Federal Tax Ombudsman rejects Revenue Board viewpoint

ISLAMABAD (January 12 2003) : The Federal Tax Ombudsman has turned down the clarification of Central Directorate of National Savings that credit for investment in Regular Income Certificates can only be allowed to the person in whose name Foreign Currency Accounts are maintained.

The clarification was given by the CDNS on a query from its Aabpara Branch where foreign currency account maintained in a single name was on conversion into Pakistani rupees was invested in RICs purchased in joint names.

The complainant, Syed Ashfaq Ali Azad, had taken the plea that the CDNS clarification was contrary to law as it has been offered by the CBR without invoking provision of law authorising CBR to issue this.

The complainant, who served with the UN peacekeepers in Bosnia, had been depositing foreign currency in UBL Islamabad. Since foreign deposits were frozen after May 1998 nuclear tests, the government had allowed their conversion into Pakistani rupees and even allowed tax-free investment.

At the time of purchase of RICs, the incharge of Aabpara Centre said that since the entire amount of Rs 0.75 million belonged to the complainant, it was exempt from withholding tax.

Consequently, as the RICS were purchased, the tax was exempted on the certificate holders. But after some time, the CBR held that since the mother was not holder of FC account she was not entitled under clause (78E) of the part-1 of the second schedule to tax exemption.

This clarification was sent to the CDNS on its query.

The FTO's order noted that the CBR's comments were not relevant to the present case as the tax exemption is allowed to investment made out of foreign accounts conversion under clause 78 E which reads: 'Any profit or interest derived from Pak rupees account or certificates of deposit which have been created by the conversion of a foreign currency account or deposit held on the 28th day of May 1998 with a bank authorised under the FCA scheme of State Bank.'

The order reads: “It follows that once it is ascertained by CDNS that the certificates are being purchased or created by conversion of foreign currency account, provided in clause 78E, then profits accruing on it will be exempt from tax, irrespective of the fact whether it accrues to the account holder himself or to him jointly with his mother or any other person.

“In the light of the unambiguous provision of law on the issue involved in the complaint, the clarification issued by the CBR is arbitrary, contrary to law and based on irrelevant ground falling under the term maladministration. The alleged maladministration is proved.”

The Tax Ombudsman has recommended that the CBR should withdraw the clarification issued to the CDNS under official memo dated Sept 16, 1999 and its compliance be reported within 30 days.

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