WAHEED SHAHZAD BUTT VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2012 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 554 (2011)

(a) Income Tax Ordinance (XLIX of 2001)---

----S.153(1)(b)---F.B.R. letter C.No.1(6)WHT/2009 dated 4-7-2009---F.B.R. Circular No.3 of 2009 dated 17-7-2009---F.B.R. Circular No.6 of 2009 dated 18-8-2009---F.B.R. Letter C.No.1(10)WHT/2006-Part-III dated 1-11-2010---F.B.R. letter No.1(25)WHT/2009 dated 26-4-2011---Payments for goods, services and contracts---Services---Despite imposition of minimum withholding tax @ 6%, the Commissioner issued exemption certificate to taxpayer providing services and falling under the ambit of S.153(1)(b) of the Income Tax Ordinance, 2001 being corporate taxpayer---Validity---Clarifications circulated by the Federal Board of Revenue to its field formations were sufficient proof that the amendment made in S.153 of the Income Tax Ordinance, 2001 through Finance Act, 2009 had ousted all the National Tax Number holders whether individuals, Association of Persons or Companies providing services fromNormal Tax Regime/Final Tax Regime and brought them under the Minimum Tax Regime---Exemption certificate issued by the Commissioner on the request of some corporate taxpayer prior to issuance of Circular No.6 of 2009 dated 18-8-2009 were withdrawn when the legal position was explained totheCommissioner---Prima facie, it seemed that the corporate sector providing services thereafter approached the Federal Board of Revenue and Circular No.6 of 2009 dated 18-8-2009 was issued, ousting the corporate sector from Minimum Tax Regime of S.153 of the Income Tax Ordinance, 2001 (as amended) without withdrawing the Federal Board of Revenue's earlier clarifications issued through its letter dated 4-7-2009 and Circular No.3 of 2009 dated 17-7-2009---Exemption Certificate was wrongly issued in the month of July 2009, when changed position of applicability of S.153(1)(b) of the Income Tax Ordinance, 2001 was clear---Clarification issued vide F.B.R.letter C.No.1(6)WHT/2009 dated 4-7-2009 and F.B.R.Circular No.3 of 2009 dated 17-7-2009 were not followed while issuing exemption certificate---Ambiguous clarification was issued through Circular No.6 of 2009 dated 18-8-2009 which was withdrawn on 26-4-2011---Revenue admitted that public exchequer suffered losses because of issuance of Circular No.6 of 2009 dated 18-8-2009 and the exemption certificate issued by the Commissioner all over Pakistan---No measures were taken by Federal Board of Revenue to recoup the losses because corporate taxpayers were still issuing bills to their customers with a printed note that they were exempt from deduction of withholding tax and the same was not being deducted by many service recipients---Circular No.6 of 2009 dated 18-9-2009 was wrongly issued and the Commissioner issued exemption certificate contrary to law and in departure from Federal Board of Revenue's earlier clarifications, which was tantamount to maladministration---Federal Tax Ombudsman recommended that Federal Board of Revenue to initiate appropriate action against officials who approved/issued Circular No.6 of 2009 dated 18-9-2009; initiate appropriate action against officials who issued exemption certificate to unduly benefit the corporate entities; ascertain the particulars and the amount of tax not withheld @ 6% from each service provider; take immediate measures to recover the loss of revenue, as per law and direct the concerned officials to take suitable action to ensure that the taxpayers, including the cellular companies, issue bills/invoices without reference to exemption from withholding tax.

(b) Establishment of the Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

----S.9---Jurisdiction, functions and powers of the Federal Tax Ombudsman---Complaint in public interest---Investigation by Ombudsman on its own motion---Jurisdiction---Scope---Objection raised by the Revenue regarding matter being sub-judice in High Court or regarding jurisdiction of Federal Tax Ombudsman to investigate the complaint in public interest were not legally tenable---No evidence had been submitted to prove that the issue was sub judice before the High Court prior to filing of application---Section 9(1) of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000, empowers the Federal Tax Ombudsman to investigate, on his own motion, any allegation of maladministration on the part of Revenue Division or any tax employee.

