WHT exemption under IT law: dubious provision leads to major audit objection

The dubious provisions of Income Tax Ordinance, 2001 to grant exemption of withholding tax u/s 148 on the basis of superseded statutory regulatory order (SRO) ultimately turned into a major audit objection by the Auditor General of Pakistan (AGP).
Sources told Business Recorder here on Sunday that temporary importation of raw materials and inputs used in finished goods to be exported had been granted exemption under clause 56 of Part IV of Second Schedule under superseded SRO.1065(I)/2005. Apparently, the lacuna in the law cost huge loss of revenue to the national exchequer. An anomaly in the Income Tax Ordinance 2001 has resulted in a major audit objection by the Auditor General of Pakistan (AGP) due to exemption of withholding tax on the temporary importation of raw materials and inputs used in finished goods to be exported under superseded SRO 1065(I)/2005.
Sources said that a few Model Customs Collectorates (MCCs) have raised the issue of legal ambiguity in the Income Tax Ordinance 2001 due to applicability of the superseded SRO 1065(I)/2005 within the said Ordinance. The MCCs have pointed out that audit objections have been made by the Directorate General of Revenue Receipt Audit. During the course of audit for the year, 2009-10, the DRRA, Lahore made the audit observation that, while temporarily imported goods, intended for subsequent exportation, were exempt from customs duty and sales tax under SRO 492(1)/2009 dated June 13, 2009, exemption of withholding tax on such goods, under the relevant provisions of Income Tax Ordinance, 2001, was not available and, therefore, liable to be recovered from the importers for deposit in the national exchequer.
To the aforesaid effect, it may be stated that, earlier, vide sub clause (iii) of clause (56) of section 148 of the Income Tax Ordinance, 2001, goods temporarily imported into Pakistan for subsequent exportation were exempt from levy of withholding tax, in line with exemption of customs duty and sales tax under SRO 1065(1)/2005 dated October 20, 2005. However, the said SRO was superseded vide SRO 492(I)/2009 dated while the existing sub clause (iii) of clause (56) of section 148 of the Income Tax Ordinance, 2001 was not, accordingly, amended while retaining the superseded entry of SRO 1065(I)/2005 dated 20.10.2005. The said anomaly has led to the audit observation made by the DRRA.
The sub-clause (in), Clause (56), section 148 (Part IV) of Income Tax Ordinance 2001 allows the exemption on goods temporarily imported into Pakistan for subsequent exportation, which is re-produced as under:
"Clause (56)
The provision of section 148, regarding withholding tax on import, shall not apply in respect of:-
Sub-Clause (iii)
Goods temporarily imported into Pakistan for subsequent exportation and which are exempt from customs duty and sales tax under notification No SRO 1065(I)/2005, dated the 20th October, 2005;"
In this regard, it is stated that SRO 1065(I)/2005, dated the 20 October, 2005 was superseded vide Notification SRO 492(I)/2009 dated 13.6.2009 but the existing sub clause (iii), Clause (56), Section 148 (Part IV) of Income Tax Ordinance, 2001 was not changed accordingly. This anomaly has led to the said audit observation.
The tax officials have requested the Board that the above stated anomaly may be rectified by amending sub-clause (iii) of clause (56), section 148 (Part IV) of Income Tax Ordinance, 2001 by substituting the number of SRO .492(I)/2009 dated 13.6.2009 with SRO 1065(I)/2005 dated 20.10.2005. This substitution may take effect from the date of issuance of SRO 492(I)/2009 ie dated June 13, 2009, so that audit observation could be settled, sources added.