ST and income tax registered persons can claim immunity: amounts credited in books of accounts

A taxpayer registered under both income tax and sales tax can claim immunity for amount credited in the books of accounts out of business transactions carried out with five zero-rated sectors, where one percent income tax has been withheld.
Explaining the recent changes in the applicability of SRO333(I)/2011, Waheed Shahzad Butt, a leading Lahore-based lawyer, told Business Recorder here on Friday that as per the Circular 08 of 2011, a single transaction in not enough to avail the benefits of SRO.333. The period to claim exemption has also been restricted wef date of issuance of SRO to 30th day of June 2011. The word "Any" has also been elaborated to mean that "ANY" amount credited out of business transactions with five zero-rated categories of taxpayers, where income tax @ 1 percent has been withheld by the taxpayer. All transactions prior to date of issuance of SRO shall not be eligible for claiming benefits of immunity under section 111(1)(a).
He said that the scope of immunity has been explained that it is restricted to the extent of clause (a) of the sub-section 1 of section 111, while sub-section 1(b) and 1(c) are out of domain of SRO 333. Examples already forwarded have also been explained with specific reference to claiming immunity u/s 111(1)(a). The scope of registration has also been explained that registration means registered under income tax as well as sales tax categories.
Waheed was of the view that the FBR has finally admitted the crucial issue that a 'blanket' immunity from provisions of Section 111(1)(a) of the Income Tax Ordinance, 2001 would not be available under SRO 333, which was earlier communicated to general public. Earlier clarifications issued in this respect have been superseded and the issue of blanket immunity has finally been elaborated vide Circular No 08 of 2011.
He explained that earlier certain issues of highly controversial nature were announced vide SRO 333(1)/2011 dated May 2, 2011, wherein Clause 45A of Part IV of the Second Schedule to the Income Tax Ordinance 2001 has been substituted. The crux of the SRO can be summarised into following there (3) segments:
a) The rate of deduction of withholding income tax under clauses (a) and (b) of sub-section (1) of Section 153 of the Income Tax Ordinance, 2001 shall be 1 percent on local sales, supplies and services provided or rendered to the categories of sales tax zero-rated taxpayers.
b) Exemption/immunity from the provisions of clause (a) of sub-section (1) of section 111 of Income Tax Ordinance, 2001.
c) Exemption from Section 111(1)(a) shall be available to all persons, already registered or get themselves registered up to June 30, 2011.
He pointed out that a cursory look at the text of the SRO shows that amount credited by sellers, suppliers, service providers mentioned in the SRO, in the books of accounts up to June 30, 2011 shall be exempt, meaning thereby under sub-clause (b) of newly inserted clause 45A, a blanket exemption from the provision of Section 111(1)(a) has been allowed. Neither any condition nor any limit has been prescribed under the SRO. The issue needs complete elaboration to avoid unnecessary litigation. Therefore, following questions were forwarded to the Member Inland Revenue for clarification:-
1- Whether under sub-clause (b) of newly inserted clause 45A, a blanket exemption from the provision of Section 111(1)(a) of the Income Tax Ordinance, 2001 has been allowed to sellers, suppliers, service providers mentioned in the SRO?
2- Whether the sellers, suppliers, service providers mentioned in the said SRO are allowed to credit any amount in their books of accounts without paying any taxes, when neither any condition nor any limit has been prescribed under sub-clauses a & b?
3- Whether to claim the benefits under sub-clause (b) of clause 45A, a single transaction with the category of taxpayers of sales tax zero rated shall be sufficient proof?
4- Whether the amount credited by such persons in their books of accounts up to June 30, 2011 shall be treated as income exempt from income tax in the hands of existing and new taxpayers falls under the category of sellers, suppliers, service providers mentioned in the said SRO?
5- Whether any amount credited by such persons in their books of accounts prior to issuance of SRO 333(I)/2011 shall be exempt from the provisions of section 111(1)(a) of the Income Tax Ordinance, 2001?
While clarifying the above questions, the FBR issued another controversial Circular on 18/06/2011 but, quite amazingly, out of 5 questions following questions remained unanswered in the Circular No 06/2011:-
1- Whether to claim the benefits under sub-clause (b) of clause 45A, a single transaction with the category of taxpayers of sales tax zero rated shall be sufficient proof?
2- Whether any amount credited by such persons in their books of accounts prior to issuance of SRO 333(I)/2011 shall be exempt from the provisions of section 111(1)(a) of the Income Tax Ordinance, 2001?
However, through Circular 06/2011 the scope of immunity granted under SRO 333 has been extended to other clauses of sub-section (1) of section 111. According to SRO.333(I)/2011, the exemption was granted from the provisions of section 111(1)(a) only which reads as under:-
Quote..."The provisions of clause (a) of sub-section (1) of section 111 of Income Tax Ordinance shall not apply to the amounts credited in the books of accounts maintained for the period ending on the 30th June 2011, by the sellers suppliers, service providers to the categories of sales tax zero-rated taxpayers"
Circular 06/2011 of FBR extended the scope of exemption/immunity to clauses (b) and (c) of sub-section (1) of Section 111 of the Income Tax Ordinance, 2001, while it was restricted to the extent of clause (a) only in the SRO 333. Relevant text of the circular is reproduced for ready reference:-
"It is clarified that under the provisions of sub-clause (b) of clause (45A) of Part-IV of Second Schedule to the Income Tax Ordinance, 2001, where the seller, supplier or service provider to the five categories specified under the Sales Tax Zero Rating Regime is already registered or gets himself registered before June 30, 2011, then any amount credited in such person's business books of accounts (maintained for the period ending June 30, 2011), or any investment made by such person in his business or any business expenditure incurred by him, shall be exempt from the provisions of section 111(1)(a) of the Ordinance."
The bare reading of provisions of Section 111 of the Income Tax Ordinance, 2001 automatically proves the fact that clauses (a), (b) and (c) all are independent in nature; therefore, the clarification issued by the FBR vide circular 06/2011 dated June 18, 2011 is not in accordance with the intention of SRO 333.
The SRO 333 and clarifications on the issue concluded that FBR is not legally empowered to check the amount credited in the books of accounts of seller, suppliers or service provider of five zero-rated sectors registered up to June 30, 2011 under the exemption/immunity from the provisions of section 111 of Income Tax Ordinance, 2001.
The tax lawyer was of the view that it also appears that any person falling under the said categories can claim ANY amount exempt from income tax if he maintained books of account and shows any credit entries therein. At the face of it, te said clause is quite vague; therefore, it needs more clarity to avoid futile litigation.
It was inquired that FBR should clarify whether the taxpayers are obliged to pay any income tax on the amount credited in the books of account and claims as exempt under clause 45A? Finally, the FBR admitted the crucial issue and the matter of blanket immunity has been clarified in depth vide Circular No 08 of 2011, Waheed added.