According to a Business Recorder exclusive, the National Accountability Bureau (NAB) has decided to investigate the matter relating to the levy of presumptive tax on service providers under Section 153 (1) (b) of the Income tax Ordinance 2001 and the subsequent issue of Circular 6, 2009 as well as SRO 1003 of 2011.
The decision to investigate by NAB is premised on the failure of the PPP-led coalition government to ensure that procedures that were put in place after the passage of the 18th Constitutional Amendment were followed. Under the amendment the Federal Board of Revenue (FBR) does not have the authority to issue SROs.
Only the parliament can amend provisions of an act, in this case the finance act, and the government can issue exemptions. It all began with the then Finance Minister Dr Hafeez Sheikh operating with the same objective as the incumbent Finance Minister Ishaq Dar namely to generate as much revenue as possible and preferably from sources that were hitherto undocumented.
With this goal in mind, Hafeez Sheikh during his tenure as the Finance Minister imposed a 6 percent minimum tax, on turnover/revenue on all service providers in the Finance Bill 2009. The members of the various Chambers of Commerce and Industry that are dominated by traders have traditionally resisted all moves to file income tax returns and instead have offered to pay a fixed tax in lieu of submission of audited accounts and assessment of their income by the tax officials.
Upon protest and representation by the corporates in the services sector, who regularly file tax returns and pay their due tax, the government exempted them from the presumptive tax regime.
The Revenue division did not put up the issue before the Economic Committee of the Cabinet (ECC) for a decision as required under the 18th Amendment. It instead, first issued a circular in 2009, followed by a statutory regulatory order (SRO) in 2011 without approval from the ECC.
It also did not include this matter in the finance bill for the subsequent year to get it approved by parliament. Had the revenue division followed the prescribed procedure, ECC’s approval would have been a mere formality given that the Finance Minister heads the ECC.
This failure to follow procedure led to the filing of the court case by Transparency International (TI). Last year, the Supreme Court declared clause 79 in an identical case illegal. Clause 79 is a part of Income Tax Ordinance relating to exemption of minimum tax on service provider companies.
The problem now is that those companies that were allowed the option to either pay presumptive tax or to file returns and pay their due taxes allowed under the 2011 SRO and who opted for the latter option may now be asked to pay back taxes which is the difference between what was their due tax and the 6 percent presumptive tax.
The Federal Board of Revenue, it is being feared, may simply hold the refunds due to these companies by arguing that they have adjusted the difference. Refunds are already the major reason behind the severe liquidity constraints of the productive sectors of the economy and with the incumbent Finance Minister seeking ways to increase revenue there is a serious concern that the refunds, already considerably delayed, would not be released and would not be legally challengeable to boot.
It is therefore hoped that the government undertakes the requisite procedures to protect the corporate taxpayers who have paid their due taxes after filing their returns in years past.