Businessmen and the legal fraternity dealing with taxation matters are pleased with the change in the attitude of the Federal Board of Revenue for creating more transparency and clarity for better tax compliance. Circular No.13 of 2008 dealing with Workers Welfare Fund can be quoted as an example.
However, tax revenue related laws are complex and ambiguous and need further clarifications/amendments. The said circular needs to be reviewed for further clarification/ rationalisation.
The total income for the purposes of charging Workers Welfare Fund, as defined in the circular is as follows:
(i) where return of income is required to be filed under this (Workers Welfare Fund) Ordinance , the profit (before taxation or provision for taxation) as per accounts or the declared income as per the return of income , whichever is higher; and;
(ii) where return of income is not required to be filed, the profit (before taxation or provision for taxation) as per accounts or four per cent of receipt as per the statement filed under section 115 of the Ordinance, whichever is higher.’
Section 4 (1) of the Workers Welfare Fund Ordinance, 1971 charges WWF as under:
“Mode of payment by, and recovery from, industrial establishment.- (1) Every industrial establishment , the total income of which in any year of account commencing on or after the date specified by the federal government in the official gazette in this behalf is not less than five lakh of rupees shall pay to the Fund in respect of that year a sum equal to two per cent of its total income.”
It is a cardinal principle of revenue laws that the same income cannot be subjected to tax twice in the hands of same taxpayer. Since the declared/taxable income in the return is arrived at by making certain adjustments, the use of phrase whichever is higher makes these adjustments subject to levy of Workers Welfare Fund twice. This double charging may be removed by making one basis of charging of WWF consistently [either on accounting profit basis or on taxable basis and not higher of the two].
Tax on income from services/construction contracts outside Pakistan is one per cent on the basis of gross receipts irrespective of the accounting income accrued to the taxpayer on account of these receipts as per Clauses (3) and (3A) of Part II of the Second Schedule to the Income Tax Ordinance, 2001.
Levy of two per cent WWF on income arising abroad in which there is no contribution of the local workers, is not justified and would discourage repatriation of money earned from abroad by such taxpayers. This aspect becomes more important when Section 111(4)(a) is still on the statute which protects bringing of foreign exchange from abroad without disclosing its source. Even otherwise, the facility of one per cent tax under the second schedule would lose its incentive impact when WWF is to be charged on profit before tax in the accounts instead of on income worked out by taking four per cent of the receipts as income.
Similarly, the levy of WWF on export proceeds on which income tax is levied at a rate of one per cent as an incentive to promote exports, levy of WWF on the basis of total income [where being higher than four per cent of total receipts] would bring a negative impact in already depressed exports.
This new method of levy of WWF would necessitate pro-rating of profit before tax to different sources/receipts and will result in unnecessary litigation with the department. Even in the case of final taxation , preparation of audited accounts would be necessary so that profit before tax could be computed accordingly. It would mean more cost to the taxpayers apart from audit probing into whether accounting profit is according to the generally accepted accounting principles or not?
When income tax is being collected at the stage of remittance of export proceeds, why to subject them to departmental proceedings of audit, etc. unnecessarily. If at all it is necessary to collect WWF on export proceeds, it should be collected at the time income tax is collected from export proceeds.
To conclude, it is suggested that:
a: In normal law cases, WWF should be charged consistently either on the basis of accounting profit before tax or on the basis of taxable income to avoid double charging otherwise the courts will be burdened with litigation on this account too with no chance for the federation to win it being a clear case of double levy.
b: In case of receipts covered under the final taxation, WWF may charged on the basis of those receipts [along with income tax] and not on the basis of accounting profit before taxation.
c: In case of receipts on account of services rendered or construction contracts executed abroad, the levy of WWF may be waived off. It is desirable on two grounds:
i: The income is not earned in Pakistan and there is no contribution of any local worker in this earning. The companies earning such income abide by laws relating to welfare of workers working in their establishments abroad.
ii: Non-levy of WWF on such receipts would help keep the foreign exchange inflow. Otherwise, higher cost means more incentive to save [from their point of view or evasion from departmental point of view] and the loser would be the national exchequer.
The article was originally published in The Daily Dawn.