KTBA protests advance tax estimates by tax offices, issuance of recovery notices

KTBA protests advance tax estimates by tax offices, issuance of recovery notices

KARACHI: Tax practitioners have protested making estimates of advance tax by the tax offices and issuing recovery notices to taxpayers in this regard.

Karachi Tax Bar Association (KTBA) in a letter sent to Asim Ahmad, Chairman, Federal Board of Revenue (FBR) on Tuesday pointed out to a number of notices being issued by tax offices in the wake of due date of advance tax payment of second (2nd) installment i.e. for the quarter ending December 2022.

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“The taxpayers have been confronted in respect of their advance tax liability worked out by department itself as per tax to turnover ratio and have asked the taxpayers to give an explanation as to why the computed amount or any shortfall of payment arising out of it should not be collected under section 147(7) of the Income Tax Ordinance, 2001,” according to the KTBA.

The tax bar said that the exercise of issuing the notices, poses a clear challenge to advance tax liability computed by taxpayers by re-estimating the liability of its own by the department and is fundamentally without any legal jurisdiction in the first place.

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“The power of estimating advance tax liability is bestowed by the legislature on the taxpayer alone and not on the taxation officer; a legal fact which must not be misunderstood by tax officers,” said KTBA President Syed Rehan Hasan Jafri in the letter.

The tax bar stated that the tax officers have no power to challenge the estimates of advance tax made by taxpayers.

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The Sindh High Court in case of Karachi Port Trust reported as 2011 PTD 1996 observed that tax authorities do not have any power under the law to challenge the correctness of the estimates filed by a taxpayer. “The only recourse available to them is when the tax returns are filed that the additional tax (default surcharge) under section 205(1B) of the Ordinance can be imposed and obviously if it is found that the estimate was incorrect,” according to the letter.

The KTBA further pointed out that section 147(7) of the Ordinance also misunderstood completely by the tax officers. The section speaks of recovery of advance tax estimated by taxpayer which had not been paid and not of recovery based on tax estimate made by the taxation officer himself.

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The Karachi Port Trust judgment provided that section 147(7) of the Ordinance empowers the tax authorities to recover the estimated advance tax not paid by the taxpayer but does not give any jurisdiction to the taxation officer to determine him advance tax liability through an order.

Previously, tax officers had powers to estimate the advance tax but the proviso was omitted through the Finance Act, 2021, which therefore means that the power to challenge the estimate of taxpayer is no more available to a tax officer as the law has reverted to the old position i.e. that power to estimate advance tax vests with the taxpayer and the taxpayer alone.

The Islamabad High Court in the judgment in the case of First Micro Finance Bank Limited reported as 126 TAX 408 has affirmed the above legal stance on advance tax payment scheme under the provisions of section 147 of the Ordinance.

A tax officer cannot challenge it. He can only levy default surcharge once after the return of income is filed and only if it is established that advance tax was factually under paid by the taxpayer. Hence all the case laws and judgments referred above becomes very much applicable.

The KTBA urged the FBR chairman to intervene into the matter and issue directions to the field formation to cease this fruitless exercise, which will yield nothing but unnecessary and very much avoidable litigation.