Draft IT return form, wealth statement: tax experts pinpoint certain critical errors, legal issues
Tax experts have detected certain errors and legal issues in the draft income tax return form and wealth statement issued for individuals and Association of Persons (AOPs) for Tax Year 2013. In this regard, former FBR Member Habib Fakhruddin has written a letter to the Member Inland Revenue (Policy), Federal Board of Revenue highlighting issues in the proposed income tax return form and wealth statement for Tax Year 2013.
Copyright Business Recorder, 2013
According to the tax expert, referring to the Draft Income Tax Return Forms and Annexes for individuals and AOPs notified through SRO No 739(I)/2013 dated August 26, 2013 for the tax year 2013. Tax experts have gone through the said forms/annexes and offer following comments and suggestions for public consideration before notifying the final version:
1. IT-2 (Income Tax Return Form for Individual's and AOP's):
b. Sr. No 39 - Tax payable on Taxable Income:
The term "tax payable" is defined in section 4 of the Income Tax Ordinance, 2001 which is the amount of tax after all tax credits, etc.
Accordingly at Sr. No 39 it will be appropriate that the word "chargeable" is used instead of 'payable".
c. Sr. No 46 - Full Time Teacher/Researcher's Rebate:
This is duplication since all tax reductions, rebates and credits including full time teacher/ researcher rebate are already covered at Sr. No 40 - Tax Reductions/Credits/ Averaging (including rebate on Behbood Certificates, etc).
If the intention is to get the information of this tax reduction separately than at Sr. No 40 the words "excluding full time teacher/researcher rebate" needs to added and the correct placement of this is after Sr. No 40.
d. Sr. No 50 - Refund Adjustments (not exceeding current year's tax payable), if not adjusted against Income Support Levy (ISL):
The expression "if not adjusted against Income Support Levy (ISL)" indicates that earlier years income tax refunds can be adjusted against Income Support Levy Tax.
Contrary to this at Sr. No 20 of the Wealth Statement no such space is provided for adjustment of earlier years income tax refunds against the Income Support Levy Tax due. It may be mentioned that the at Sr. No 20(4)(a) of the Wealth Statement only the space is provided for adjustment of current year's income tax refund against the Income Support Levy Tax.
The spelling of "levy" is also incorrect.
e. Sr. No 91 - Flying Allowance
Flying allowance and Submarine allowance of certain specified persons falls under the fixed tax regime. However, no space is provided for the Submarine Allowance.
Earlier, both these allowances were in a single row with the description "Flying/Submarine Allowance".
If the requirement is separate line items for each than a new row needs to be added for Submarine Allowance other wise the description need to be corrected to cover both.
f. Sr. No 93 - Services rendered/contracts executed outside Pakistan
The rate of tax has been inadvertently stated as 0.50 percent instead of 1 percent.
Note 1 - Balance Sheet in case of income from business (in case declared/assessed turnover for the tax year 2012 or any subsequent year is Rs 5 million or more:
Effective tax year 2013 every individual has to furnish Wealth Statement along with its re-conciliation statement. Note No 4 of the Wealth Statement requires furnishing of balance sheet of the business or breakup of business capital, wherever applicable, along with the Wealth Statement irrespective of any threshold.
Accordingly, the Note No 1 of the IT-2 is not in line with the Note No 4 of the Wealth Statement and needs to be re-considered.
The spelling of the word "assessed" is in-correct.
g. Precautionary Note - (Return will not be accepted without attachment of these documents)
A return of income furnished without any of the documents required to be furnished along with the return under section 114(2) of the Income Tax Ordinance, 2001 can only be declared as an in-complete return under section 120(3) of the Income Tax Ordinance, 2001.
There is no provision in law whereby an in-complete return can not be accepted.
This precautionary Note needs to be either removed or appropriately re-drafted to avoid any problems on the return receipt counters or e-filing system.
The spelling of the word "accepted" is incorrect.
2. Annexure A - Depreciation, Initial Allowance and Amortisation
No space has been provided for claiming depreciation on "Ramp for Disabled Persons" at the rate of 100 percent.
b. Sr. No 16 - Any plant or machinery in relation to which a deduction has been allowed under another section for the entire cost of the asset in the tax year in which the asset is acquired:
Under section 22(15) of the Income Tax Ordinance, 2001 "depreciable asset" does not include any asset in relation to which a deduction has been allowed under another section for the entire cost of that asset. Accordingly depreciation on such assets is not admissible.
Contrary to this a row has been provided for plant and machinery in relation to which a deduction has been allowed under another section for the entire cost of the thereof with depreciation rate of 15 percent, which is not correct.
c. Sr. No 21 to 27 - Brought forward adjustments:
Depreciation, initial allowance and amortisation for the year and un-absorbed amounts brought forward from earlier years are adjustable against the business income of the current year and not against the total income of the current year.
Accordingly, the words "total income" needs to be replaced with "business income".