Muhammad Munir Qureshi, Advisor Dealing Officer.

Ramzan Bhatti Adviser

Waheed Shahzad Butt for Applicant.

Dr. Muhammad Iqbal, Chief,F.B.R., Asif Rasool, Secretary, F.B.R. and Ashfaq Ahmad, DCIR Departmental Representatives.

FINDINGS/RECOMMENDATIONS

DR. MUHAMMAD SHOAIB SUDDLE (FEDERAL TAX OMBUDSMAN).---The issue involved in this complaint taken up under "own motion" jurisdiction conferred under section 9(1) of the FTO Ordinance, 2000, is illegal issuance of exemption certificates, particularly by RTO, Karachi and LTU Islamabad.

2.Under the Finance Act, 2009, an amendment was made in section 153 of the Income Tax Ordinance, 2001 (the Ordinance) rendering all service sector taxpayers subject to minimum withholding tax @ 6% of gross receipts. It meant that neither a refund could be allowed nor an exemption certificate issued to such taxpayers if their assessed income tax was less than the amount withheld @ 6% of gross receipts. After the amendment, the F.B.R. issued letter C.No.1 (6) WHT/2009 dated 4-7-2009 advising the Directors General, LTUs/RTOs, that the tax deducted under section 153(1)(b) of the Ordinance would be the "minimum tax". The F.B.R. also issued a Circular No.3 of 2009 dated 17th July, 2009, advising the field formations that tax deducted under section 153(1)(b) would be considered "minimum tax" and all taxpayers falling in the ambit of this provision of law shall file returns under the normal tax regime instead of statement under final tax regime.

3.However, despite the imposition of minimum withholding tax @ 6%, the Commissioners, Inland Revenue issued exemption certificates to taxpayers providing services and falling under the ambit of section 153(1)(b) of the Ordinance. In particular, the Commissioner, RTO, Karachi and Commissioner, LTU, Islamabad issued, exemption certificates to Messrs LEOPARDS Courier and Messrs Mobilink respectively on 9-6-2009 and 8-8-2009. When the Commissioners, Inland Revenue, RTO, Karachi, and LTU, Islamabad, were informed of the illegality in issuance of exemption certificates, they withdrew the certificates on 5-8-2009 and 12-8-2009 respectively.

4.The ubiquitous maladministration of the Department further came to light when F.B.R. issued Circular No.6 of 2009 (on 18-8-2009), stating that the status of corporate sector companies rendering services remained unchanged even after the amendment in section 153 of the Ordinance, and so the corporate sector companies would remain subject to minimum tax @ 0.5% as provided under section 113 of the Ordinance. Thereafter, the LTUs and RTOs again started issuing the exemption certificates, including to Messrs Pakistan Mobile Communication Ltd., Islamabad, reiterating that no tax would be deducted/withheld on payments made on account of providing/rendering services.

5.The F.B.R. through e-mail dated 20-10-2010 was again informed of the inaccurate computation of tax on service sector leviable under section 153(1)(b) of the Ordinance, using the software available on F.B.R. website for filing of income tax return for tax year 2010. Secretary (Withholding Tax), F.B.R., through letter C.No.1(10)WHT/ 2006-Part-IIIdated1stNovember,2010clarifiedthatthelawdidnot allow to club income on account of services rendered by professionals --- on which minimum tax @ 6% had already been deducted --- with other sources of income for further taxation under the normal tax regime.

6.Thereafter, the applicant filed Complaint No.719/LHR/IT(594)/ 1258/2010 alleging that the return form for tax year 2010 placed on F.B.R's. web portal was faulty and erroneous. The Hon'ble FTO decided the complaint on 25-4-2011, directing the F.B.R. for removal of defects in the return form placed on web portal, besides retrieval of loss of revenue in service sector through appropriate measures.

