Finance Bill 2013: Some half-hearted positive steps

Fiscal laws are difficult to implement and to be accepted for they work towards extraction of money, albeit for the betterment of society. As it is said “Tax is the price for living in a civilised society” while in our society, paying tax voluntarily is not something generally liked by all. Once you pay tax, the government is obliged to provide you basic necessities, law and order, infrastructure etc.

However, what we see is that a common man has to arrange all such facilities from his own resources. The state revenue on the other hand is being exploited by government. functionaries and is not utilised for the purpose for which it is collected. We, as a nation, need to work towards bridging the gap between the poor and the rich though it is the government which has to work for this. As a result, the gap is widening – the rich is becoming richer. Pakistan is blessed with enormous resources and fantastic brains and still our social fiber is deteriorating.

The newly elected PML-N government presented its first Federal Budget for the fiscal year 2013-2014 before the National Assembly on 12 June 2013. The Federal Finance Minister, Ishaq Dar, suggested a number of amendments in the tax laws of the country and also proposed enacting a new fiscal levy viz. Income Support Levy Act, 2013. In this paper, I will discuss two proposals made by Dar which in my humble view are bold and positive and have far reaching effects.

The first is an amendment proposed in the Income Tax Ordinance, 2001 (“Tax Ordinance”) in its section 111 which tends to tax unexplained income/ investment/ expenses. As we all know under the Constitution of Pakistan, tax on agricultural income has always been a Provincial prerogative; therefore, by one way or the other, agriculture income remains exempt under the Federal Legislation. Under the existing scheme of taxation, every person discloses and/ or utilises their agricultural income without corroborating it with Provincial agricultural tax paid thereon.

For the first time in the history of tax legislation, Finance Bill 2013 seeks to introduce a very significant and positive step towards curbing untaxed and unchecked utilisation of agricultural income for the purpose of explaining the source of investment made, money or valuable article owned or expenditure incurred by the person. In this respect the Finance Bill seeks to insert the following proviso to sub-section (1) of section 111 of the Tax Ordinance –

“Provided that where a “taxpayer” explains the nature and source of the amount credited or the investment made, money or valuable article owned or funds from which the expenditure was made, by way of agricultural income, such explanation shall be accepted to the extent of agricultural income worked back on the basis of agricultural income tax paid under the relevant provincial law.” (emphasis supplied)

This would mean that only if an existing taxpayer fails to correlate his/ her investment or expenditure etc. via properly taxed agricultural income under the relevant Provincial agricultural tax laws, such unexplained income/ expenditure etc. will be liable to be taxed under the Tax Ordinance. It therefore, appears that the legislature intends to restrict the misuse of agricultural income to support a source of unexplained income, asset or expenditure and at the same time encourages that provincial agricultural tax should be paid in order to claim credit for sources of income, assets or expenditure. The proposal will entitle claim of credit of income to the proportion of taxes paid in the concerned Province. However, by using the phrase “taxpayer” instead of “person” it appears that the legislature does not intend to catch all persons who earn agriculture income, and consume such income in lavish spending yet do not pay due tax. It is also pertinent to note that in the entire section 111, the phrase “person” has been used and not “taxpayer”. As such, it is imperative that if the authorities are willing to implement the aforesaid provision of law, appropriate amendment to the above effect is required.

The proposal further lacks clarity for the reason that the Provincial agricultural taxes vary from Province to Province and are generally based on the unit produce basis of land or classification of land location i.e. Barani or otherwise. Accordingly, unless it is clarified, it will lead to un-called for tax litigation between the taxpayers and the tax authorities. It is, therefore, suggested that an explanation be added to clarify the mode and manner in which the related amount of investment/ expenditure/ income being explained would be computed to avoid any action under section 111 ibid.

The second one is the introduction of the Income Support Levy Act, 2013. The Bill seeks to introduce a new Act by the name of “Income Support Levy Act, 2013” (the proposed Act). The object and purpose of this Act is to promote social and economic well being of the people and to provide basic necessities of life more particularly to the economically distressed persons and families.

The proposed Act provides that there shall be charged for every tax year, commencing from the tax year 2013, a levy, in respect of the value of net moveable assets held by an individual as on 30 June of the respective year (after allowing the liabilities relating to his moveable assets), at the proposed rate of 0.5% of the “net moveable wealth” exceeding Rs 1,000,000. An individual who is liable to pay this levy would be required to pay it alongwith the wealth statement as required to be filed by individuals under the Income Tax Ordinance, 2001.

