It is no novelty that a vast majority of people do not pay taxes in Pakistan. Tax avoidance is a universal phenomenon and it is best illustrated by the fact that corporate giants like Google have been asked to pay 130 million pound sterling in back taxes in the UK and Apple has admitted that it is holding $200 billion cash assets overseas to minimise the incidence of tax. Tax avoidance by these two corporate behemoths is a tip-off the iceberg and only proves that tax payment is not voluntary and tax avoidance or evasion is prevalent world-wide.
Tax avoidance in Pakistan is not to be grudged as it is perfectly legal; however, for tax evasion schemes have been introduced by governments to lure non taxpayers in Pakistan to join the taxpayers' club that has less than one million members in a population of over 180 million. For this purpose, Governments have offered many tax amnesty schemes in the past but the results have not been very encouraging or forthcoming. Maximum tax collected in any such scheme was around Rs 10 billion only, with almost no increase in the number of tax return filers.
Now, the PML (N) government has offered a tax amnesty scheme described as Voluntary Tax Compliance Scheme (VTCS) through Income Tax (Third Amendment) Act 2016.The scheme is essentially for the trading class with an inbuilt threat to the trader that if he fails to avail the VTCS then he will have to pay, per force, 0.6% income tax on all his bank transactions. It is in this respect that the present VTCS offered to the trader through an act of parliament is different from the previous tax amnesty schemes, as it offers reward for joining in and also carries a penalty in the form of forced income tax @ 0.6% on almost all bank transactions if the trader fails to avail the VTCS. It is, therefore, an improvement from the previous amnesty schemes that carried no penalty at all other than fear of being caught.
Before commenting on the expected success of the scheme we need to examine what the VTCS offers. VTCS is not available to all, which means the scheme is for traders only. VTCS defines trader as an individual or an association of person (not companies) engaged in buying and selling goods without further processing and it specifically excludes from the scheme, industries, service providers as well as the retailers who are registered under Special Procedure Rule 2007. So the scheme is not for everybody but just for the non corporate trader engaged in buying and selling of goods or merchandise Even in the case of the trader, there is a maximum limit of business capital of Rs 50 million which can be declared.
Under the VTCS, if the trader qualifies he can file a one page return of income for tax year 2015; can declare working capital up to Rs 50 million and the tax payable is only @1% of the working capital declared for tax year 2015. By depositing 1% tax of the working capital declared the declared. Thereafter capital will become tax free provided this one page return is filed in each of the next 3 tax years 2016-2018 also and tax is also deposited in the next three years at least, on the following basis:
A non-filer trader who has paid tax under the scheme for tax year 2015 will have to pay further tax for tax year 2016, 2017 and 2018 fulfilling the following conditions, namely:
a) For tax year 2016 the trader will declare turnover at least three times of the working capital declared during tax year 2015; and;
b) For tax years 2017 and 2018 the trader will declare turnover on which tax paid is at least 25 percent more than the tax paid for the preceding tax year.
The following will be tax rate on the turnover declared:
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TURNOVER RATE
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Where Turnover does no 0.2% exceed 50 million rupees
Where Turnover exceeds Rs 100,000 plus 0.15% of
50 million but does not the amount exceeding 50
exceed 250 million rupees million rupees
Where turnover exceeds Rs 400,000 plus 0.1% of the
250 million rupees amount exceeding 250 million rupees
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So the scheme is not for one year but has to be adhered to and paid for in four years or instalments. The tax payable on declaring capital of Rs 50 million under the scheme will be Rs 500,000 in the first tax year 2015, Rs 250,000 in the year 2016, Rs 312,500 in the year 2017 and at least Rs 390,625 in the year 2018 which means total minimum tax liability of at least Rs 1,453,125(in four years) on declaring working capital of Rs 50 million which is about 2.80% on gross in total. If the tax due as per the forestalled is not deposited in each of next 3 years the amnesty shall stand withdrawn.
The existing taxpayer who is a trader can file return under this amnesty but for tax year 2015 the tax payable on profits should be higher by 25% than the tax paid for tax year 2014 or for the latest tax year for which return has been filed on the basis of taxable income. More over in the case of the existing tax paying trader the tax payable for the tax years 2016 to 2018 will again be 25% higher tax on the basis of a taxable income than the tax paid for the each preceding tax year; or turnover tax at the rates specified in the chart above whichever is higher. Existing taxpaying traders, who have filed return for tax year 2015 before the due date of filing of return under this scheme, may file a revised return subject to the condition that the tax paid in the revised return is higher by10% than the tax paid as per original return.
The benefit offered by the scheme is that those traders who file return under VTCS will be exempted from the 0.6% compulsory deduction of tax from non filers on their bank transactions. The business capital will be accepted as declared up to Rs 50 million. Purchases of the trader will be free from tax withholding u/s 153.The returns filed under VTCS will be exempt from audit under section 171 or 214C of the Ordinance. The new trader opting for the scheme will file one page return without wealth statement.
However, there are some pertinent issues, which if not addressed, may result in attracting the filing of returns under the scheme far below expectations.
(a) The filer needs to be provided exemption from the application of Sales tax Act 1990 at least for the year2015 and the year2016 as it is compulsory for the trader to declare turnover three times the capital declared in the year 2016. Without this built-in exemption from sales tax in the scheme at least for two years, the trader will feel exposed to notice for payment of sales tax otherwise he will be reluctant to take the bait offered in the form of Voluntary Compliance Scheme.
(b) The condition of declaring turnover in the year 2016 at three times the capital declared in 2015 is a hindrance in the scheme and this condition is also unnecessary because it has been prescribed in the scheme that the trader will pay 25% more tax every year in comparison to the preceding year in the next 3 years 2017-2018. Therefore this condition serves no purpose.
(c) The Commissioner has been given power to increase the tax and reject the declaration by invoking section 122 of the Income Tax Ordinance in the case of returns filed under the VTCS any time up to six years after the return is filed if he has definite information as regards misdeclaration of income. If we bear in mind the misuse of power that is prevalent in the tax department, notwithstanding the word "definite information" used in the Act 2016, the offered immunity is meaningless. The power of section 122 given in respect of the VTCS returns renders the exemption from audit under section 177/214C provided in the scheme meaningless. The trader therefore remains vulnerable for receiving notice even for the years prior to 2015 and up to 2018.
(d) The scheme is available to a very small group as it is not open even to the small-scale manufacturers, service providers (that account for 52% of GDP), limited companies, even most of the retailers or anybody with a capital in excess of Rs 50 million or a person registered in Sales tax and so on. What is the magic in the figure of Rs 50 million and why not a higher amount and the scheme open to many others?
(e) The VTCS is spread over four tax years to be complied by the trader. The amount payable in four years is less than 2.80% of the capital declared. What is the wisdom in spreading the scheme over four years when the same result can be achieved over two years?
(f) Section 113 of the Income Tax Ordinance 2001 ordains that a trader with turnover in excess of Rs 50 million is liable to pay minimum tax @ 1% of the turnover and there is no specific exemption provided in the scheme. The trader filing under this scheme remains vulnerable to section 113.
A close look at the scheme suggest that the architects of the VTCS may well have good intentions to facilitate the trading class but more reliance in drafting the VTCS on the FBR bureaucracy is very apparent. This may become a spoiler and hinder the achievement of the desired results.
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