7.As the applicant in the meanwhile continued to send repeated representations through e-mails to the F.B.R., the Chief (ITP), F.B.R., through Letter No.1(25)WHT/2009 dated 26th April, 2011, clarified that "the matter has been examined again and it is ruled in supersession of earlier instructions issued through Circular No.6 of 2009 that the tax deducted on payments made for rendering or providing of services is to be treated as minimum tax and the taxpayers falling in the ambit of section 153(1)(b) of the Ordinance shall file return of income instead of a statement under Final Tax Regime." Additional Secretary, Revenue Division, also clarified through statement published in daily Business Recorder dated 28-4-2011 that "every person whether a company, Association of Persons (AOP) or individual providing or rendering services will pay minimum tax @ 6% under section 153(1)(b) of the Ordinance."

8.Commenting on the prevalent confusion on the issue, the applicant felt that F.B.R. functionaries were either not fully aware of the changes made in section 153 of the Ordinance, 2001, through the Finance Act, 2009, or were wrongly interpreting the law with ulterior motives. He further alleged that the functionaries of F.B.R. by not taking the applicability and enforcement of law seriously were quality of negligence, inattention and arbitrariness in the discharge of their duties and responsibilities.

9.The complaint was sent on 8-6-2011 to the Secretary, Revenue Division, for comments. In response, Mr. Muhammad Imtiaz, Secretary (Withholding Tax), F.B.R., filed comments through F.B.R's. Letter C.No.4(577)/TO-I/2011 dated 18th June, 2011, which were sent to the applicantforrejoinder, if any.Theapplicantfiledarejoinderon4-7-2011, stating that the F.B.R. had accepted that Circular No.6 of 2009 dated 18th August, 2009 was issued solely to benefit some blue-eyed taxpayers who obtained exemption certificates and avoided the deduction of 6% minimum withholding tax on their gross receipts. The applicant also claimed that F.B.R. had deliberately avoided to comment on the issues raised and had wrongly construed that the applicant wanted to claim any refund.

10.During the hearing, the applicant contended that the functionaries of the F.B.R. had deliberately mis-interpretered the provisions of section 153 of the Ordinance as emended by the Finance Act, 2009. They had issued Circular No.6 of 2009 and the exemption certificates in order to benefit certain taxpayers. In support of this allegation, he contended that a report was published on 28-4-2011 in the widely circulated Business Recorder that the concerned F.B.R. functionaries had made a commitment with mobile phone companies to change the withholding tax regime of minimum tax @ 6% into an adjustable tax regime. He maintained that all the telecom operators/ cellular companies were doing businesses of several hundred billion rupees but were continuously showing operational losses. The applicant apprehended that by making the minimum withholding tax @ 6% of gross receipts as an adjustable tax, the public exchequer would be bearing a colossal loss of revenue as all the mobile telephone companies would claim refund of the withheld amount of tax.

11.The applicant requested that F.B.R. be directed to initiate disciplinary proceedings against its functionaries who had issued exemption certificates and Circular No.6 of 2009. He also requested that loss of revenue had to be recouped either by amending the tax return form for Tax Year 2010 or by asking the taxpayers providing services to file revised returns on the new return form prescribed for Tax Year 2011. The applicant also contended that many taxpayers particularly cellular companies were still sending bills/invoices with a note that they were exempt from withholding tax deductible @ 6% on gross receipts. Resultantly, no tax was being withheld by many recipients of services causing a huge loss of revenue.

12.The DR, Mr. Asif Rasool, Secretary, F.B.R., raised legal objections by stating that the Hon'ble FTO was not competent to decide the cases on the basis of applications for suo moto investigations in the public interest. He, however, admitted that the applicant had raised valid objections and stated that the mistakes made by F.B.R. were later rectified through clarificatory letters. He stated that the income tax return form for the year 2010 could not be legally amended/re-issued as the benefit once given could not be withdrawn with retrospective effect. The DR also claimed that the F.B.R. was considering other alternatives to recoup the loss of revenue caused due to wrongly issued exemption certificates, Circular 6 of 2009 and faulty income tax return form for the year 2010.

13.Dr. Muhammad Iqbal, Chief (ITP), F.B.R., who also appeared as DR, admitted the maladministration by functionaries of F.B.R. in issuing self-contradictory instructions and Circulars. The DR stated that many taxpayers had challenged the withdrawal of Circular No.6 of 2009 dated 18-8-2009 in the Lahore High Court, Lahore, and the matter being sub-judice was out of the jurisdiction of Hon'ble FTO in terms ofsection 9(2) of the FTO Ordinance, 2000.

