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In the following paragraphs I will only discuss three major proposals in the proposed Finance Bill, 2021, two of which may be potentially great positive steps leading in the right direction. The third step is a wrong, premature, and erroneously drafted provision that needs to be changed.

In summary these three proposals are:

  • Retail sale of smuggled goods to be treated as ‘smuggling’;

  • Prosecution against businesses if all ‘Business Bank Accounts’ are not declared; and

  • Arrest on the matter of concealment of income.

Each subject is described briefly as under:

Retail sale of smuggled goods to be treated as ‘smuggling’

Smuggling is a very serious crime under the Customs Act, 1969 and in practical terms any person engaged in smuggling can be immediately arrested if it is proved that such person holds smuggled goods. The Customs Act, 1969 deals with the subject of smuggling. For over thirty years it has been my constant struggle to disseminate that smuggling, abuse of Afghan Transit trade and under-invoicing are all related to importable/ imported goods and are the source of many economic and fiscal problems. There is no cavil in the argument that all such activities are undertaken through the physical borders of the country and corrections and checks at those entry points have to be improved. However, the second question is whether there should be, across the board, liberty to deal publicly in smuggled/Afghan transit/or under invoiced goods. When I was the Chairman, Federal Board of Revenue (FBR), at a meeting in the Karachi Chamber of Commerce & Industry I highlighted the importance of this issue. I was not successful, however this problem was ‘well registered’. In the Finance Bill 2021 the necessary correction has been proposed as under:

The term ‘smuggling’ is defined in Section 2(s) of the Customs Act, 1969. It states as under:

smuggle” means to bring into or take out of Pakistan, in breach of any prohibition or restriction for the time being in force, 45[, or in any way being concerned in carrying, transporting, removing, depositing, harbouring, keeping, concealing[, or en route pilferage of transit goods] or evading payment of customs-duties or taxes leviable thereon……………

Through the Finance Bill, 2021 Section 2(s) has been amended and after the word ‘concealing’ the word ‘retailing’ has been inserted. This simply means that anyone engaged in the ‘retailing’ of smuggled goods or the goods for which valid documentary trail of import is not available will be considered a ‘smuggler’. This is socially, religiously and legally correct. This is what I was propagating voluntarily in 2019 which has now been proposed to be incorporated in the law in 2021.

In reality markets in Pakistan are full of such goods. If properly implemented, like all other civilized countries we will re-enter the era where such goods are sold discreetly as we used to have discreet ‘Chor Bazar’ in cities. The culture of retailing smuggled or imported goods without documents openly without any check has rightly been brought under the target of implementation of law. It is to be remembered that this is an issue under the Customs Act, 1969 not Income Tax Act, 2021.

The government of Imran Khan is to be complimented that they, after realising the real issue of the country, are moving in the right direction. This action will give a direct boost to local industry and will also indirectly curtail retailing of under-invoiced goods. It is suggested that a phased approach be adopted; and at the first stage 25 to 50 major items be identified for enforcement which should gradually be increased to across the board execution. This is one of the most positive amendments made in the budget.

Compulsory Disclosure of Business Bank Account

In Pakistan there are a very large number of bank accounts of businesses that are not declared in the taxation system. It is estimated that the number of such accounts are around 50 to 60 million whereas 10 to 20 million are declared in various forms in the tax returns under various sections of the tax laws. In one of the most important changes introduced in the budget the compulsory disclosure of a ‘business bank account’ has been introduced for the purpose of Income Tax laws; and non-disclosure has been placed under charge for prosecution.

The process adopted and law introduced is as follows:

Prosecution is the next stage of penalty. This means that concealment or error or error or mistake or fraud has been identified, penalty is due and there is a case for prosecution physically against the culprit. The Acts which lead to prosecution under the Income Tax laws have been identified in Section 191 of the Income Tax Act, 2001. These are:

  1. Prosecution for non-compliance with certain statutory obligations. — (1) Any person who, without reasonable excuse, fails to —

1

(a) comply with a notice under sub-section (3)2 [and sub-section (4)] of section 114 or sub-section (1) of section 116;]

(b) pay advance tax as required under section 147;

(c) comply with the obligation under Part V of this Chapter3 [or chapter XII] to collect or deduct tax and pay the tax to the Commissioner; 4

[(ca) furnish particulars or complete or accurate particulars of persons mentioned in sub-section (1) of section 165;]

(d) comply with a notice served under section 140 or 176;

(e) comply with the requirements of 5 [sub-section (3) or subsection (4) of] section 141; or

(f) provide reasonable facilities and assistance as required under sub-section (3) of section 175, shall commit an offence punishable on conviction with a fine or imprisonment for a term not exceeding one year, or both.