It is pertinent to point out that by making reference to a wealth statement as prescribed under the Income Tax Ordinance, 2001 it appears that the intended levy would be restricted to existing taxpayers only. On the contrary, in the present circumstances, it is desirable that every individual who is capable of contributing towards the intended purpose of this proposed levy, the government should consider making all Pakistani individuals residing in Pakistan irrespective of their source of income should be liable to this levy. As discussed above, the levy should be made payable based on “net movable wealth” as on 30 June of the respective year and the related filing vis-à-vis payment of the levy should be made by 30 September each year.

Under the proposed Act, “net moveable wealth” has been defined to mean the amount by which the aggregate value of the moveable assets belonging to a person as declared in the wealth statement for the relevant tax year, is in excess of the aggregate value of all the liabilities owed by that person which relate to such moveable assets.

The proposed enactment however, does not provide the basis of valuation of assets and liabilities of an individual for the purpose of this levy. In the absence of Rules providing for such valuation, a number of disputes would arise which will result in uncalled for litigation. As such in order to bring clarity and for the sake of avoiding any disputes, the government should consider prescribing specific Rules for valuation of assets held by individuals like shares, jewellery, clothing and other like items.

We all know that currently we as a nation are facing absolute financial difficulty and economic chaos. In order to meet the financial needs, our governments either beg for aid or ask the international lenders to provide financial assistance. These days also an IMF delegation is in session with the financial team of the country deciding the strict terms of the loan being granted to Pakistan. These sorts of loans set very strict conditions to be met which result in inflation, unnecessary taxation and price hike. As a result only the common man suffers the agony and pays a very high unreasonable price of living. On the contrary the government is unable to provide basic necessities and facilities to masses though this is attributable also to the inefficiency of the government. Yet it is high time that all those who are blessed with resources contribute positively to the well being of Pakistan. It is also the need of the time that our resources are exploited and used for the betterment of Pakistan. Pakistan is regarded as one of the most generous nations of the world. As such the proposed levy should not be treated as a “tax” but a “contribution” towards the well being of Pakistan. It is therefore, desirable that the proposed levy is collected and implemented in the most efficient manner and should be contributed by all patriotic Pakistanis.

In view of the above, the following suggestions need consideration if the intended levy is to be made effective and meaningful –

(i) the present threshold of Rs 1,000,000 is on the lower side and does not seem rational. The rules being framed should provide liberal exemptions in connection with personal belongings of the persons who are made liable to this levy. They should also contain proper basis of valuation of moveable assets.

(ii) as expounded by Dar during his budget speech, the purpose of the intended levy is to promote social and economic well being of the people and to provide basic necessities of life more particularly to the economically distressed persons and families. It is therefore, desirable that that the intended levy be made time bound i.e. for 2-3 years and efforts should be made to achieve the desired objects within the specified time. This would also lead to boosting the confidence of the persons who are made liable to contribute that it is not an alternate of Wealth Tax which stands abolished in the year 2003 after almost 40 years of it being implemented.

(iii) a separate body of professional individuals, and representatives of the concerned quarters i.e. businessmen, agriculturist, industrialist etc. having integrity should be established to implement and monitor the collection and consumption of the funds generated through the intended levy. If this task is assigned to the existing members of the bureaucracy, the result would be obvious. The body so constituted should be directly reporting to either the Prime Minister or the Finance Minister with no bureaucratic involvement. The body should be provided with ample and meaningful powers to enable it to implement the levy in letter and spirit. If this is done, the funds collected/ contributed would be enormous and sufficient to meet the desired objects.

(iv) the proforma of the wealth statement should be separately introduced. The condition of filing wealth statement is for the existing taxpayers while it is desirable that the intended levy should be contributed by all every patriotic Pakistani. If the declaration is presently linked with the wealth statement, the object of the introduction of such levy will not be achieved.

Apart from the above, the Finance Bill 2013 contains certain irritants. One of such amendment is exclusion of Retailers from the ambit of presumptive tax regime which perhaps has been done in view of the fact that big retailers are benefiting from this scheme and do not pay their share of due taxes. If this is the reasons of omitting existing sections 113A and 113B from the Income Tax Ordinance, 2001, this could have been done by making appropriate amendments in the existing sections. It is seen that after the above provisions were introduced in the Income Tax Ordinance, 2001, small retailers were contributing to the national exchequer and a reasonable amount of taxes was being collected from them. They were accordingly, not subject to the rigours of the discretionary powers of the tax officials. However, by omitting the above sections, the bureaucracy has prevailed to bring them back to the hassles of tax assessments by inefficient and corrupt tax officials. On the other hand, the government would likely to lose its share of tax being contributed by such retailers. It is therefore, necessary that the existing provisions of minimum tax payable by retailers shall remain intact and big retailers may be excluded from such scheme by introducing appropriate amendments to the Income Tax Ordinance, 2001.