The government has introduced major changes through Finance Bill 2018 for broadening the tax base and makes it mandatory purchases of immovable properties and vehicles only by filers of income tax returns.

A fundamental step has been taken in order to curb acquisition of certain assets by persons who are outside the taxation regime.

FBR has extended the date of filing of Income Tax Return for salaried individual and Statement of final taxation u/s 115(4) for Tax Year 2018 up-to September 30, 2018.

It explains following:
1. The Finance Bill 2018 includes certain policy changes in the taxation regime that have been there over three to four decades.

Following revolutionary positive measures have been introduced:

a) Valuation of Immovable Properties and the pre-emptive right of the Government to acquire under-declared properties;

b) Restriction on acquisition of immovable properties and new vehicles by nonfilers;

c) Measures relating to non-cash gifts between persons who are not relatives;

d) Abolition of presumptive tax regime for commercial Importers;

e) Introduction of the concept of year of discovery for taxation of unexplained foreign sourced income and foreign assets;

f) Withdrawal of immunity of foreign remittances exceeding certain threshold; and

g) Substantial reduction in tax rates for Individuals including salaried class.

2. As a result of the reduction in tax rates for businesses undertaken by Individuals, the difference in tax incidence for similar businesses undertaken by corporate sector and Association of Persons (AOP) vis-à-vis an Individual has widened.

The net effective take home income through a corporate business and AOP is limited to Rs 60 if the profit is Rs 100 whereas same business undertaken by an individual will result in take home income of Rs 85.

This difference may lead to de-corporatization of businesses. We propose that the gap should be reduced.

Generally accepted international measure for the same is to treat tax on dividend as adjustable against corporate tax liability so as to avoid economic double taxation.

3. The Government has introduced one time compliance scheme for disclosure of undeclared income and assets. The Finance Bill has proposed certain measures to curb the possibility of future accumulation of undeclared foreign assets and foreign income.

4. In order to incorporate tax measures for proper disclosure of foreign assets and foreign income and enhance the ambit of anti-avoidance provisions, the Finance Bill has introduced certain provisions which may deem a foreign source income as Pakistan source income.

This aspect needs to be examined in relation to the generally accepted principle of international taxation.

5. In order to avoid protracted litigation and delay in settlement of cases, the whole concept of Alternative Dispute Resolution (ADR) has been revamped.

Now, the ADR Committee (ADRC) will comprise of three members, out of which two will be independent persons.

If the taxpayer decides to opt for ADR regime instead of appellate regime then the recommendations of ADRC will be binding on both the parties.

6. In the past, certain anti-corporate tax measures such as levy of tax on bonus shares, tax on undistributed profits and super tax had been introduced.

Through the Finance Bill, corrective actions have been taken in respect of all these measures and tax on bonus shares has been abolished whereas the other two taxes are to be phased out over the period of time.

7. In the past, regressive measures were adopted that had rolled back the business oriented regime for group taxation.

It was expected that certain measures will be introduced to reinstate all-inclusive group taxation system.

No such measures are, however, appearing in the Finance Bill. It is expected that these measures will be taken care of in the Finance Act, 2018.

8. There has been disputes between taxpayers and tax department on the matter of taxability of composite contracts undertaken by non-residents.

These disputes inter alia primarily relate to taxation of offshore supplies being part of an overall arrangement.

The Finance Bill has proposed deeming provisions for taxation of income from such supplies which, in our view, overrides the principles of nexus as laid down in international taxation system.

This matter requires reconsideration to bring it in line with the generally accepted principles especially in the cases where the contracts are executed by a person resident in a tax treaty jurisdictions.

9. Domestic tax laws around the globe invariably provide principles to curb tax avoidance measures, however, details guidelines and processes are laid down for this purpose.

Substantial powers have been provided to taxation authorities for undertaking actions in case of tax avoidance schemes which include disregarding a legal entity and protection provided under the tax treaties.

These provisions without substantive guidelines and safeguards are prone to abuse by the tax authorities.

It is suggested that the application of the same be subject to the adoption of detailed guidelines for General Anti-Avoidance Regulations (GAAR).

10. Banking companies are subject to tax on their profits as determined by the regulations prescribed by State Bank of Pakistan (being the Regulator of Banking Sector in Pakistan).

The application of recharacterisation provisions in the case of banking companies is undesirable where the amount of profit is the one as determined in accordance with SBP regulations.

11. It should be the objective of every growth based taxation policy to encourage capital investment in plant and machinery.

This objective is achieved by allowing charge for depreciation against taxable income and the right to carry forward in subsequent year.

The Finance Bill has proposed certain measures whereby the right to adjust brought forward unabsorbed depreciation is being deferred.

This negates the very objective of the concept as described above which may lead to curtailment of industrial investment without any real benefit to the Government.

12. There has been a general and genuine complaint of taxpayers for repetitive selection for tax audits.

A corrective measure has been proposed whereby a composite audit, covering Income Tax, Sales Tax and Federal Excise, shall be undertaken not more than once in three years.

There are cases of abuse of provisions relating to amendment of assessment in order to create tax demands. Corrective measures are required in this regard also.