The habit of saving is a tested way to reach financial betterment in latter years. It takes discipline and time, but unlike lottery, it guarantees a better financial future. It is a steady plan of investing in secure schemes.
The government policies should aim at promoting national savings. However as observed by Mr A. M.Talha (Dawn-EBR February 23-29, 2004), there are contradictions in these policies. On the domestic front, it is squeezing savers by reducing the returns but it is offering taxpayers' money to foreign investors (as is the case with euro-bonds).
Further, changes have been brought in the income tax law regarding tax deduction at source and final tax liability in respect of profit on investments in these schemes.
Profit on many schemes have been brought under tax net. Even the law as it is at present is not being implemented correctly causing harassment to investors in these schemes. It is not difficult to assess the response of investors to such an environment from the table given below.
This article aims at covering taxation aspects of profit from investment in NSS to enable resident investors make an informed decision and beware of their rights.
Investment made on or up to 30th June 2001: According to section 239(14) of the Income Tax Ordinance, 2001 , any yield from NSS where investment was made on or before 30th June 2001 is exempt from levy of income tax.
As the yield is exempt from taxation, it has been provided in the tax law that there would be no tax deduction under section 151 of the said ordinance. For this purpose, investors are not even required to produce exemption certificate from the commissioner of the income tax under section 159 of the ordinance which, in the case of other exemptions, is normally required.Investment made after 30th June 2001 in 'Mahana Amdani Account' (MAA):
The 'Mahana Amdani Account' is a perpetual income scheme. An account holder continuously deposits monthly instalments ranging from Rs500 to Rs5000 and receives profit equal to his monthly deposits till the account lasts.
Only one account can be opened in the name of any one person either singly or jointly. However, father, mother or legal guardian may also open an additional account on behalf of a minor. Monthly deposits in an account shall be received till maturity as under:
a) on the accounts opened before 01-07-2000. Five Years (60 instalments)
b) on the accounts opened between 01-07-2000;Six Years (72 instalments) and 30-06-2002.
c) on the accounts opened on and after 01-07-2002. Seven Years (84 instalments) (source: www.savings.gov.pk)
In MAA where monthly instalment is upto Rs1000, income from such account shall be exempt even if the amount is invested after 30th June 2001. In such cases NSC are required to pay the entire amount of profit without tax deduction under section 151 of the ordinance.
They are neither required nor allowed to ask for producing exemption certificate from the commissioner of income tax under section 159 of the Ordinance.
Investment made after 30 June, 2001:2001 in different schemes (other than Mahana Amadni Account with monthly instalment up to Rs1000), tax is deductible on profit at the rate of 10 per cent. However, it shall not be final discharge of tax liability and tax deducted shall be treated as advance tax only.
Final tax may or may not be equal to the amount of tax deducted depending upon the rate applicable to his total taxable income. The amount of profit liable to tax deduction shall be reduced to the extent of Zakat paid under the Zakat and Ushar Ordinance, 1980 at the time the profit is paid.
However, the following profits are not liable to tax deduction under section 151 as per clause (7) of Part II of Second schedule to the income tax ordinance, 2001:
1. Defence Savings Certificates (DSC), Special Savings (SSC) Certificates, savings accounts (post office savings account) if the deposit does not exceed upto Rs1, 50,000. It would, however, form part of taxable income of an individual. Whether it is real intention of the legislature or mere oversight, cannot be commented.
2. Profit paid on all certificates of deposits (without reference to the issuing financial institution) which are created by conversion of a foreign currency account or deposit held on 28th day of May, 1998, with a bank authorized under the Foreign Currency Accounts Scheme (FCAS) of the State Bank of Pakistan (SBP), shall be exempt from advance tax in the form of tax withholding u/s 151 and from taxation as part of taxable income. Foreign currency account or deposit conversion of which entitles exemption should fulfil the following conditions:
(a) The FCAS was held with authorized banks in Pakistan in accordance with foreign currency accounts scheme by citizens of Pakistan and foreign nationals residing abroad, foreign association of persons, companies registered and operating abroad and foreign nationals; or
(b) Private foreign currency account held with authorized bank in Pakistan in accordance with FCAS introduced by the SBP excluding incremental deposits therein and foreign currency accounts opened after 16-12-1999.(Clause (83) of Part I of the Second schedule to the Ordinance).
It has been observed that some national saving centres are demanding exemption certificates u/s 159 even where the amounts were invested upto 30th June 2001 by referring to clause (83) of Part I of the Second Schedule to the Ordinance.
Clause (83) is not relevant here. Where amount was invested in NSS on or before 30th June 2001, there is no such requirement whether funds were invested by conversion of foreign currency account/deposit or otherwise as per Section 239(14).
Clause (83) in the case of certificates of deposit of national saving schemes would only come into operation if funds were invested by conversion of qualifying foreign currency account or deposit after 30th June 2001. Foreign currency account/deposit converted funds invested in all certificates of deposit (accounts) are exempt.
In such case, a taxpayer has to prove that the funds are out of qualifying foreign currency accounts/deposits as discussed above. Where the period between conversion of funds and investment is upto 30 days, the National Saving Centres have not asked for any detailed evidence due to an internal circular of the department said to be issued after consulting CBR.
However, where the period is longer, they ask for an exemption certificate from the commissioner. The investor has to prove trail of funds to the effect that funds invested in the national saving schemes were from the said foreign currency schemes/deposits.
However, it is proposed that investors who produce certificate from the concerned bank/financial institution of withdrawal of funds from the qualifying foreign currency account/deposit, profit should be paid without requiring tax exemption certificate from the commissioner of income tax under section 159.
In any case where the Directorate has been paying profit since 1999, asking for exemption certificate at this belated stage is causing a feeling of mistrust on the part of government in these investors. What you get in reciprocal? Mistrust. Can the government afford it!
Final treatment: As stated above, where profit is taxable, the amount of tax, if any, withheld shall be treated as advance tax and the amount of profit included in other taxable income of the taxpayer. Final tax shall be determined on the basis of rate of tax applicable to each income bracket as per first schedule to the Ordinance. No tax would be payable on taxable income upto Rs80,000.
Would the government look into woes of the small investors who have no other source of income and whose profit in these schemes is upto Rs 80,000 per annum. To get the amount refunded, they will have to visit income tax offices to get exemption certificates/refunds.
What is the fun in first deducting and then refunding the deducted tax in such cases? It is also the negation of so vocally pronounced policy of the CBR to reduce contact between taxpayers and the department. We pin our hopes on the next budget for mitigation of these problems.
Where the amount is received in arrears: Where a taxpayer receives profit in arrears, it is possible that higher rate of tax becomes applicable to a taxpayer's income.
The legislature has taken notice of hardship which it could have caused due to application of higher tax rate. Consequently, the taxpayer has been given option to get the profit taxed at the rate that would have been applicable if the profit had been paid to the person in the tax year to which it related.
This option can be made in writing to the commissioner within due date of filing of return of the tax year in which the profit is received or in extended time (by the concerned commissioner of income tax). How much extension you get is your luck as it is newly bestowed discretion on the commissioner in an ordinance which was supposed to do away with discretions.
