KARACHI: The tax authorities should introduce adjustable advance income tax for entire corporate service sector in the forthcoming budget 2022/2023.
Karachi Tax Bar Association (KTBA) in its proposals for budget 2022/2023 submitted to the Federal Board of Revenue (FBR) highlighted minimum tax on corporate service providers under Section 153(1)(b) of the Income Tax Ordinance, 2001.
It said that after the amendments made by the Finance Act, 2015, the tax withholding at source is a minimum tax for Corporate Service providers.
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Withholding of 8 per cent of income tax and that too inclusive of the amount of service tax of 13 per cent, automatically implies a fictional profit of over 30 per cent which is completely irrational and devoid of any sound logic. “This has resulted in unreasonable tax liabilities for a number of service providers. The exception provided to fourteen (14) service sectors under Clause (94) is again a blatant discrimination with other service sectors,” the tax bar said.
Therefore, the KTBA proposed that the position prior to Finance Act, 2015 is re-enacted and the tax withheld at source is considered as adjustable advance tax invariably for whole of the corporate service sector entities. Consequent to above, concept of reduced rates for prescribed sectors which has created further litigation would become redundant.
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“This will not only lower the cost of business for service sector entities but will also bring the desired level of growth in Corporate Service Sector. It will also encourage the unregulated service providers to incorporate companies for the purpose, thereby coming under the umbrella of regulated sector,” it added.
The tax bar also highlighted companies whose accounts are prepared on accrual basis are being subjected to tax twice on a single transaction and are unable to claim refund because both the tax are minimum tax.
It said that companies whose income falls under normal tax regime with a caveat of minimum tax are required to prepare return and pay tax on accrual basis of accounting whereas tax deduction is made on their revenue on receipt basis.
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In Year 1, the company receives advance against revenue and no revenue is recorded in its accounts. Income tax would be deducted on advance received against revenue, which will be treated as minimum tax whereas since there is no revenue in its financial statement, there would be no corporate tax payable. Hence, minimum tax deducted would be the tax liability of the company.
In year 2, revenue would be booked in the financial statement of the advance received last year and the company would be required to pay corporate tax in year 2 on the same transaction in which the company has already paid income tax in year 1.
The KTBA proposes the following amendment:
“Provided where the minimum tax exceeds the tax due under normal tax regime, the excess shall be eligible for carry forward for set off in the following three succeeding tax years.”
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Provided further that such deduction shall be minimum tax in respect of amount subjected to witholding of tax in the tax year in which the related revenue is recognized. With the proposed amendment, this anomaly will be addressed. Else, an amendment to be made under the Ordinance for companies being taxed under normal tax regime with minimum.
These amendments will resolve the anomaly explained in the implication column and the company would not be jeopardize by subjecting it to tax twice on the same income.
