WAHEED SHAHZAD BUTT VS SECRETARY REVENUE DIVISION, ISLAMABAD
2011 P T D 1672
[Federal Tax Ombudsman]
BeforeDr. Muhammad Shoaib Suddle, Federal Tax Ombudsman
WAHEED SHAHZAD BUTT
Versus
SECRETARY REVENUE DIVISION, ISLAMABAD
Complaint No.719/LHR/IT(594)/1258 of 2010, decided on 25/04/2011.
Income Tax Ordinance (XLIX of 2001)---
----Ss. 114 & 153---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), Ss.2(3), 9, 10 & 11---Defects in the electronic Income Tax Return---Complainant, a practising Advocate, in public interest complaint, had taken the issue of defects in the electronic Income Tax Return and contended that in the case of taxpayer providing services, such as Lawyers, Architects, Accountants, Doctors, etc. the electronic Income Tax Return I.T.2 (Return of Total Income/Statement of Final Taxation), provided misleading information to taxpayers---As a sequel to the amendments made in S.153 of Income Tax Ordinance, 2001, through Finance Act, 2009, all Professional income arising from rendering service became liable to be treated as regular income in Tax year 2010---Previous electronic Return Form for the year 2010 under-stated the tax payable by service-sector-taxpayer thereby resulting in loss to Revenue---Federal Board of Revenue had not devised any mechanism to recoup the revenue in service-sector-returns, filed up to October, 2010---Electronic Return placed on the Federal Board of Revenue Web Portal, prima facie, appeared to be defective, failing to report tax payable correctly in the normal course; one had to resort to various improvisations to get correct results; and it was not realistic to assume that such improvisations were within easy grasp of ordinary taxpayers with little or no technical background---Failure to design an electronic return that reported tax payable correctly in the case of taxpayers deriving professional income from service rendered, was indicative of its inefficiency and was tantamount to maladministration under S.2(3) of Establishment of Federal Tax Ombudsman Ordinance, 2000---Recommendations were made to Federal Board of Revenue to ensure that apparent defects in the electronic return placed on the Federal Board of Revenue Web Portal, were removed so that tax payable was correctly worked out when all the fields were filled out; to issue appropriate instructions for retrieval of any revenue lost in Service Sector Returns filed upto October, 2010 and to submit compliance report within 15 days.
Muhammad Munir Qureshi, Advisor, Dealing Officer.
Waheed Shahzad Butt, Authorized Representative.
Mujahid Naeem, Manager (Automation) PRAL and Khurram Ali Qadri, DCIR, Departmental Representatives.
FINDINGS/RECOMMENDATIONS
DR. MUHAMMAD SHOAIB SUDDLE, FEDERAL TAX OMBUDSMAN.---This is a public interest complaint in which the complainant, a practicing Advocate, has taken issue with defects in the electronic Income Tax Return the F.B.R. web portal requires to be e-filed by taxpayers receiving professional receipts for services rendered in Tax Year, 2010.
2.The complainant contends that in the case of taxpayers providing services, such a lawyers, architects, accountants, doctors, etc, the electronic income tax Return IT-2 (Return of Total Income/Statement of Final Taxation) provides misleading information to taxpayers. According to him, this fact came to his attention when he started preparing Returns of his clients for Tax Year 2010, after the close of their accounts on 30th June 2010. He noted that the electronic Return Form with built-in tax computation facility and placed on the F.B.R. web portal understated the taxpayer's due tax liability. He lodged a complaint with the Federal Board of Revenue (F.B.R.) but received no satisfactory response. He therefore brought the matter to the notice of the Hon'ble Federal Tax Ombudsman. Subsequently, in October 2010, after the FTO Office had asked the F.B.R. to do the needful in the matter, a new electronic Return Form replaced the earlier Form for the professional taxpayers.
3.Not satisfied with the new Return Form, the complainant continued to assert that the revised Return Form still provided incorrect information to taxpayers regarding tax payable by them on the total income declared. Whereas previously the Return understated the payable tax, it now, statedly, burdened the taxpayers with extra tax liability that would eventually lead to refund claims, creating avoidable problems for taxpayers and the Departmental functionaries.
