THE Income Tax Ordinance, 2001, promulgated on 13 September 2001, will become operative with effect from 1st July 2002. This law as promulgated contains a number of typographical errors, drafting blunders, legal lacunae, inconsistencies, conceptual fallacies and dichotomies.

It needs to be thoroughly revised and reviewed, if the State is really bent upon to implement it from the next financial year. However, it would be better if its implementation is deferred till general elections in October 2002. The Constitution of Pakistan requires that no tax should be imposed without representation.

The new income tax law should be properly debated, at least, for three years before its enforcement. It should be implemented, if at all it is necessary, after taking proposals from all the stakeholders, feedback from professional bodies and after reaching a national consensus. In case, the regime is under pressure from the IMF or/and the World Bank to enforce it from 1st July 2002, it must revise it and through the Finance Ordinance 2002, suitable amendments should be made.

The Income Tax Ordinance, 2001 deviates from the scheme of the Income Tax Ordinance 1979 in the following areas (I have just taken some and not all material provisions, especially those having no bearing for taxpayers):

1. Concepts of “taxpayer”, “tax year”, “taxable income” have been introduced replacing the terms “assessee”, “income year”, “assessment year” and “total income”. This shift has changed the basic scheme of the existing law, and it will take many years for the professionals and tax officials to understand the real import and scope of these new terminologies. The concept of “tax year” vis-‘-vis application of tax rates for assessment purposes can create utter confusion and chaos. There is no clarification in the new enactment to this effect. This lacuna needs to be addressed if the law has to work smoothly.

2. The new law is obnoxiously harsh for the salaried class. It requires that value of even notional benefits and perquisites are to be translated into monetary terms without providing any exemption. Presently, salaried persons having basic salary of Rs. 300,000 or more are taxed on gross-emoluments basis, with a few exemptions. But the new law has extended this (mal)treatment for the entire salaried class, without any distinction between low-paid employees or wage-earners to highly paid executives. In the case of many bank employees, who are availing interest-free loans, the notional benefit in monetary terms as provided in this law will raise taxation to the level of confiscation of their entire salary. This is indeed a bizarre situation where it appears that the maker of this new law has some personal vendetta against the already oppressed salaried class. The taxation of the salaried persons needs thorough review and anomalies in the enactment should be removed.

3. Dividend income received from resident company by the corporate sector, other than insurance companies, is presently taxed on reduced rates ranging from 5 per cent to 15 per cent, to promote inter-corporate investment. The new law seeks to tax it at the rate of 10 per cent for all taxpayers including companies as a separate block of income being full and final discharge of tax liability. This is irrational and illogical. The companies and other taxpayers who borrow money to invest in shares should be allowed interest paid by them against dividend income. Instead of removing presumptive taxation of dividend income in the hands of non-corporate taxpayers, its scope has been extended to companies, which is shocking. It exposes the tall claims of the government that dependence on presumptive income will be reduced in the new law.

4. Gross incomes from dividend, air transport and shipping, fee for technical services and royalty have been made final discharge without adjustment of any expenditure, allowance or set off of loss. It is against established principles of taxation that requires due regard to real income and as far as possible notional incomes should not be taxed, as it erodes the capacity-to-pay canon of fiscal liability. It appears that the CBR stalwarts (sic) want to tax people beyond their real incomes as they are under the impressions that like them people have far excess sources beyond their known means. It can be true for them and their friends in trade and business, who are tax evaders, but the fact remains that many middle class people have not even enough to meet both their ends. Besides, it is unfair to tax a widow on her below taxable income on gross basis at the rate of 10%.

5. Allocation of expenses is provided between the income-earned under the various heads of income as well as exempt and non-exempt income. The established principles laid down by the courts in this regard have been ignored and the misplaced emphasis is on “protection of revenue”. It appears that some over zealous persons have been approached to suggest changes and they have tried to provide everything that can be harmful for trades and professions.

