Exemption for five zero-rated sectors: FBR not empowered to check amount credited to books

The Federal Board of Revenue is not legally empowered to check the amount credited to the sellers books of accounts, suppliers or service providers of five zero-rated sectors registered before June 30, 2011 under the exemption/immunity from the provisions of clause (a) of sub-section (1) of section 111 of Income Tax Ordinance, 2001 under SRO.333 (I)/2011.
When asked whether the FBR is empowered to check the huge amount remitted under the said scheme, sources told Business Recorder on Tuesday that legally, the FBR cannot check such amount credited to the books of accounts as per SRO.333(I)/2011. The provisions of the law and FBR's circular number 6 of 2011 are very much clear on the issue.
The intention of the law is to encourage registration of small and medium size sellers, suppliers or service providers of five zero-rated sectors. If somebody misuses the scheme by crediting huge amount and later obtaining de-registration certificate after filing some returns, the motoring and enforcement could be done in such cases by the tax department. The FBR can monitor units, trying to misuse the scheme or take undue benefit of the scheme, sources added.
To a question, whether it is an amnesty scheme, sources said it is a scheme to encourage registration of the sellers, suppliers or service providers of five zero-rated sectors. Meanwhile, Waheed Shahzad Butt Advocate High Court has asked the FBR to clarify certain issues pertaining to SRO.333 (I)/2011. Certain controversial issues were announced vide S.R.O 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 these decisions revealed that 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 one percent on local sales, supplies and services provided or rendered to the categories of sales tax zero-rated taxpayers.
Secondly, the exemption/immunity from the provisions of clause (a) of sub-section (1) of section 111 of Income Tax Ordinance, 2001. Thirdly, exemption from Section 111(1) (a) shall be available to all persons already registered or get themselves registered till June 30, 2011.
Tax expert said that at present the normal rate of tax deduction on supply and services is 3.5 percent and 6 percent respectively, while under the SRO 333 rate of tax deduction has been reduced to 1 percent for certain categories of taxpayers. Apparently there is no rationale to provide blanket exemption to certain categories of taxpayers from the provisions of Section 111(1)(a) of the Income Tax Ordinance.
According to him, a cursory look at the text of the SRO reveals that amount credited by sellers, suppliers and 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.
Tax expert said that it 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, said clause is quite vague, therefore, needs more clarify to avoid futile litigation.
In a nutshell the said SRO needs further elaboration at the FBR's end to avoid unnecessary legal battle for which mail was earlier forwarded to the Member Inland Revenue on May 10, 2011. In response thereof, FBR issued another controversial Circular on 18/06/2011 but some questions remained unanswered and Circular No 06/2011 is silent on certain issues. The FBR has to clarify the following issues:
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?
Tax expert quoted three examples seeking clarification on the issue. First Example: During the period July 2010 to June 2011 a supplier supplies good worth Rs 100,000 to any taxpayer specified in the five categories and receive payment Rs 99,000/- after tax deduction of 1 percent u/s 153(1)(a). Said supplier credited a sum of Rs 100,000,000 in his books of account as income exempt under clause 45A.
Second example: During the period May 02, 2011 to June 30, 2011 a service provider rendered services worth Rs 50,000 to any taxpayer specified in the 5 categories and receive payment Rs 49,500 after tax deduction of 1 percent u/s 153(1)(b). Said Service provider credited a sum of Rs 50,000,000 in his books of account as income exempt under clause 45A.
Third example: On August 07, 2010 a service provider provided services worth Rs 25,000 to any taxpayer specified in the 5 categories and receive payment after tax deduction u/s 153(1)(b). Said Service provider credited a sum of Rs 25,000,000 in his books of account as income exempt under clause 45A of Part IV of the Second Schedule to the Income Tax Ordinance, 2001.
The FBR should clarify whether under the above said examples, the taxpayers are obliged to pay any income tax on the amount credited in the books of account and claims as exempted under section 45A? The matter is quite sensitive in nature and may create unnecessary litigation on the issue of claim of exemption from the provision of section 111(1) (a), therefore, it is requested to clarify the propositions before June 30, 2011, Butt added.