4.When confronted, the Department submitted that the defects pointed out had already been removed. The Manager (Automation), PRAL, Islamabad, appeared in person to explain the position during the complaint case proceedings at the Regional Office, Lahore. He insisted that no more there was any defect in the amended electronic Return. When asked why defective reporting of tax payable was still there, he submitted that correct results could be obtained by following the proper procedure in filling out the relevant fields in the electronic Return. According to him, tax deducted at source should be entered in Annex-B of the electronic Return and total value of receipts should not be entered inthefieldprovidedforservicessector receipts at serial No. 8 on page-1. Only the Minimum Tax chargeable be entered at serial No.37 on page-1 of the Return. Moreover, the services sector receipts ought to be treated as a separate block of income and should not be clubbed with income from any other source. He further submitted that income or loss from sources other than rendering services be computed manually and entered in the relevant field on page-1 of the Return.
5.The complainant submitted that he first brought the matter to F.B.R's. attention in July, 2010 through an email message detailing problems in the changed law pertaining to service sector taxpayers. He had since been provided with various 'solutions' by F.B.R., but these were more in the nature of improvisations than solutions. The explanation given by Manager (Automation), PRAL, fell in the same category. According to him, whereas the previous Return Form understated a service sector taxpayer's due tax liability the revised electronic Return Form overstated the tax payable. There was no justification to treat services sector receipts as a separate block of income. He pointed out that many taxpayers derived income from different sources and expected the electronic Return to compute their tax liability correctly without being called on to segregate their different sources of income. In any case this was a task that was beyond the capacity of taxpayers who did not have access to expert legal advice.
6.The complainant criticized PRAL for advising that the field for receipts be left blank and only the field for minimum tax chargeable be filled out. He pointed out that the Return provided fields for receipts as well as expenses and both fields were required to be filled out as the information was necessary for the assessing officer to be able to correctly evaluate the declared results. Failure to fill out fields for receipts and expenses could also have serious legal consequences as the taxpayer would be certifying a Return that had no formal explicit declaration of his receipts and expenses. The complainant insisted that the short cut procedure advocated by Manager (Automation), PRAL, was itself a proof that the electronic Return was defective. The complainant also made a practical demonstration about shortcomings of the electronic Return before the Manager (Automation), PRAL.
7.It may be noted that as a sequel to the amendments made in section 153 of the Ordinance, through Finance Act, 2009, all professional income arising from rendering services became liable to be treated as regular income in Tax Year, 2010.
8.The previous electronic Return Form for the year 2010 understated the tax payable by a service sector taxpayer thereby resulting in loss to Revenue. The F.B.R. apparently had not devised any mechanism to recoup the revenue in service sector returns filed upto October, 2010.
9.The complainant further contended that while the original Income Tax Return for tax year 2010 was approved vide S.R.O.895(I)/2010 dated 22-9-2010, the subsequent changes made in the Tax Return were without issuing any fresh S.R.O. This was violation of subsection (3) of section 237 of the Income Tax Ordinance, 2001.
10.While service sector income has been placed in the regular tax regime with effect from Tax Year 2010, it does not require much ingenuity to see that the concept of minimum tax chargeable offers taxpayers an obvious loophole to exploit to their advantage. By manipulating expenses, a taxpayer can artificially arrive at a figure of net income equal to 6% of his gross service sector receipts and fill out the Return accordingly. And because of universal self assessment, the Return will be accepted when filed. While there is a chance that the Return may be picked up for audit in the future, that is a chance that many taxpayers might be willing to take. Thus not only was the electronic Return seriously defective, it also offered services sector taxpayers an opportunity to get their total income assessed on concessional terms by paying tax equal to 6% of gross receipts.
Findings:
11.The electronic Return placed on the F.B.R. web portal prima facie appears to be defective, failing to report tax payable correctly in the normal course. One has to resort to various improvisations to get correctresults and it is not realistic to assume that such improvisations are within easy grasp of ordinary taxpayers with little or no technical background. PRAL's failure to design an electronic Return that reports tax payable correctly in the case of taxpayers deriving professional income from services rendered is indicative of its inefficiency and is tantamount to maladministration under section 2(3) of the FTO Ordinance.
Recommendations:--
12.F.B.R. to--
(i)ensure that apparent defects in the electronic Return placed on the F.B.R. web portal are removed so that tax payable is correctly worked out when all the fields are filled out;
(ii)issue appropriate instructions for retrieval of any revenue lost in services sector Returns filed up to October, 2010; and
(iii)submit compliance report within 15 days.
H.B.T./130/FTOOrder accordingl