6. The concepts of merger, take-over and amalgamations have been introduced vis-a-vis taxation rules, but this has been done without taking into account the mundane realities of Pakistan where the corporate sector is already on the verge of collapse. These rules are not beneficial for the corporate mergers, amalgamations and take-over. We need to provide liberal and soft rules to promote such transactions. The thinking of the new lawmaker is that all such transactions involve income avoidance. This is biased and myopic thinking. This law would damage the existing corporate sector and dissuade the already shy foreign investors from coming to Pakistan.

7. All the Returns would qualify for acceptance. Return can be revised within 5 years of the end of the tax year. Amended assessment would be made in such a situation. In other cases it shall be made on receipt of definite information or audit report or on the Commissioner’s selection of the case. This is a positive step that all the returns should be accepted on the face value. However no legal safeguards have been provided to check the arbitrary and mala fide actions of the officers in the name of audit to harass the common taxpayers.

8. In the definition of tax authorities only the CBR, RCIT and CIT have been included. All the powers are entrusted to the Commissioners who can delegate the same to the “taxation authorities”, on the basis of the functional division of work and the tax reforms scheme.

9. Certain exemptions have been made part of the statute and at the same time Second Schedule has been retained, with the delegated powers vesting in administrative authority to create, amend or modify any exemption clause. It ensures the continuity of the infamous SRO culture, which is the main tool of the tax bureaucracy. This lethal weapon in the hands of CBR babus has to be taken back if a meaningful exercise of tax reform is to succeed. Before going for tax reform, the deweaponisation of CBR stalwarts is a prerequisite.

10. Multiple shift allowance has been deleted. The depreciation is to be allowed for the period during which there is actual use of asset and not on notional basis for whole year if it is used even for a fraction of time in the tax year.

11. Various tax rebates and credits have been put under the tax credits head. At first, foreign taxes payment is to be given credit, followed by the investment rebates and payments tax credit is to be allowed.

12. The income from the foreign sources under all the heads is to be considered and is to be adjusted against loss under any other head, and, only net amount remaining under any head is to be added to the total income form Pakistan sources.

13. Minimum tax is restricted to companies as against Companies, Registered Firms and individuals.

14. Stringent audits, harsh penalties and prosecution have been provided. However, double jeopardy is not there for the same offence. Where prosecution is to be launched, the penalty amount is to be refunded.

Because of the above-mentioned deviations, there is no need to enforce this new Income Tax Law as the deviations could easily be adjusted in the existing Income Tax ordinance, 1979. There is no valid justification to introduce an all together different law when the existing one is quite capable of absorbing the reform agenda providing a few more stringent measures for better tax compliance.

The new law has equal or rather more dependence on withholding of taxes, the plethora of exemptions is there, and it has nothing extraordinary in substance to justify the abrogation of a law that has now a well-tested 21 years’ existence. People are familiar with the concepts and provisions of the Income Tax ordinance, 1979; they understand and appreciate it on the basis of case law evolved during the last two decades. It will be unjust and unnecessary to repeal it just to please the foreign masters and their local lackeys.

The Income Tax Ordinance 2001, has nothing that can improve our ailing tax machinery. On the contrary, it is bound to further deteriorate their working as none of the existing lot has means, inclination or willingness to implement even the existing, what to talk of the new law, which, they will find hard to learn. Tax reform agenda has nothing to do with the enactments of new laws.

The truth of the matter is that there is nothing wrong with the existing law and it is because of the corruption of the tax authorities that the system is malfunctioning. The amendments made from time to time by the CBR just to show higher figures of collection have utterly distorted the scheme of the tax law. The presumptive taxation and heavy reliance on withholding taxes is the root cause of the present malady.

The CBR babus have been playing havoc with the tax laws by inserting mindless changes and then instead of allowing permanence to the provisions they even modify those changes leaving the taxpayers in a maze of bewilderment. Now they have done it at a mammoth scale by introducing an altogether new law about which they themselves are convinced that it is a bad piece of drafting.