Our company has made an agreement with ABC Company for services. According to the agreement, ABC shall give us their services and we shall pay to them at time of completion of the agreement. Our company is also liable to reimburse all their actual expenses while performing tasks of the agreement.
While performing tasks of the agreement, ABC purchased a GSM connection and deposited a security of Rs. 6,000.00 for the connection. So here total expenses made for the connection is Rs. 8,000.00.
I am sure that we shall deduct tax @ 6% when we shall pay their consultancy fee. However, I have the following question about the above discussion
1 Whether we shall deduct any tax while reimbursing their actual
expenses to them?
2 What will be the accounting treatment of the security deposited
by them? Whether we shall deduct any tax while reimbursing
security to ABC?
I shall be thankful for an early reply.
Thanks.
Dear,
Actual re-imbursement of out of pocket/ re-imbursale expenses is not subject to deduction of tax. Accordingly, you will deduct @6% tax only on the value of services received by you.
I cannot understand that who will keep the connection obtained by your service providers. These are mainly asset and receivables (at least Security) and should not be claimed by them as an expense unless the connection is handed over to your company at the end of contract. If these are handed over to your company after the conclusion of contract how you will change the ownership in the record of GSM company.
These are the crucial points and must be considered by you.
If these are handed over to you, and you get the connection transferred to company's name at the end of contract, you should account for security (Rupees 6,000) as an asset and remaining expenses (Rupees 2000) as expenses. However, payment will be made in full to service providers.
If GSM connection is not taken back by you at the end of contract and it is not transferred in your name, due to any reasons, you should expense out total amount i.e. Rupees 8,000.
In both cases tax is not deductible on re-imbursable amount.
However, you will deduct tax on service value payment at 6 %.
Regards,
Kamran.
Thank you very much Mr. Kamran. You have cleared my confusions. however, for your information, i want to mention it that the connections will be handed over to our company at the end of the contract.
Thank you very much once again.
Zia ur Rahman
Kamran Sb. I'd be grateful if you could the relevant provision of the Income Tax Ordinance, 2001, or any Circulars issued by CBR in this regard. By the way I am not challenging the accuracy of your reply, I just need to know the exact reference because I have a same query from a client. Your reply will save me the hassle of going through all the stuff.
Oh, I forgot to first give my understanding that why tax deduction is not required on reimbursement expenses.
Section 153 of the Income Tax Ordinance, 2001, requires to withhold tax on the following types of payments.
1. Supplies
2. Services
3. Execution of Contracts
As payment of reimbursable expenses do not fall in any of the categories, WHT deduction is not required. But isn't it possible that getting the connection, as in the above case, involves an element of providing services? I mean the contractor is getting the connection for the company (although it would be made available in future) which may create doubt that it is the service provided by the contractor to the Company.
@ Mr. Zurpk
Please don't be confused by my post. You should follow the advice given by Mr. Kamran. What I am trying to clear is very technical in nature.
yes Mr. MSC i fully agree with you. I hope that Mr. Kamran shall provide the relevent section about the matter.
Thanks to all for giving me good responses.
Dear Mr. Mahmood,
As stated by you, the wording of section 153 is very much clear about which amount is subject to deduction of income tax at source. Its sub-section 1 states that every presecribed person while making payment in full or in part or by way of advnace to resident person or permanent establishment of a non-resident person in respect of
(a) for the sake of goods.
(b) for the rendering of or providing of services and
© for the execution of a contract )other than a contract for the sale of goods or rendering of services)
shall deduct tax at source (as per rates prescribed.
This is very much clear that payment under discussion that has been made subject to dedcution of tax must be for goods, services or contract value.
This section is silent for re-imbursable or out of pocket expenses.
In my view since only the subject matter is the payment against delivery either of goods, services or contract, therefore there was no need to explain anything relating to reimbursable expenses.
Reimbursable expenses are incurred on behalf of the contractee or buyer of services. If company "ABC" will incur certain expenses, like travelling, entertainment, or boarding/lodging expenses , would it deposit tax against all such expenses? The reply is NO. Tax is deducted or deposited only on those items where it is prescribed. For example, if GSM JAZZ connection is in the name of company ABC and its consultant is using it and he purchases scratch card he would be paying income tax on such scratch card as a part of purchase price. When he will get reimbursment the company ABC will not deduct tax from his expenses reimbursment. Rather, if possible, it will get the JAZZ card to claim the tax in its return or get certificate of collection at source from GSM company. But no tax would be deducted from consultant's claim.
Now if due to lack of planning or whatever, connection remained in the name of the consultant and he has deposited tax as part of its purchase price etc or as part of cost of cards used by him, it cannot be claimed by ABC company. Normally consultants come from abroad and they do not claim such advance taxes in their return (that is incorrect actually). The company will have to make full payment to consultant unless some thing was agreed at the outset.
There is no requirement to deduct tax from reimbursable expenses claimed by service providers. However, as a matter of arrangement, if ABC has already agreed with its consultants, the payment of reimbursment expenses could be reduced to the extent of any taxes included in their claims as reimbursable expenditure which are likely to be claimed by them in their return.
This reduction/dedcution would be the income (decrease in expense) for ABC limited and would not be a deduction of tax at source. This depends upon agreement and not on tax law.
I understand that there is no specific provision in Income Tax Ordinance 2001 discussing reimbursable expenses to be paid to service providers and in my view the circumstances do not grant a necessaity for having such a provision.
However, somewhat in past, I have read some case laws where this matter was brought under discussion/appeals and where reimbursbale expenses were excluded from deduction of tax at source as per decision of ITAT and honourable high courts.
If you will need such case law, I will search it for you but it will require some time to go back to office library and search for such case law.
Hope you will find this explanation in line with your professional opinion as well. If you find anything contrary, please enlighten me as well.
Best regards,
Kamran.