24/06/22

PAKISTAN: Govt to plug tax loophole for rich.

As published on tribune.com.pk, Friday 24 June, 2022.

The government may change the definition of resident Pakistani to include all those people in the tax net who do not stay in any foreign country for more than six months, after over 4,000 individuals having $2 billion in bank accounts turned out to be non-resident Pakistanis.

The government on Thursday also considered the option of reducing the advance income tax on cellular services from 15% to around 13% and slashing the proposed duties on low-value handsets.

These measures could be made part of the Finance Act 2022 to be presented in the National Assembly next week.

The government could amend the Income Tax Ordinance through the Finance Act 2022 to plug a loophole which is often exploited by the rich Pakistanis to avoid tax payment, according to sources in the Federal Board of Revenue (FBR).

The FBR had also proposed to change the definition through the Finance Bill but it created more confusion, as the proposed change would have resulted in taxing the income of millions of Pakistani labourers working in the Middle East.

Now, it may further amend the definition to broaden the scope to cover only the rich persons by stating in the law that a person for tax purposes will be considered non-resident only if he or she is present in any other country for more than 183 days in a tax year.

It will be the fourth time in as many years that the FBR has tried to plug the loophole but every time it has created a mess.

In 2019, it amended the law and stated that a person will be treated as resident Pakistani and will be liable to pay income tax, if he stays in Pakistan for a minimum of
four months.

Prior to the Finance Act 2019, an individual was treated as a “resident individual” if the person was present in Pakistan for a period of 183 days (over six months) or more in a
tax year.

Then it brought an amendment last year to delete a clause that had been retrospectively applied to calculate 183 days but the FBR again failed to get the desired results.

During the past few years, the Pakistan Muslim League-Nawaz (PML-N) and the Pakistan Tehreek-e-Insaf (PTI) governments brought substantial changes to the Income Tax Ordinance 2001 aimed at improving tax recovery from abroad. But so far these changes have not translated into revenues due to the capacity and implementation issues.

Pakistan has so far received information about $35 billion from the Organisation for Economic Cooperation and Development (OECD) but the information about nearly $30 billion turned out to be not actionable.

The OECD data showed that over 4,000 individuals had the non-resident status and they had $2 billion in their bank accounts. The authorities believe that a significant portion of this sum can be brought to the tax net by targeting those individuals who do not stay in one country for more than six months for
tax purposes.

Minister of State for Finance Dr Aisha Pasha on Thursday concluded the debate in the Senate and announced the acceptance of 19 recommendations of the Senate out of the 50 proposed for the budget.

In the budget, the government has also proposed 1% capital value tax on the movable and immovable assets abroad. There was a proposal to introduce the non-filer category for the offshore asset holders and jack up the rates.

The government has also attempted to tax the income of real estate in the budget, including withdrawing 50% capital gains tax exemption for the families of martyred soldiers, ex-servicemen and ex-federal government employees.

There is a possibility that the government may restore the exemption for the families of the martyred and serving personnel.

The government may also amend the clause introduced on June 10 to collect tax on the deemed income from properties. The government will treat these immovable assets as capital assets to avoid legal complications.

The proposed changes may still exclude one capital asset under self-occupation owned by the resident person from the deemed income tax.

Any constructed property in respect of which the completion certificate has been obtained from the concerned authority will also be excluded from the levy.

Sources said that a major exclusion could be the properties given on rent.

The definition of capital asset for this clause can be introduced. The capital asset will not include any stock-in-trade, consumable stores or raw materials held for the purpose of business; any shares, stocks or securities; any property with respect to which the person is entitled to a depreciation deduction or amortisation deduction.

In the budget, the government has withdrawn the option of carrying forward the minimum tax-related losses. There is a possibility that the unadjusted balance of minimum tax paid up to tax year 2022 may be made available for adjustment in the future.

Sources said that the finance minister considered the options to again lower the advance income tax on mobile phone calls amid opposition by the FBR.