(2) If a person convicted of an offence under clause (a) of sub-section (1) fails, without reasonable excuse, to furnish the return of income or wealth statement to which the offence relates within the period specified by the Court, the person shall commit a further offence punishable on conviction with a fine or imprisonment for a term not exceeding two years, or both. 192. Prosecution for false statement in verificat

Through the Finance Act, 2021 an amendment has been made in Section 191(1) and sub-section (g) has been inserted. That subsection states as under:

“(g) declare business bank account(s) in the registration form or updated registration form or return of income or wealth statement,”;

The government has adopted a two-pronged approach for it. Firstly, by way of insertion of definition of a business bank account through Section 2(10A) declaration of such has been made a part of particulars of a business for registration as a taxpayer. After identifying such an account at a secondary stage, disclosure of such account has been included in the list which prosecution can be undertaken. The provisions of Section 2(10A) state as under:

“(10A) “business bank account” means a bank account utilized by the taxpayer for business transaction declared to the Commissioner through original or modified registration form prescribed under section 181;”;

This is the most significant effort undertaken by the government in a very civilized manner to move toward documentation of the economy. It is a correct and productive step, however the government has to move in this direction with caution. As stated earlier it is my personal view the real distinction between a ‘personal’ and ‘business bank account’ would have to be practically placed in the system. Business Bank Accounts cannot be left undisclosed as it raises many issues other than FATF, etc. It is reiterated that concerted, transparent, civilized and organized direction be adopted to achieve the results from these efforts. On the other hand, this will greatly assist the banking sector in their regulatory function as there will be ease in enforcing ‘know your client’ (KYC) plans. This government should be complemented for undertaking this corrective measure.

Arrest of Defaulting Taxpayers

A completely new procedure has been introduced that deals with the ‘arrest’ of a defaulting taxpayer. At the outset, let me state that there is no need for these provisions as it already exists in law and there is no need to install ‘parallel’ non-workable provisions. Section 203A as introduced by the Finance Bill, 2021 which is the master provision of this section states as under:

“203A. Power to arrest and prosecute.– (1) An officer of Inland Revenue not below the rank of an Assistant Commissioner of Inland Revenue or any other officer of equal rank authorised by the Board in this behalf, who on the basis of material evidence has reason to believe that any person has committed offence of concealment of income or any offence warranting prosecution under this Ordinance, may cause arrest of such person.

(2) All arrests made under this Ordinance shall be carried out in accordance with the relevant provisions of the Code of Criminal Procedure, 1898 (Act V of 1898).

(3) Notwithstanding anything contained in sub-sections (1) and (2) or any other provision of this Ordinance, where any person has committed offence of concealment of income or any offence warranting prosecution under this Ordinance, the Chief Commissioner with the prior approval of the Board may, either before or after the institution of any proceedings for recovery of tax, compound the offence if such person pays the amount of tax due along with such default surcharge and penalty as is determined under the provisions of this Ordinance.

(4) Where the person suspected of offence of concealment of income or any offence warranting prosecution under this Ordinance is a company, every director or officer of that company whom the authorised officer has reason to believe is personally responsible for actions of the company contributing to offence of concealment of income or any offence warranting prosecution under this Ordinance shall be liable to arrest: Provided that any arrest under this subsection shall not absolve the company from the liabilities of payment of tax, default surcharge and penalty imposed under this Ordinance.

It is my personal view that subsection (1) of this Section and the sentences underlined will not stand the test of law and courts will not entertain an arrest of person only on the ground that an officer of income tax on the basis of material evidence has reason to believe that any person has committed offence of concealment of income or any offence warranting prosecution under this Ordinance is to be arrested. The process is missing in the primary provisions. That process has been included in tax law since 1922.

As stated in the earlier paragraphs there already exist reasonable provisions that outline the procedure for warranting an arrest of a person who is actually a tax defaulter. In conclusion, instead of creating a parallel system, which has always failed in this country, the existing system be improved and implemented. In addition to the comments the summarised errors in these provisions are under:

The whole system as envisaged emanates from the assertion that there is ‘concealment of income’. The important consideration in this matter will be the determination of the stage where it is decided or is appropriate to consider that there is a ‘concealment of income’ as defined under the law. It will not be correct to assert the said position has to emerge after due process which may be an independent stage of appeal at least at the level of Appellate Tribunal that operates under the Ministry of Law and not under Federal Board of Revenue.

There will be a requirement to decide the scope of a special judicial system as envisaged and prescribed now to deal with the person so arrested and regular legal proceedings, contained in taxation laws as some pre-emptive conclusions and conflicts may arise.

In the light of the above it is suggested that the newly-inserted Section 203A to 203H be deleted in the Finance Bill, 2021 and improvement as suggested in these sections be integrated with already existing provisions relating to prosecution.

To conclude, we should praise the government in adopting correct policies; however, it is also our responsibility to prevent instances where abuse of power and harassment can be ingrained in the law.

Copyright Business Recorder, 2021

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