Numerous non-residents stuck in Pakistan after the cessation of air traffic following Covid-19 have accidentally become Pakistani residents for tax reasons and have levied taxes on their world income.
Under the 2001 Income Tax Ordinance, a person is treated as a Pakistani resident if they reside in Pakistan for 120 days or more in a tax year.
Last June, former Federal Board of Revenue (FBR) chairman, Shabbar Zaidi, introduced an amendment to the Income Tax Act to cut length of stay for individuals from 182 days to 119 days and expand the internet for offshore assets.
Sources said many Pakistanis who worked in the Middle East and Europe were affected by the change in the law. They were trapped in Pakistan for months after various countries suspended and restricted air traffic in an attempt to contain the deadly pandemic.
Sources said the Prime Minister’s Special Assistant for Overseas Pakistan, Syed Zulfiqar Ali Bokhari, had also looked at the FBR.
A Pakistani non-resident is exempt from paying taxes that a Pakistani resident is required to pay, with the exception of income derived from Pakistan. A Pakistani resident of Pakistan must pay tax on their global income unless the double taxation treaty with the other country can be circumvented.
Income tax law empowers the board to tolerate the deadline in emergencies and in invisible situations like Covid-19, said Dr. Ikramul Haq, a leading tax professional.
Haq said that under Section 214-A, the FBR could tolerate the cases of individuals who were not resident in Pakistan for tax reasons but were stuck.
Prior to the 2019 Finance Act, a person was treated as a “resident” for a tax year if the person was present in Pakistan for 183 days (over six months) or more in a tax year.
Not only that, Section 82 (ab), which was added to Income Tax Regulations in 2019, has made matters more complicated for non-resident Pakistanis.
“An individual is a resident individual for a tax year if the individual has been present in Pakistan for a total of one hundred and twenty days or more in the tax year and the four years preceding the tax year. The tax year was for a total of three hundred and sixty five days or more in Pakistan. “
Instead of putting these legislative changes into effect from 2023, the FBR has made the changes of the previous four years effective from tax year 2016, which some experts believe is against the spirit of the constitution that discourages taxation retrospectively.
The FBR could not invoke the 365 day requirement if a person stayed in Pakistan for 119 days, Haq said.
He said that section 82 (ab) should be read at the same time and the condition of 365 days of residence in Pakistan in the past four years would only apply if a person stayed in Pakistan for more than 120 days in the 2020 tax year.
Some tax experts argue that only past procedural changes could take effect, while others say that certain past tax changes can be made if specifically stated.
However, Section 82 (ab) does not specifically state the 2016 tax year and is vague, according to FBR officials.
The FBR has also failed to include all 6.5 million Pakistanis who have valid National Tax Numbers (NTNs) in tax year 2020 on the tax network. However, Wednesday’s tax machinery defended its poor performance.
“In total, almost 1.8 million returns were submitted, together with an amount of around 22 billion rupees. Last year, 1.73 million tax returns were filed at this point, while around 13.5 billion rupees were filed for income tax. In comparison, the returns are 4% higher and the tax deposited is 63% higher, ”said a statement by the FBR.
The government decided not to extend the final December 8, 2020 deadline in order to restore the credibility and predictability of the final date and to encourage tax discipline.
However, in the 2019 tax year, FBR had received a total of 2.975 million income tax returns. The number of returns fell by 40%, or 1.18 million, which is likely to be cause for concern for Prime Minister Imran Khan.
Before Prime Minister Imran came to power, he was a firm believer that “honest leadership” could convince people to pay taxes and become a tax-compliant nation. However, his government tried to motivate the population to introduce the tax culture.
He had promised to double the tax collection to 8 trillion rupees, which seems impossible given the numbers for the first two years in power.
According to the FBR, at least 300,000 taxpayers had requested an extension of the filing date, bringing the number of potential tax returns to 2.1 million. But the 2.1 million returns will still be 870,000, or 29% fewer than in tax year 2019. There are 6.5 million people holding NTNs and the FBR failed to get them on the tax network despite being high Have made claims and advertised.
Posted in The Express Tribune on December 10, 2020.
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