Payment to non residents- an agony and a mode of exploitation of tax payers

Burdening taxpayer with unnecessary tax is an unjust enrichment which has been highly disregarded by the Higher Courts of the country.

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By Syed Muhammad Ijaz

Trade with the non-residents is an important and integral part of businesses. Imports are needed to coup with the requirements of new machinery and raw materials in order to add value to the economy. For every import you have to pay to a non-resident. Payment to non-resident requires interaction with SBP as payments are to be made in light of guidance provided under the Foreign Exchange Manual. Similarly, FBR comes into play when analyzing transaction with non-residents to tax. Section 152 of the Income Tax Ordinance 2001 [hereinafter as “Ordinance 2001”] deals with the payments to non-residents. Subsection (5) of section 152 provides where a person intends to make a payment to a non-resident person without deduction of tax under this section, [other than payments liable to reduced rate under relevant agreement for avoidance of double taxation,] the person shall, before making the payment, furnish to the Commissioner a notice in writing setting out– (a) the name and address of the non-resident person; and (b) the nature and amount of the payment. Under sub section (5A) of section 152 The Commissioner on receipt of notice shall, within thirty days, pass an order accepting the contention or making the order under sub-section (6).

Language of the law is clear & straight and Commissioner has to decide within 30 days of the application/Notice. However, reality is far from the time line provided under the law. Tax department keeps the exemption certificates pending in order to put business in such an agonizing state that they will pay/grease as per the sweet will of the departmental stalwarts in order to avoid any undue taxation. The matter is time and again been brought in the notice of high-ups of FBR however, no concrete punitive measures are taken against those rouge elements in the department. Business is bound by the time line [normally agreed through LCs. or payment period mentioned in agreements or invoices that normally ranges from 30 days to 180 days]. Business before making payments approach the FBR through online portals by filing application/notice along with necessary documents normally 30-60 days in advance in order to avoid any unpleasant situation. Department keep things pending even if given 3-4 reminders. LTUs are the worst of them all especially the Karachi LTU. Neither the Commissioner nor the Chief Commissioner will heed to your requests. Treatment is equally meted out to national or multinational companies including banks. CIR violates itself the guidelines provided by the FBR which are binding on them under section 206 of the Ordinance 2001 that provides (1) To achieve consistency in the administration of this Ordinance and to provide guidance to taxpayers and officers of the Board, the Board may issue Circulars setting out the Board’s interpretation of this Ordinance.              (2) A circular issued by the Board shall be binding on all Income Tax Authorities and other persons employed in the execution of the Ordinance, under the control of the said Board other than Commissioners of Income Tax (Appeals). (3) A Circular shall not [be] binding on a taxpayer.

FBR through its circular No. 4(59) ITP/2005, dated 03-03-2006 directed its functionaries to issue exemption certificates preferably within a fortnight. When the process of filing of notice was computerized [online filing] guidelines were issued through Cir. 05/2013, dated 28.06.2013. These guidelines provided the documents required, the monitoring by FBR and Technical guidelines. (A) Administrative Guidelines para (f) provided “Throughout, FBR would virtually MONITOR the process as regards a notice/application lodged, incremental progress achieved by the Commissioner towards its disposal, due diligence and rigor of analysis conducted, and robustness of arguments/grounds recorded by the commissioner in the order towards accepting or rejecting the exemption claimed.” However, no such monitoring is being done yet and if done it is nothing more than an eyewash.

Now here a technical point is very important under section 152(5) a notice is required to be given to CIR who shall within 30 days decide its fate under subsection (5A). It is not an exemption application as provided under section 159 of the Ordinance 2001. Subsection (6) provides that “where a person has notified the Commissioner of a payment under sub-section (5) and the Commissioner has reasonable grounds to believe that the non-resident person is chargeable to tax under this Ordinance in respect of the payment, the Commissioner may, by [order] in writing, direct the person making the payment to deduct tax from the payment in accordance with sub-section (2)”.  Subsection (7) provides certain exception from applicability of subsection (5) particularly to imports where title is transferred outside Pakistan except [on] the import that is part of an overall arrangement for the supply of goods, their installation, and any commission and guarantees in certain cases.

Further delaying order with an intention to burden taxpayer with unnecessary tax is an unjust enrichment which has been highly disregarded by the Higher Courts of the country. Latest judgement in this regard by Honorable Lahore High Court is reported as (2016) 113 TAX 320 [H.C. Lah.] / 2016 PTD 2004 in Haider Industries through its Managing Partner vs. FOP and others inter alia decided that: “46.  In any case where a claimant has paid tax which is not due, the restitutionary claim lies against the revenue authority which has received the payment, so that the ground of restitution would be that recognized by the House of Lords in Woolwich Equitable Building Society v. I.R.C [1993] A.C 70, namely ultra vires receipt.

  1. In the present petitions, however, the ground of unjust enrichment has been raised in the general broad sense of the term without the context of restitution in mind. It is more in the nature of ultra vires receipt as held in Woolwich Equitable case. The petitioners claim to be aware of the ultra vires nature of the demand and do not wish to make the payment under a mistake of law to be restituted at a later stage.
  2. In view of the above, these petitions are accepted. The conditions “V and VIII” in the impugned Notification are held ultra vires the powers of FBR and beyond its remit, and are thus declared without lawful authority and of no legal effect.”

Another important aspect of payment to non-resident is covered by Avoidance of Double Taxation Treaties [DTTs] that have overriding effect over the local laws as provided under section 107 of the Ordinance 2001. However, department not being properly trained in interpreting the treaties violates the same by trying to tax through delaying tactics and other technicalities thus virtually disregarding the DTTs.

The moot point is law is not clear that if the CIR failed to decide within 30 days what course will it take then. Earlier the amendments in tax laws were suggested by tax baboos and are incorporated as such by the parliament without even debating the same. Now A new PM with the slogan of change is there let us see if we can see a change in tax administration as well. It is said that the ACTION SPEAKS LOUDER THAN WORDS.

 

Syed Muhammad Ijaz, FCA, LL.B. is Advocate High Court and Partner Huzaima Ikram & Ijaz.