PkRevenue.com – A storm is brewing in the tax community as the Finance Bill 2024 proposes to revoke the power of Commissioners of Inland Revenue to issue tax exemption certificates.
This move, deemed illogical by many, has ignited concerns about its impact on entities relying on full tax exemptions or credits.
Currently, Commissioners hold the authority to issue exemption certificates in various scenarios. This includes situations where income is tax-exempt, such as for non-profit organizations (NPOs), or qualifies for a 100% tax credit. Additionally, these certificates can be granted for specific payments made to residents and non-residents under certain conditions.
However, the Finance Bill proposes a drastic shift, aiming to strip Commissioners of this power entirely by July 1, 2024. While the ability to issue certificates for reduced tax rates remains, experts warn this could severely affect those who currently depend on full exemptions or credits.
A. F. Ferguson & Co. Chartered Accountants strongly criticize the proposal, calling it harsh and demanding reconsideration. They emphasize the potential harm it poses to entities whose income falls under tax-exempt provisions or qualifies for a 100% tax credit.
Haider Ali Patel, a prominent tax practitioner, sheds light on the intended shift from exemption certificates to reduced rate withholding certificates. While the Federal Board of Revenue (FBR) justifies this as a means to document sales transactions, Patel highlights the resulting ambiguity regarding how these reduced rates will be determined.
A more crucial issue emerges with the amendment to section 159 of the Income Tax Ordinance. This change effectively limits certificates to reduced rates only. Patel raises the critical question: how will entities currently exempt or eligible for a 100% credit avoid tax withholding under these new provisions? He cites a relevant Sindh High Court ruling requiring non-withholding certificates even for exemptions under the Second Schedule. This suggests entities could still face tax withholding on receipts, leading to cash flow disruptions and the need for accumulated refunds.
Echoing these concerns, other tax professionals highlight the contradiction with principles of equity. Withholding agents will be left to navigate a complex system of multiple rates for similar payments, potentially causing confusion and delays. Furthermore, entities with 100% tax liability, like NPOs, will be denied full exemption certificates, leading to withheld taxes and financial strain due to accumulated refunds.
The FBR’s track record with refund processing raises additional concerns. The absence of a transparent and corruption-free refund system is well documented. The withdrawal of exemption certificates only adds to this complexity.
Adding to the confusion, a senior FBR official, who wished to remain anonymous, expressed bewilderment over the decision. The official noted concerns from tax managers, particularly those representing compliant taxpayers already paying substantial advance taxes. They caution of potential complaints and increased workload for the Federal Tax Ombudsman, as different field formations might issue certificates with varying rates.
The proposed withdrawal of tax exemption certificates has ignited a firestorm of controversy. Tax experts and practitioners urge policymakers to reconsider this move, citing its potential for widespread disruption and financial hardship, particularly for non-profit organizations and entities relying on tax exemptions or credits. The way forward necessitates a more transparent and well-defined approach that does not unfairly burden entities entitled to tax benefits.