Budget Proposal 2007
on Income Tax
The Income Tax Bar Association, Karachi
April 17, 2007
Presented by:
Ali A. Rahim
Director
TAX REFORMS

Bigger the Tax Base-Lesser the Rates –
It is now well settled through studies that bigger the tax base is, the lesser
the rates of tax can be
Further, efforts be made to bring more people into tax base

Establishment of Research and Development Department under the
auspicious of CBR in corroboration with Business Community,
Professionals, Tax Advisors and other Stake holders:
Area of Studies-Examples 




Undocumented economy
Double Taxation Agreements
E-Commerce
Economic and Tax Factors
Contribution by different Sectors According to percentage of G. D. P.
(Contd…)
2
TAX REFORMS

Further, encouragement and Incentives to be provided for
Savings and Investment

New provision to be introduced for Tax Credit for investments
made in National Saving Schemes and quoted and unquoted
mutual funds to give incentives for savings which will create
investment and employment

It is proposed that tax should be imposed on all segments of
the society. Exemptions and concessions to certain classes of
income or classes of persons be abolished.
(Contd…)
3
TAX REFORMS

Islamic Banking & Insurance
Issues regarding withholding of Taxes and taxation to be
examined to promote Islamic mode of Banking & Insurance

SME
It is proposed that reduced rates be Extended for Small
Company and Medium Enterprise (SME)
4
IRRITANTS
 For automation and facilitation Common Tax Identification (CTI)
number to be introduced for Companies and Firms and CNIC for
Individuals.
 Efforts to be made for effective legislation of Regulations which
require mandatory incorporation of the above on all the
documents executed in any form at any stage. e.g.
(a)
(b)
(c)
(d)
(e)
(f)
Transfer of Properties
Transfer of Shares
Transfer of Vehicles any model or cc
Bank Documents
Travel Documents
Large Expenditures
(Contd…)
5
IRRITANTS
 Return forms have remained constant and thus are now user
friendly. However, frequent changes of quarterly and monthly
statements are an irritant. These should also be designed on
permanent basis and while designing such forms, the literacy rate,
socio economic and judicious norms should be considered
rationally.
 Quarterly statements to be reintroduced instead of monthly.
 Filing of monthly or quarterly statements should only be done in
one zone.
(Contd…)
6
IRRITANTS
 Employers should be allowed to deduct tax after giving
adjustments for investment rebates, donations, medical
expenditure etc.
 e-filing of returns and statements should not be made mandatory.
 Jurisdiction for monitoring of tax on deductions made.
 Selection of cases for audit.
7
PERMANENT ESTABLISHMENT
Section 2(41)
ISSUE
The perusal of the definition shows that under Sub
section (d) and (f) any services or any substantial
equipment installed or other assets or property capable of
activities giving rise to income has been included
PROPOSAL
Since, the industrial growth has been promised by the
government. It would be appropriate that a minimum
period of suitable time be included in Sub section (d) and
(f) as was done in Sub section (3) A. Minimum period,
therefore, for Sub sections is suggested to also be 90
days.
RATIONALE
To correspond the provisions with treaty provisions
8
ROYALTY
Section 2(54) (g) & 37(5)
ISSUE
The consideration for the disposal of any property
or right referred to in sub-clauses (a) through (e)
are included within the definition of term royalty. If
the definition of the capital assets as contained in
Sub section (5) of section 37 is read, the disposal
of any property or right falls under the purview of
subsection (5) of section 37
PROPOSAL
It is, therefore, suggested that clause (g) be
deleted which is overlapping section 37(5).
RATIONALE To avoid confusion and overlapping
9
ORDINANCE TO OVERRIDE OTHER LAWS
Section 3 & 54
ISSUE
Ordinance to Override other laws
PROPOSAL
Words “Subject to this Ordinance” be inserted at the
start of Section
RATIONALE Contrary Provision by inserting Proviso to Section
54 has been made. As such additions of words
proposed are necessary to avoid doubt and
confusion. In our opinion Section 3 and amendment
made through proviso to Section 54 are contrary to
each other. It is therefore, proposed that either
Section 3 be deleted or in the alternate, the proviso
inserted in Section 54 be shifted and annexed with
Section 3.
10
ROYALTY & FEE FOR TECHNICAL SERVICES
Section 6 & Rules 18 & 19 of the Income Tax Rules, 1982
ISSUE
