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mtgondal · #42 Friday, May 25, 2007

Direct tax policy principles: a review-III MOHAMMED ASHRAF

ARTICLE (May 24 2007): Donation out of Penalty: A heavy non-performing portfolio and default on part of the clients is a serious problem confronted by the Shariah compliant financial product provider. This problem could threaten the success of the Shariah compliant financial products service provider.

If clients do not honour their commitment in respect of timely payment in respect of a Shariah compliant financial product, it could cause irreparable loss to the system. In Islam, it is permissible to penalise a financial debtor, who delays payment of debt without any genuine reason.

The Holy Prophet (PBUH) said, "A rich debtor who delays payment of debt commits zulm". Hence, jurists allow the punishment (Taazir) to such a borrower in the form of a fine. In the opinion of some Maliki jurists, a delaying borrower would be obliged to pay for charitable activities.

In view of the severity of the problem, all Shariah bodies including the Shariah bench of the Supreme Court of Pakistan, have approved the provision of a penalty clause in contractual agreements that keep a balance between the requirements in view of the severity of the problem and that of the Shariah conditions/principles, to maintain the fine difference between interest and profit on Shariah compliant financial products intact.

However, the penalty proceeds would be used for charity because penalty on default in repayment cannot become an automatic source of income for the creditor. Hence, it is imperative that a new sub-section needs to be introduced in section 20, whereby all such penalties are donated, and amounts are reflected, in the tax returns of such 'not for profit making organisations,' having NTN.

GROUP RELIEF:

THESE POINTS ALSO NEED CONSIDERATION

LOCAL CONSOLIDATION:

1. How will the territorial boundary of a multinational group be defined

2. Will the controlled foreign companies be included in a group

3. The term 'group' is not defined in the Companies' Ordinance, 1984, hence, will any new framework have its own definition?

4. Should groups be given the option to be taxed on the basis of a group consolidated account or should the consolidated basis be mandatory - and what about groups, which are not required to produce consolidated accounts under the Companies' Ordinance, 1984

5. How will associated companies and minority interests be dealt with?

6. How will losses be dealt with?

7. Will the elimination, on consolidation, of profits on intra group sales of trading stocks and other intra group trading transactions be followed for tax purposes

8. How will consolidation adjustments be dealt with?

9. To the extent that group member companies outside the national territory are included, how will the limitation on national taxing right afforded under bilateral tax treaties be identified

INTERNATIONAL CONSOLIDATION:

1. It will be necessary to harmonise the basis of computation of similar profit and gains, especially trading profit. 2. It will be necessary to harmonise the basis of taxation of intra-group dividends.

3. It will be necessary to determine some method of apportioning consolidated profits and losses between countries having DTT and dealing with effects of cross-border set-off of losses against profits.

TAX RETURN:

It is requested that the tax return dates should be extended from September 30 to October 31 and from December 31 to January 31, as this will provide an ease to taxpayers. However, this needs to be coupled with obligation over Withholding Tax agents to send Withholding Tax deduction certificate and tax payment receipts to the person from whom tax was collected or deducted till September 30 or December 31. This may also be coupled with rigorous penalties.

It is also suggested that persons, from whom Withholding Tax was deducted or collected, need to file tax returns, however, the literacy rate may become an impediment in this.

TAX REFUND, ADJUSTMENT AND VERIFICATION:

Central Board of Revenue's recent refund adjustment circular is highly applauded, however, the point is to verify the refund. Refund was verified at the time of assessment and then again at the time of refund. The problem is coupled when the tax payment receipt are from all over Pakistan. This needs to be resolved.

ROOT CAUSES OF TAX EVASION - PERCEPTION:

Firstly, this Income Tax was introduced in 1860 after the Ghadar or Battle of Freedom for five years, and then there was a three years gap in order to subsidise the loss of this battle. It was again imposed in 1868 till 1873, and then again imposed in 1886 for around 30 years. Then in 1918 a new enactment was enacted, which was renamed as 1922 after some amendments, which was then changed into Income Tax Ordinance, 1979 and currently available in the shape of the Income Tax Ordinance, 2001.

However, in Pakistan, there were and are, many perceptions regarding the applicability of Income Tax being Un-Islamic, as people believe that zakat, khiraj, fai and Jazia are the only prescribed taxes. However, taxes are not limited to that, but one may consider the import tax - chungi that was first imposed during the period of first four Caliphs, as this was a need of society at that time.

However, the wrong perception about taxes has still not been corrected, although corrective measure have been taken by reducing the tax rate, etc.

OWING TO THE FOLLOWING REASONS THEY REMAIN INTACT:

1. Name-based exemptions, instead of industry or principle based exemptions

2. Social welfare schemes are not normally undertaken owing to non-availability of principle-based exemptions for donations and deductions for the taxpayer

3. In Islam, there is a concept of donation, the left hand should not know when the right hand donates and one must help their poor relative, however, no such concept is recognised in the Income Tax Ordinance, 2001

4. Zakat is a deductible allowance but it is not allowed to be deducted from tax payable - this strengthens the concept that Income Tax is Un-Islamic.

5. A person earning 200K required to feed a family of three member, while another person earning the same income are required to feed not only his family but parents and small sister and brother. Both are taxed in the same way!

6. The concept of one's deduction and other's income is absent, as this may bring new taxpayers on verification.

POINT FOR CONSIDERATION CENTRAL BOARD OF REVENUE:

1. Consider tax reforms which take into account all taxes borne and collected by businesses, as well as the cost of tax compliance - Total Tax Contribution

2. Increase governments accountability and communicate with taxpayers as to how taxes are spent

3. Consider clear tax education campaigns to explain the taxes, how to pay them and the benefits to all stakeholders

4. Consider how simplification of tax legislation, the ease of compliance burden, and the consolidation of taxes might generate benefits for both governments and taxpayers.

5. Consider consultation with taxpayers when developing ideas for tax changes

TAXPAYERS:

1. Gather information on the total tax contribution, including all taxes borne and collected, as well as the cost of tax compliance.

2. Ensure that information around the total tax contribution is made accessible to governments and tax authorities to help inform their decisions over reform.

3. Communicate the total tax contribution to the wider stakeholder groups to demonstrate the extent to which they are supporting public finances through taxes.

4. Engage in regular dialogue with the Central Board of Revenue over the need for reform and specific areas of concern.

I personally appreciate the efforts of the CBR who is trying to provide developed countries facilities in a developing country, however, they are in a room full of age-old garbage with a vision of a clean room. The Central Board of Revenue is moving in the right direction, but when things move in the right direction then expectation grows! As stated earlier, taxpayer's need to know how their taxes are spent and I would like to end on a small part of history.

"At times, Syria (Sham) was attacked by the Tatars, the King decided to take judicial decree from Islamic Scholars for imposing a tax to meet the expenses. When the issue came before Imam Noovi [Rahmat ullah Alah], he opined

The King lives a lavish life and has a lot of wealth, he also spends a lot of money but his wealth, income and perquisites are not taxable, let him start first by donating his wealth, and then the treasury has the right to tax over the common people."

(Concluded)