PBA asks FBR to clarify WHT exemption certificate in FY21 budget
ISLAMABAD: To avoid litigations between bank customers and tax officials, banks have asked the Federal Board of Revenue (FBR) to include a clarification in the Income Tax Ordinance, 2001, through Finance Bill, 2020, that withholding tax (WHT) exemption certificate would not be required where exemption under Second Schedule (Exemption Schedule) or any other provision of the ordinance is provided.
According to the proposals of the Pakistan Banks Association (PBA) to the FBR for budget 2020-21, the issue is that the law under the Second Schedule exempts certain transactions and persons but while monitoring of WHT commissioner asks for exemption certificate under Section 159 of the Income Tax Ordinance. The proposed clarification in the income tax law would provide clarity to avoid unnecessary litigations on withholding tax matters where exemption is already provided in second schedule or the other provisions of the ordinance, but taxation authorities required exemption certificates to allow the expense.
The PBA has also proposed that the definition of Free Tax Number (FTN) is to be introduced in Section (2) read with Section 49 of the ordinance. The FBR should clarify that the exemption under Section 49 of The Income Tax Ordinance, 2001, is available to the federal government, the provincial government and the local government shall also be available to all entities having FTN number.
Banks have also proposed to the FBR that the restriction of setting-off of tax depreciation to the extent of 50 percent of taxable business income should be abolished in coming budget (2020-21).
The proposals of the PBA further revealed before the amendment made through Finance Bill 2018, while computing income from business, the unabsorbed depreciation and amortization on fixed assets and intangibles from prior tax years were allowed to be adjusted/absorbed against business income for the year. Any depreciation and amortization not completely absorbed/adjusted were allowed to be carried forward infinitely until these are fully adjusted.
This has provided a fair benefit to taxpayers and especially to those taxpayers who have substantial unabsorbed depreciation and amortization due to operating losses or heavy infrastructure investment in lieu of business expansion.
The concept of setting-off depreciation and amortization against business income is a longstanding concept, which was initially adopted in the Income Tax Act, 1922, and was also made part of the repealed Income Tax Ordinance, 1979, and the Income Tax Ordinance, 2001, and has also been tested at appellate forums.
However, amendment through Finance Bill 2018 has disturbed this longstanding model by knocking down the allowability of full amount of unabsorbed depreciation against taxable income and instead allowing it to the extent of 50 percent of business income (except where the taxable income is up to Rs10 million or below).
Resultantly, those taxpayers who already have higher amount of unabsorbed depreciation and amortization are not able to fully adjust their taxable income and since only 50 percent of their income is allowed to be adjusted, they would then be working out corporate tax liability.
Currently, taxpayers having unabsorbed depreciation and amortization are already subject to payment of minimum tax despite having being losses or low taxable income.
However, based on this amendment, they are now ending up paying corporate tax liability higher than minimum tax.
The PBA has also raised the issue of the reduced rate of tax on additional advances for micro, small and medium enterprises.
Clause 7D of Seventh Schedule reduced rate of tax on additional advances for micro, small and medium enterprises allowed in Seven Schedule of ITO, 2001, which is applicable for commercial banks.
Microfinance industry is out of scope of seventh schedule hence unable to avail benefit of reduced rate of tax.
As the microfinance industry is working under the Microfinance Institutions Ordinance, which is in place to provide advances to micro and small enterprises as one of the main activities.
There is discrimination with microfinance industry as benefit of reduced rate on micro loans is only available to commercial banks, whereas, microfinance industry is a major player of providing micro loans. In case, same incentive is provided to microfinance industry this will ensure achievement of true objective of financial inclusion.
Newspaper: Business Recorder