Option under Rules 18 & 19 of the Income Tax Rules 2002
read with Section 6
PROPOSAL
The said concession should either be brought in through
an amendment in section 6 or it may be put in Second
Schedule, which is part of the statute itself
RATIONALE
The intention of the lawmaker appears to be to allow the
non-resident persons having a permanent establishment in
Pakistan to avail final tax basis assessment as provided
under section 6 read with section 8. According to the rules
of interpretation, rule cannot override the main statute, the
concession given to the non-residents in the said rules is
not legally proper, this is despite the fact of usage of
words “Subject to the Ordinance” appearing in the
beginning of Section 6.
11
INCOME FROM PROPERTY
Section 15(2)
ISSUE
Under this section, a charge is created on rent received
or rent receivable by a person in a tax year other then
the rent exempt from tax under this Ordinance. Sub
section (2) defines the term “Rent” which means any
amount received or receivable by the owner of land or
a building as consideration for the use or occupation of,
or the right to use or occupy, the land or building and
including forfeited deposit paid under a contract for sale
of land or a building
PROPOSAL
It is suggested that in Sub section (2), where-ever the
word “or” has been used between the expressions "the
land” “building” said “or” be replaced by “and”
(Contd…)
12
INCOME FROM PROPERTY
Section 15(2)
RATIONALE Under the provisions of section 39 (1)(d), ground
rent has been specially dealt with arising out of the
land alone. Since the word “or” has been used in
definition clause in between land and building, it is
suggested that according to the rules of
interpretation, it connotes disjunctive consideration.
It seems the intention of legislature is that if an
amount is received or receivable by the owner of
land/building, such amount would be treated as rent.
As such, rent of land is being specially and
separately dealt with under Section 39
13
BAD DEBTS
Section 29(1)(b)
ISSUE
Allowability of bad debts in a tax year
PROPOSAL
It is proposed that in order to undo hardship clause
(b) of Sub section (1) of the section 29 may be
rephrased as under : “29(1)(b) the debt or the part of the debt is
written-off in the accounts of the person in the
tax year or in any previous tax year or
assessment year; and”
RATIONALE Facilitation
14
ACCRUAL BASIS OF ACCOUNTING
Section 34(5)
ISSUE
Where liabilities are not discharged within three
years
PROPOSAL
It is, proposed that words used in Sub section (5)
“Expenditure” be replaced by word “Trading
liability”
15
STOCK IN TRADE
Section 35
ISSUE
Under this section, the concept of determination of
the cost of Stock in trade disposed of has been
introduced. Generally in the cases of companies, the
valuation has to be mandatorilly made on the basis of
International Accounting Standards
PROPOSAL
It is, therefore, proposed that in Section 35, whereever word “person” has been used, words “other than
companies” may be inserted
RATIONALE Conversance of Tax
Accounting Standards
laws
with
International
16
INCOME FROM OTHER SOURCES
Section 39(3)
ISSUE
Loan, Advances, Deposit for issuance of shares
and gifts otherwise than by a crossed cheque
drawn on a bank or through Normal Banking
channel from person holding NTN Card. However
practical difficulties arise in respect of payment
received as loan or gift from Non-Resident to family
members
PROPOSAL
It is, therefore, proposed that a proviso be added
for dispensing with the condition of NTN
(Certificate) for amounts received from abroad
(Contd…)
17
INCOME FROM OTHER SOURCES
Section 39(3)
ISSUE
The world is moving very fast. The concept of paper
money is being replaced by Plastic money. The
normal banking practices are now absorbing
concept of Electronic Banking. One may receive
loan, gift or advance through other mode of transfers
PROPOSAL
(a) It is, therefore, suggested that the condition of
holding an N. T. N. should be abolished. Since all
bank accounts have CNIC's
(b) Advance Rent received be included Sub section
(4) subject to just and reasonable restrictions to
further increase documentation of the economy.
18
FAIR MARKET VALUE
Section 68
ISSUE
Discretion of the Commissioner
PROPOSAL
It is, proposed that suitable parameters for valuation
may be prescribed by the Central Board of Revenue
in the Income Tax Rules, 2002 and for the purposes
of Immovable properties, parameters defined under
Rule 228 of the income Tax Rules, 2002 be adopted
