The federal government on Monday asked provinces to work together to apprehend large landowners who have evaded taxes by declaring agriculture their source of income after it was revealed that more than 161,000 people reported on federal tax returns as having an agricultural income of 79 billion Rs.
The move comes as the government seeks new ways to increase revenue and looks for means to keep the flow of foreign remittances flowing – the two areas critical to avoiding budget or balance of payments crises.
In a similar development, the government on Monday accepted monetary services bureaus and exchange offices as the “legal source” for remittance of foreign remittances for income tax exemption and withdrew dozens of tax refund cases.
The Federal Tax Office (FBR) has issued a circular to withdraw procedures for reclaiming up to 35% income tax on suspicion of evasion, which were submitted because foreign transfers were received via exchange offices and money service providers.
According to the constitution, agricultural income is a provincial issue – a loophole almost every influential landowner and industrialist exploits to evade taxes by claiming income from land. The Income Tax Ordinance stipulates that agricultural income is only tax-free if the state income tax has been paid on it.
The chairman of the FBR, Dr. Mohammad Ashfaq Ahmad, has written letters to four provincial finance ministers asking for their assistance in filling a loophole intentionally left in the constitution to appease landlords.
Agriculture accounts for around a fifth of the economy, but its share of total revenue is less than 1%, suggesting massive tax evasion in this sector. In the 2020 tax year, 161,069 applicants nationwide declared an income of Rs 79 billion from agriculture and applied for tax exemption.
In the 2020 tax year, wrote Dr. Ahmad, in a letter to Punjab Finance Minister Hashim Jawan Bakhat, said about 128,550 people in Punjab said 51.4 billion rupees in agricultural income – exempt from federal income tax. “I suspect that a large part of this income did not meet the national income tax liability.”
According to the FBR, nearly 25,000 Sindh landlords claimed Rs23.2 billion in income that was federal income tax exempt. 6,140 farmers demanded Rs 2.7 billion federal income from KP and over 1,500 declared Rs 1.5 billion federal income from Balochistan.
As part of the cooperation to increase state revenue, it is offered that the FBR could issue system-generated notices to taxpayers who state agricultural income in the federal income tax returns for the proper fulfillment of their tax debts to the federal states, the FBR chairman continued to write.
The FBR would issue tax assessments based on the provincial agricultural income tax laws, such as the Punjab Agriculture Income Tax Act of 1997 and the Sindh Land Tax and Agriculture Income Tax Ordinance, 2000.
Punjab agricultural tax rates are lower than the rates for salaried taxpayers. A few years ago, Punjab was barely collecting rupees 2 billion a year for agricultural income tax, which is not the income reported on federal tax returns.
Dr. Ashfaq Ahmad wrote that cooperation with the FBR in the interests of national revenue has been expanded to ensure that those who earn agricultural income can pay the taxes due to the provinces and that there is no income from either the FBR or the provincial governments remains untaxed.
Finance Minister Shaukat Tarin had pledged to the International Monetary Fund (IMF) that he would show healthy sales growth in the first quarter of the current fiscal year to prove that this year’s tax target of Rs 5.829 trillion in taxes.
In 2013 the FBR introduced an amendment to § 111 EStV 2001. The change aimed to crack down on those hiding behind farm income. However, the FBR did not take action against the landlords who claimed tax exemption for incorrectly claiming to have paid the taxes due to their respective provinces.
The chairman of the FBR has offered to coordinate a meeting at the technical level to deal with this issue and contain tax evasion in the national interest. The FBR also issued a circular on Monday to end a lawsuit to keep the flow of foreign money transfers uninterrupted.
Recently, the FBR has had reports indicating that the wording of the tax law, the SBP regulations and the case law explained over time regarding the taxation or non-taxation of international transfers are opposing poles.
According to the circular, this has led to the initiation of an avoidable tax procedure, the creation of an unsustainable tax claim and an additional burden on taxpayers (4) Income Tax Ordinance 2001 ”, it says in the circular.
In order to gain the trust of taxpayers and to spare the public funds for a more productive use elsewhere, all appeals submitted in accordance with the strict interpretation of the law will be withdrawn immediately and no further appeals will be made if this is possible on all four Clarification ” , adds the circular. “All previously issued circulars and instructions on this topic are repealed.”
The State Bank of Pakistan (SBP) expects remittances of more than $ 31 billion this fiscal year, which is very important to avoid a balance of payments crisis as imports have started to soar to around $ 5.5 billion per month .
The tax exemption of transfers is guaranteed in accordance with Section 111 (4) of the Income Tax Act if four conditions are met: the amount is in foreign currency, the amount is transferred to Pakistan via normal bank channels, the amount is redeemed by a scheduled bank and a redemption slip is issued by issued by the bank concerned.
Until 2015 there was no upper limit for income tax exemption under Section 111 (4) of the 2001 Income Tax Ordinance. However, a limit of 10 million rupees was introduced in 2018, which was later reduced to 5 million rupees in 2019.
“For some time now, controversy has emerged as innovations in banking, money transfer mechanisms and the development of new products for cross-border transactions have outstripped the letter of the law as money services companies, bureaux de change and money transfer companies are now almost identical to these scheduled banks”.
The field formations of the Inland Revenue Service had denied concessions for international transfers sent through bureaux de change and money transfer companies, citing the 2013 judgment of the Court of Appeal for Finance.
The SBP has found that money service companies, money transfer companies and exchange offices are “equated with line banks”. The foreign exchange should come from overseas, must reach and hand over to the SBP and the transaction should leave a bank mark. The FBR has now accepted the position of the SBP.