3. Annexure B - Tax already paid:
No space is provided in the form to state the tax collected under section 154 of the Income Tax Ordinance, 2001 from foreign exchange realisation against export of goods and foreign/export indenting commission, where the taxpayer opts to remain out-side the final tax regime.
b. Sr. No 19 - On trading of shares through a Member of Stock Exchange:
This is a duplication of Sr. No 18 - On sale/purchase of shares through a Member of Stock Exchange
4. Annexure H - Determination of minimum Tax Payable on certain transactions
a. Sr. No 2 - Taxable Income [Transferred from Sr-30 ]:
Taxable income has no relevance with determination of minimum tax payable on certain business transactions.
Accordingly this row needs to be deleted.
b. Sr. No 6 - Higher of (3) and 4(b):
The reference is not correct it should have been "Higher of 4 or 5(b).
However, if the row at Sr. No 2 is deleted, as stated above, then the reference is in order.
5. Annexure J - Request of Taxpayers falling under PTR Regime for availing Normal Tax Regime (NTR):
a. In this annexure following points have been totally ignored:
(i) No column has been provided for Foreign/Export intending Commission.
(ii) Total tax payable at Sr. No 2 has been linked with Sr. No 39 of main return, which is amount of gross tax. In fact comparison of chargeable tax has to be made (ie, gross tax minus reductions/rebates/credits plus minimum tax on certain transactions plus minimum tax under section 113).
(iii) Tax payable is on the taxable income which may include income from sources other than business as well and even within business income it may include income which is subject to normal tax.
(iv)In the absence of any column for business income from FTR sources and Non-FTR sources how the net sales transferred from Sr. No 1 of Main Return could be reconciled.
In fact, the basis of working out whether a taxpayer qualifies for exclusion from FTR has three stages. First the apportionment/bifurcation of taxable income between business and non-business sources, than the apportionment/bifurcation of business income between various sub-components and finally apportionment/bifurcation of chargeable tax on such apportioned incomes. In the proposed annexure these three steps have been overlapped and confused.
b. The apportionment/bifurcation of business income into various sub-classifications can not be standardised and this varies from case to case depending upon the facts and circumstances of each case.
c. For the sake of your convenience we are enclosing our version of what should have been the Annex J. This will cater for almost every case.
d. In order to properly appreciate and understand our version of Annex J, we would request for a meeting in person with you.
6. Wealth statement:
a. Sr. No 1 - Business Capital:
In the draft form of wealth statement one of the change is classification of immovable assets and moveable assets for the purpose of computation of Income Support Levy Tax.
Business capital generally comprises of movable asset and in many cases business capital also comprises of both movable and immovable assets. In the draft form of wealth statement, space for business capital has been provided under immovable assets only, whereas it should have been provided under both immovable and moveable assets with the titles "Business Capital comprising of immovable assets" and "Business Capital comprising of movable assets" respectively.
b. Sr. No 12 - Assets, if any, standing in the name of spouse, minor children & other dependents:
Section 116(1)(b) of the Income Tax Ordinance, 2001 requires disclosing of assets and liabilities of the spouse, minor children and other dependants in the person's wealth statement. We understand, that such disclosure is in respect of assets and liabilities owned/owed by them and not the one acquired in their name(s) (Benami transactions) by the person furnishing the wealth statement.
Accordingly, the correct title should have been "Assets and liabilities, if any of the spouse, minor children and other dependents".
It may be mentioned that the assets acquired by the person in the name(s) of spouse etc, as a "Benami" transaction" are for all purposes assets of the person furnishing the wealth statement and have to be declared in the respective sections by such person.
The assets and liabilities of the spouse etc though required to be declared by the person furnishing the wealth statement are not his/her assets since each individual is a separate entity for taxation purposes. Further, such assets may comprise of both immovable and moveable assets. Accordingly, classifying such assets under "Movable Assets" is not appropriate.
In fact, Sr. No 12 should have been separately numbered as section "C" and not under moveable assets.
c. Sr. No 20 - Computation of Income Support Levy (ISL) under the Income Support Levy Act. 2013:
No row/line for exemption of Rs 1,000,000 has been provided in the form.
d. Sr. No 20(1) - Declared value of moveable assets:
As explained above the assets and liabilities of the spouse etc, required to be declared in the wealth statement under section 116(1)(b) are not the assets or liabilities of the person furnishing the wealth statement.
Further, as stated above, such assets have been classified as "moveable assets". Accordingly at Sr. No 20(1) the description should have been "Declared value of moveable assets (excluding assets of the spouse, minor children and other dependents).
e. Sr. No 20(1) - Declared value of moveable assets:
The term used is "Value" which is distinct from the term "cost" at which the assets appear in the Wealth Statement. This also needs to be clarified.
f. Adjustment of prior years income tax refunds against Income Support Levy: Please refer to our comments under Sub-Para (d) of Para 1. Appropriate space for this purpose needs to be incorporated, Habib Fakhruddin added.