and corresponding amendment be made in Rule 228
accordingly
19
NON-RECOGNITION RULES
Section 79(1)
ISSUE
Under Section 79(1) and under clause (d) no gain or
loss shall be taken to arise where the asset is
compulsorily acquired under any law but a condition
has been put that such gain or loss will not be taken if
consideration received is reinvested by the recipient
in any asset of a like kind within one year of the
disposal
PROPOSAL
It is, proposed that words “of a like kind” be deleted
The period for reinvestment i.e. one year is too short.
This may be increased to atleast three years
20
NON-RECOGNITION RULES
Section 79(2)
ISSUE
Sub Section (2) of Section 79 stipulates that
provisions of Section (1) shall not apply where
person is a non-resident. This seems to be
discriminatory and could cause unnecessary
hardship in the case of gift and transmission of the
asset to an executor or beneficiary on the death of a
person and distribution of assets to non-resident
members of an AOP or non-resident shareholder in
the case of a company, in the event of liquidation of
the company or dissolution of an AOP.
PROPOSAL
It is, proposed that Sub section (2) be deleted
RATIONALE To eliminate discrimination
21
INVESTMENT IN SHARES
Section 62
ISSUE
Increase in investment rebate.
PROPOSAL
It is proposed that the investment should be
increased to Rs. 500,000/-
RATIONALE To encourage investment
22
EXTENSION OF TIME FOR FURNISHING
RETURN & OTHER STATEMENTS
Section 119(2)
ISSUE
Application to the Commissioner.
PROPOSAL
It is proposed that right of representation before the
Director General of Region may also be introduced to
redress the grievance of taxpayers.
RATIONALE Principles of Natural Justice.
23
EXTENSION OF TIME FOR FURNISHING
RETURN & OTHER STATEMENTS
Section 119(6)
ISSUE
According to Sub section (6) extension of time granted
under Sub section (3) shall not for the purpose of charge
of additional tax under sub section (1) of section 205
change the due date for payment of income tax under
Section 137. The interpretation of this Sub section (6)
plainly shows that addition tax imposition shall not stop
running
PROPOSAL
It is, proposed that sub section (6) may kindly be deleted
RATIONALE
It is submitted that once extension is granted by the
Commission or it cannot be said that Taxpayer has failed.
Therefore, even otherwise, once the Commissioner grants
time, it will be very harsh in genuine cases
24
DISPOSAL OF APPEALS BY
APPELLATE TRIBUNAL
Section 132(2)
ISSUE
Appeal can be dismissed in default
PROPOSAL
It is, proposed that said Sub section (2) may
accordingly be amended in the following manner –
“The Appellate Tribunal shall afford an
opportunity of being heard to the parties and in
case of failure to attend the appeal by the person
filing the appeal, the Tribunal may proceed exparte to decide the appeal on the
basis of the
available record”
(Contd…)
25
DISPOSAL OF APPEALS BY
APPELLATE TRIBUNAL
Section 132(2)
RATIONALE In fiscal laws, and more particularly law governing
Income tax, it has been the practice to decide the
matters on merits, as ITAT is the last fact finding
authority and by virtue of Sub section (1) of Section
132, the decision of the Appellate Tribunal on an
appeal shall be final
In our considered opinion, the language used in Sub
section (2) is defective and needs suitable
amendment as it cannot be presumed that legislature
intended to cause injustice
26
ALTERNATE DISPUTE RESOLUTION
Section 134A Read with Rule 231(6)
ISSUE
Time limit of 30 days for disposal
PROPOSAL
Period for disposal of application by ADR Committee to
be extended from 30 to 60 days
RATIONALE Broadening the time limit for effective decision making
27
ALTERNATE DISPUTE RESOLUTION
Section 134A Read with Rule 231(15)
ISSUE
PROPOSAL
-
Time limit for decision by CBR
-
Rejection of recommendation by CBR
-
Appropriate time limit for decision by CBR
preferably Six Months be incorporated
-
Cogent reasons for disagreement with
recommendation of the committee.
RATIONALE Effective decision making
28
ADVANCE TAX
Section 147
Appropriate amendment be made to adjust - Unadjusted amount
of tax of one quarter to another within the same Tax year
29
EXEMPTION OR LOWER RATE CERTIFICATE
Section 159
ISSUE
Grant of an exemption or lower rate certificate
PROPOSAL
It is, proposed that words “within 15 days” may be
inserted after the words “ the Commissioner shall” in
sub Section (1)
The right of appeal be provided to challenge the refusal
of application before the Commissioner of Income Tax
(Appeals)
