Highlights on Tax Laws Third Amendment Ordinance, 2021

Tax Laws third amendment Ordinance 2021

Compulsory Digitized Payment for Expenditure by Companies:

This is a highly discussed amendment made in the tax laws for the documentation of the economy. Government is considering to give a grace period of 40 days for its full implementation.

It is a commonly known fact that there are a substantial number of undeclared bank accounts through which huge business transactions are undertaken without reflection in the taxation system. The amendment now proposed is the continuation of earlier one introduced by the Finance Act, 2021. In the earlier amendment all entities are required to declare the bank account that is used for business purposes.

Companies are now required to make all payments for expenditure over a certain limit (Rs. 250,000) only through ‘digitized transactions‘ undertaken in a bank account notified to the tax department.

The conditions are:

• Transactions under a single head of account exceeding Rs. 250,000;

• Digital method of payment through declared Bank Account.

A Digital Transaction generally means:

“A digital payment, sometimes called an electronic payment, is the transfer of value from one payment account to another using a digital device such as a mobile phone, POS (Point of Sales) or computer, a digital channel communications such as mobile wireless data or SWIFT (Society for the Worldwide Interbank Financial Telecommunication). This definition includes payments made with bank transfers, mobile money, and payment cards including credit, debit and prepaid cards.”

It appears that banking transactions undertaken through cheques would not qualify under this section. Procedural aspects relating to the digital payment system need to be clarified as the proposed system envisages a complete replacement of the present manner of payment which is undertaken through cheques.

It is reiterated that this amendment is a continuation of another important amendment made by the Finance Act, 2021 whereby declaration of Business Bank Accounts has been made mandatory.

Collaboration with NADRA & Indicative Income

National Database & Registration Authority (NADRA) is the national custodian of data and transactions undertaken by an individual. This data is maintained in NADRA for every citizen of Pakistan on the basis of Computerized National Identity Cards (CNICs).

A new system of collaboration and use of data between NADRA and that available with the Federal Board of Revenue (FBR) has been introduced in the tax laws.

Under the newly-inserted section 175B certain role has been assigned to NADRA which inter alia include:

• Identification of income, receipts, assets, properties, liabilities, expenditure or transactions that have escaped assessment; and

• Identify the differences in valuation of underlying subject matter in the transaction.

Concept of determination of “Indicative Income” has been introduced.

Under that process NADRA using artificial intelligence, mathematical or statistical modelling or any other modern device or calculation method can determine the indicative income of any individual on the basis of data available with NADRA. This is a unique strategy not tested in other jurisdictions.

This indicative income will be intimated to the person through FBR which in effect will be taken as a deemed amendment of return filed under the self-assessment system as laid down in Section 120 of the Income Tax Ordinance, 2001.

In case if the person has not filed a return such indicated income will effectively be deemed to be the tax liability of that person.

Disconnection of Utilities for Delinquent Persons

A new section has been added to the tax law through which FBR has been given powers which entail disconnection of utilities for the persons not filing income tax returns required under the tax laws. These utilities include mobile phones or mobile phone sims, electricity and gas connection.

It is important to note that there is provision by way of Section 181 AA of the Income Tax Ordinance, 2001 that requires new registrants of new commercial or industrial connection to be mandatorily registered with the tax department. This provision which was introduced in 2014 is not being implemented in a practical sense and there is no coordination between the electricity and gas suppliers and the tax department.

Foreign Remittances

Foreign remittance through banking channels up to 5 million are not subject to any tax enquiry. This facility was limited to remittances through banks only. Now remittances other than banks’ such as Money Service Bureaus (MCBs), Exchange Companies (ECs) and Money Transfer Operators (MTOs) will also qualify for such a concession.

It is suggested that adequate procedures be introduced to ensure that there is no abuse of this concession and at the same time adequate documentation is available for availing this concession.

Discontinuance of Electricity & Gas Collection-Sales Tax Registration

Under the new provision introduced in the Sales Tax Act 1990 powers have been entailed to FBR for disconnection of electricity or gas connection if a person who is required to be registered under the Sales Tax Act, 1990 is not so registered.

This provision in practical sense is the most relevant amendment made in the Sales Tax law in Pakistan after 1996. It is a known fact that there is a very large number of unregistered persons under the Sales Tax laws.

There are around over 400,000 industrial or commercial persons in the country whereas the number of persons registered under the sales tax laws is around one-fourth of this number.

On the practical side the Government as a policy would have to consider the following steps for the adequate implementation of this provision:

• An adequate time period for integration of records and correction under the respective laws;

• A waiver of the liability for the transactions for the period when such persons were not registered who opt for voluntary registration.

This provision is also applicable for the Tier 1 retailers, though being registered do not integrate with the Board’s Computerized System.

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