14.The averments made and record produced has been examined. It is an admitted fact that the F.B.R. through its letter C.No.1(6)WHT/2009 dated 4th July, 2009, had issued guidelines to all the Director Generals of LTUs/RTOs in the country. The F.B.R. also placed income tax return form (IT-2) with built in tax computation facility for the year 2010 on its web portal which calculated the tax on service sector as "minimum tax". The income tax form prescribed by the F.B.R. for tax year 2011 and placed currently on its web portal also calculates the withholding tax deducted from the service providers as a minimum tax.

15.The above clarifications circulated by the F.B.R. to its field formations are sufficient proof that the amendment made in section 153 of the Ordinance through the Finance Act, 2009 ousted all the NTN holders whether individuals, AOPs or Companies providing services from Normal Tax Regime (NTR)/Final Tax Regime (FTR) and brought them under the Minimum Tax Regime (MTR). The exemption certificates issued by the Commissioners on the request of some corporate taxpayers prior to issuance of Circular No.06 of 2009 dated 18-8-2009 were withdrawn when the legal position was explained to the concerned Commissioners by the applicant. Prima facie, it seems that the corporate sector providing services thereafter approached the F.B.R. and Circular No.6 of 2009 dated 18-8-2009 was then issued, ousting the corporate sector from Minimum Tax Regime of amended section 153 of the Ordinance without withdrawing the Board's earlier clarifications issued through it letter dated 4th July 2009 and Circular No.3 of 2009 dated 17th July, 2009.

16.TheExemptionCertificatesclearlywerewrongly issuedinthe month of July, 2009, when changed position of applicability of section 153(i)(b) was clear. Clarification issued vide F.B.R.'s Circular/ Letter C.No.1(6)WHT/2009 dated 4-7-2009 and Circular No.03 of 2009 dated 17-7-2009 were not followed while issuing these Exemption Certificates. Moreover, an ambiguous clarification was issued through CircularNo. 6of2009dated18-8-2009whichwaswithdrawnon26-4-2011.

17.The objections raised by the DR regarding the matter being sub-judice in the Lahore High Court, Lahore, or regarding the jurisdiction of Hon'ble FTO to investigate the complaint in public interest are not legally tenable. No evidence has been submitted to prove that the issue was sub judice before the Hon'ble Lahore High Court, Lahore, prior to the filing of application by the applicant. Section 9(1) of the FTO Ordinance, 2000, empowers the Hon'ble FTO to investigate, on his own motion, any allegation of maladministration on the part of the Revenue Division or any tax employee.

18.The DRs have admitted that the public exchequer suffered losses because of issuance of Circular No.6 of 2009 dated 18-8-2009 and the Exemption Certificates issued by the Commissioners of Inland Revenue all over Pakistan. No measures were taken by F.B.R. to recoup the losses which according to the applicant were several billion rupees because the corporate taxpayers were still issuing bills to their customers with a printed note that they were exempt from the deduction of withholding tax and the same was not being deducted by many service recipients.

Findings:

19.Inviewof above, it is clear that the F.B.R.'sCircularNo. 6of 2009 dated 18-8-2009 was wrongly issued and the Commissioners Inland Revenues Issued Exemption Certificates contrary to law and in departure from F.B.R.'s earlier clarifications, which is tantamount to mal-administration as defined under section 2(3) of the FTO, Ordinance, 2000.

Recommendations:

20.F.B.R. to--

(i)initiate appropriate action against officials who approved/issued Circular No.6 of 2009 dated 18-8-2009;

(ii)initiate appropriate action against officials who issued ExemptionCertificatestoundulybenefitthecorporateentities;

(iii)ascertain the particulars and the amount of tax not withheld @ 6% from each service provider;

(iv)take immediate measures to recover the loss of revenue, as per law;

(v)direct the concerned officials to take suitable action to ensure that the taxpayer, including the cellular companies, issue bills/invoices without reference to exemption from withholding tax; and

(vi)report compliance within 60 days.

C.M.A./284/FTOOrder accordingly.