RATIONALE No time frame prescribed
30
STATEMENT REGARDING
IMMOVABLE PROPERTIES
Section 165
ISSUE
In the Repealed Ordinances, under the provisions of
Section 143A every Registering officer, Revenue officer
or other officer appointed to register any documents
relating to property (other than agricultural land) under
the Registration Act, 1908 was required to furnish a
statement regarding the properties the value of which
was not less than Rs. 50,000/- registered with him during
the preceding financial year
PROPOSAL
It is recommended that provision be brought in under the
Income Tax Ordinance, 2001.
RATIONALE
In our opinion, such statement is instrumental for
broadening the tax base
31
REFUNDS
Section 170
ISSUE
Refund Applications and Order thereon
PROPOSAL
It is, proposed that following amendment be made
In clause (b) of sub section 2 word “and” be deleted
and Clause (c) (prescribing time limit to file Refund
Application) be deleted
Without Prejudice:
In case no order is passed by the Commissioner on
the said Application,
It is, proposed that a provisio be added after Sub
section (4) as under: (Contd…)
32
REFUNDS
“Sub Section (4)
Section 170
Provided that if no order is passed within the time
specified in this sub section, the application shall
be deemed to have been accepted and all the
provision of this Ordinance shall have effect
accordingly
Without Prejudice to above
Sub Section (5) is not in conformity with Section
127, therefore, it is proposed that necessary
amendments be made
RATIONALE Good governance and to fill up lacunas
33
PENALTY FOR NON-PAYMENT OF TAX
Section 183
ISSUE
Penalty for non payment of tax (other then penalty) has been
imposed on the failure of payment any tax due by the due
date. A person is liable for penalty at various rates of
penalties ranging for 5% to 100% of such tax due. No time
frame is provided for imposition of penalties between each
default
PROPOSAL
It is proposed that a proviso be added to provide the time
frame between each event
“Proviso”
Provided that no penalty shall be imposed in case of
subsequent failure unless the time between passing of each
order is not less than 30 days
RATIONALE
Curative amendment
34
ADVANCE RULING
Section 206A
ISSUE
Advance Ruling provisions to Non Residents
PROPOSAL
Appropriate amendment is proposed to widened and
extended the scope to other resident taxpayers.
35
TAX WITHHOLDING ON CASH
WITHDRAWAL – INCREASE IN THRESHOLD
Section 231A
ISSUE
Cash Withdrawal from Banks – Tax withholding
PROPOSAL
Threshold be increased from Rs. 25,000/- to Rs.
50,000/- Exemption to be extended to Salaried Class
RATIONALE Relief to Salaried Class
36
INCOME TAX PRACTIONER
Section 223(2)(f)
ISSUE
Appearance before tax authorities.
PROPOSAL
It is proposed that Income Tax Practitioner (ITP)
should be replaced with Federal Tax Practitioners
(F. T. P.).
RATIONALE Since one window is being implemented for all
Federal Taxes, so the person can also represent in
Sales Tax and Federal Excise cases – Facilitation.
37
ADVANCE – TAX ON TELEPHONE
Section 236
ISSUE
Advance Tax on Telephones
PROPOSAL
The Controversy of Pay Phone Companies be
amicably resolved
RATIONALE Facilitation and resolving Disputes
38
RATE OF TAX - NON SALARY
First Schedule Part-I Division 1
ISSUE
Exemption limit
PROPOSAL
Exemption should be increased to Rs. 200,000/-
RATIONALE Relief to taxpayers
39
RATE OF TAX - SALARY
First Schedule Part-I Division 1A
ISSUE
Exemption limit
Applicable rate of tax
PROPOSAL
Exemption should be increased to Rs. 250,000/It is proposed that the slabs should be readjusted to
provide relief to taxpayers.
RATIONALE Relief to the salaried class
40
RATE OF TAX – QUOTED COMPANIES
First Schedule Part-I Division 1I
ISSUE
Applicable rate of tax
PROPOSAL
It is proposed that the rate of tax for quoted public
companies be reduced to 30% from 35%
RATIONALE To encourage companies to be quoted on the stock
exchanges.
41
EXEMPTION – COMPUTER
TRAINING INSTITUTES
Clause 93-Part-I Second Schedule
ISSUE
Computer Training Institutions (Expired June 2005).
PROPOSAL
Period of Exemption be extended upto June 2010.
RATIONALE To promote Computer literacy
42
MINOR CORRECTIVE AMENDMENTS
Deduction of Tax at Source

Clause (36A) of Part IV of Second Schedule to be made as
Part of Clause (59) of Part IV of Second Schedule
Charges – Rule 230

Due to availability of returns and statements through internet
Rule 230 to be deleted
National Tax Number – Section 181 read with Rule 83

Substitution of Word Card with Certificate
43
Thank You
44