reforms)

Finance Act 2015-16: Dissecting major reforms – I

By: Omer Zaheer Meer

The finance bill for financial year 2015-16 was passed by the National Assembly with some amendments and released as the Finance Act 2015-16. The opposition’s walkout on 23rd June 2015 allowed the finance ministry officials an easy outing with the Treasury benches rendering their support for granting the approval to the finance bill. There have been positive developments in some areas while much is left to be desired in others. The honorable finance minister explained his constraints in his budget speech when the original finance bill was floated, pointing out to the strong lobbies with vested interests and that the incumbent Government is undertaking reforms in a phased manner. We’ll discuss some major reforms, their impact on businesses and economy as well as the reaction of the impacted segments towards them in this write-up.

This is first of a two part write-ups on the above titled subject aimed to enlighten our readers on some of the least understood aspects of the finance act.

First up is the reduction in tax rate for companies which has been reduced for the tax years 2016, 2017 and 2018 to be 32, 31 and 30 percent of taxable income respectively. This is the fulfillment of the commitment by the incumbent Government to reduce the tax rate for corporate sector to 30 percent by 2018. The move is seen positively and welcomed by the corporate sector. Lowering the tax incidence on corporate sector is viewed as an incentive for this segment.

Interest Free Loans for Solar Tube Wells upto Rs.1 Million for setting up new solar tube wells or replacing the existing tube wells with solar tube wells shall also be provided to small farm owners having landholdings of less than the 12.5 acres economic threshold. This is a positive step aimed to address both the energy crisis impacting the agricultural sector as well as providing some relief to the small farmer as most of the other measures for the agricultural sector seems to be aimed at benefitting large landowners and investors.

Next up is perhaps the most controversial and discussed about yet least understood reform of the imposition of advance tax on banking transactions by non-filers. A lot of hue and cry including strikes by traders has resulted in the original levy of 0.6 percent withholding tax halved to 0.3 percent till end of September 2015 by way of an ordinance promulgated by the President of Pakistan. The original reform required all banking companies to collect advance tax at the rate of 0.6 percent on all transactions from an account either by way of sale of any instrument including demand draft, pay order, etc. and/or transfer of any sum through cheque and other similar manners or clearing interbank transfer through cheques etc which meant that all debits (amounts taken out) of an account shall be liable to this tax.

There are a few important qualifications to this advance tax though. Firstly this is only applicable to non-filers. Secondly the provision will apply only where the sum total of payments for all transactions in an account shall exceed Rs 50,000 in a day. Also this tax will be adjustable against the tax liability if the person files his/her return of income. Furthermore, the onus is on the account holders to inform their banks/financial institutions about their status of being a filer sans which collection will become applicable on their accounts.

Last but not the least, this provision is in addition to the existing provisions of Section 231AA of the Income Tax Ordinance where in all cases (being a filer or non-filer) a collection of tax is made on cash transactions. This effectively means that the new tax will apply to non-cash transactions of non-filers whereas section 231A and 231AA shall continue to apply on cash transactions. The rate of withholding tax on cash withdrawals under section 231A (in case of non-filers) and section 231AA (in case of both filers and non-filers) has been increased from 0.5% to 0.6%.

If we look at this reform from an objective perspective, though cumbersome administratively it incentivize businesses and individuals to come within the ambit of filing tax returns. The objective is to broaden the tax net. However the structural inefficiencies, rampant corruption within most tax authorities and a regressive taxation system all act as a deterrent against becoming a filer. This reform alone does not address all these issues and therefore this context can help us better appreciate the negative reaction from masses particularly businesses instead of simply dismissing their concerns as the prevalent tax avoidance culture.

Another interesting reform is the imposition of a one-time “super tax” for tax year 2015 for the rehabilitation of temporarily displaced persons on all those with income of Rs. 500 million or more as below:

  • (i) banking companies at 4%
  • (ii) all other taxpayers at the rate of 3%

This is an example of a reform pursuing the progressive tax regime by taxing those with higher income to the advantage of the downtrodden sections of the society. If the entire taxation system is revamped with a focus on direct taxation pursuing a progressive tax regime many of the ills facing our revenue generation and thereby economy can be rectified.

We’ll continue with some more interesting amendments, issues and structural reforms introduced by the Finance Act 2015-16 in the second and last part of this writeup.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced Fellow Chartered Certified Accountant and Anti-Money Laundering Expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk