Oliver Wendell Holmes says that taxes are what we pay for a civilized society. We pay taxes to do together what we cannot do alone to maintain a "civilized society." But what is a civilized society?
A human society with a high level of social, moral and cultural development can be called a civilized society. All of us are under obligation to make our society civilized in true sense of the word.
Taxpayers are financial supporters of a civilized society. However, it is ironic that sometimes they themselves are treated in an unfair manner. Section 113 of the Income Tax Ordinance, 2001, being an ill-conceived one-size-fits-all piece of legislation for resident companies is such an example of unfair treatment. In this article attempt has been made to see its repercussions on the business community and latent reaction of the category of taxpayers it hits.
Section 113 of the Ordinance reads as under:
"113. Minimum tax on the income of certain persons. This section shall apply to a resident company where, for any reason whatsoever, including the sustaining of a loss, the setting off of a loss of an earlier year, exemption from tax, the application of credits or rebates, or the claiming of allowances or deductions (including depreciation and amortization deductions) allowed under this Ordinance or any other law for the time being in force, no tax is payable or paid by the person for a tax year or the tax payable or paid by the person for a tax year is less than one-half per cent of the amount representing the person's turnover from all sources for that year.
Where this section applies: (a) the aggregate of the person's turnover for the tax year shall be treated as the income of the person for the year chargeable to tax; and (b) the person shall pay as income tax for the tax year (instead of the actual tax payable under this Ordinance), an amount equal to one-half per cent of the person's turnover for the year.
In this section, "turnover" means -(a) the gross receipts, exclusive of sales tax and central excise duty or any trade discounts shown on invoices or bills, derived from the sale of goods; (b) the gross fees for the rendering of services or giving benefits, including commissions; (c) the gross receipts from the execution of contracts; and (d) the company's share of the amounts stated above of any association of persons of which the company is a member."
Thus crux of the above provision is that: (a) this section is applicable to resident companies only. If its actual tax liability as calculated under other provisions of law is less than 0.5 per cent of its total turnover, it will still have to pay tax at least equal to 0.5 per cent of its turnover; (b) turn-over has been defined in the section as gross receipts from sale of goods, gross fee, commission for providing services, receipts from execution of contracts and company's share from an association of persons.
Though the concept of minimum tax is prevalent in a few other countries it is not in as an unfair and callous manner as is in our case. In other countries, as a principle, it is levied only in cases where high-income taxpayers get escaped from tax due to different tax exemptions available to them. Here tax laws do not care for reasons.
The use of words 'for any reason whatsoever" is unreasonable and has led to following unintended implications:
(a) The government policy is that the economy should be documented. Companies are documented and are required to engage external auditors to audit their business affairs, but it is the only category which is discriminated against for levy of minimum tax on the basis of their turnover without having regard to their current and brought forward losses. It is no surprise that here businesses prefer not to have companies and in recent years, companies gave their businesses to 'association of persons' just to avoid this tax (and most of withholding tax provisions).
(b) Through the Income Tax Ordinance 2001, the government has tried to repose trust in taxpayers of this country. But minimum tax regime is the symbol of mistrust. Only resident companies are required to pay minimum tax. Non-resident companies and other tax payers in similar conditions are not required to pay this tax. This discrimination against resident companies gives rise to impression that their declared results are being looked upon with suspicion. Mistrust mirrors mistrust.
(c) If the CBR with its millions-spent survey, highly paid Pakistan Revenue Automation (Pvt.) Ltd. (PRAL) prepared database and modem-facilitated units of taxation is unable to dig out cases where there might be understatement of income, it should look inwards for reasons of its inefficiency and mal-administration. The resident taxpayer companies having low or negative income (loss) should not be punished as a class by forcing them to pay this tax for ills of the CBR. In the presence of this section it appears as if they do not believe in the maxim 'every body is innocent unless proved guilty'. If the CBR believes that resident companies are guilty (of understatement of income), unless proved innocent (after audit), even then there remains no justification for this minimum tax on turnover in the presence of sections 177 and 122 of the Ordinance giving powers of audit and amendment of assessment orders. If no understatement of income is proved as a result of audit or information processed in section 122, then declared results of the companies merit to be accepted. There is no justification for this minimum tax regime.
The turnover has been deemed (or dreamed) as income in the Ordinance. But I cringe the consequences of bringing extra-constitutional items into tax ambit by imprudent use of 'deeming' wand of magic. Definition of turnover in its present form has also been a point of litigation. The department has at times tried to treat receipts from all sources under all heads of income as its turnover for the purposes of this Section.
But this treatment has not been approved by higher appellate forums in a number of cases. For example, the Full Bench of ITAT in the case reported as (2000) 82 Tax 129 (Trib.) has held that the word "turnover" used here is confined to turnover of business and profession carried on by the assessee (taxpayer).
In its present form tax under section 113 carries no characteristics attributable to income tax. You may call it 'begging' or 'mugging' but not tax. "Please pay some tax even if you are in losses" is a begging attitude. "Hell with your business results, give my money" echoes in the mind of a taxpayer when this minimum tax is demanded by his tax officer. None is appreciated.
Tax collection is a sacred function and not begging or mugging. It will be in the fitness of scheme of the Income Tax Ordinance, 2001 to either scrap minimum tax regime from the statute or at least amend it giving a touch of reasonability.
A few suggestions are given below:
(a) The rationale be revisited. Instead of "for any reason whatsoever", reasons should be enumerated and should be restricted to such cases where tax liability is less due to exemptions given in the second schedule to the Ordinance or any other law for the time being in force.
(b) Resident companies alone should not be made the target of this tax. Either this tax should be abolished in their case too or all categories of persons should be brought in the net on the basis as indicated below. There is no rationale to single out resident companies for this purpose. This puts them at disadvantage in competition with other categories of taxpayers in the same business environment except burden of tax.
(c) According to latest year book (for year 2001-02) available on the official website of the CBR, total tax collection under corresponding section of the repealed Income Tax Ordinance, 1979 was Rs61 million. If this figure is true, the case for scrapping this unjust levy becomes even stronger. Why collect this paltry sum by an unjust levy of tax which creates understandable ill-feeling in the category of taxpayers hit by it.
Despite all this, if such tax is necessary, its basis should be changed from turnover to gross income from all sources including income which otherwise might be exempt under the Ordinance or any other law for the time being in force. If any business sector is to be protected from this levy, it can be given exemption from application of this provision in the second schedule to the Ordinance.
A democratic government is expected to treat all tax payers equally and fairly Relief due as above in the coming budget should not be delayed for any reason whatsoever.
