Advance tax, refunds & compensation — 1 – Dr Ikramul Haq

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A cursory look at the annual year books published by the Federal Board of Revenue (FBR) after the promulgation of Income Tax Ordinance, 2001 [made effective from tax year 2003, hereinafter “the Ordinance”] confirms heavy reliance on indirect taxes, on advance tax (it includes all withholding tax provisions, most of which in substance are indirect taxes) under the income tax head. Resultantly, the burden is shifted on the withholding agents or the taxpayers to pay advance tax under section 147 of the Ordinance. It is pertinent to mention that out of total collection of income tax of Rs. 1523 billion in fiscal year 2019-2020 (35% of total collection), the contribution of 10 types of withholding taxes was Rs. 943.6 billion while remaining 56 was Rs. 147.9 billion (total Rs. 1091.5 billion). Advance tax paid was Rs. 351 billion and with returns Rs. 61 billion. FBR collected only Rs. 61 billion (arrears of Rs. 14 billion and out of current demand Rs. 47 billion), which is only 4% of total collection.

The major contributors of withholding tax in fiscal year 2019-20 are: Contracts (Rs. 237.4), Imports (Rs 199.6 billion), Salaries (Rs. 129.4 billion), Bank interest & securities (Rs. 128.1 billion), Dividend (Rs. 55 billion), Telephone (Rs 54.6 billion), Electricity (Rs. 45.4 billion), Technical Fee (40.1 billion), Exports (Rs. 38.4 billion) and Cash withdrawal (Rs. 15.1 billion)—Table 10, Page 15 of Year Book for 2019-20. It is pertinent to mention that no bifurcation is given for remaining over 50 withholding tax provisions prevalent during the relevant fiscal year, out of which only six were removed in the Finance Act, 2020 (XIX of 2020) that received the assent of President on June 30, 2020.

The FBR in Year Book for 2019-20 claimed exceeding the third-time revised target of Rs. 3908 billion by Rs. 88.7 billion, collecting net amount of Rs. 3997 billion—direct taxes (1523 billion), sales tax (Rs. 1597 billion), Federal Excise (250 billion) and Customs: 626 billion). The refunds paid were: direct taxes (68.6 billion), sales tax (92.6 billion), federal excise (nil) and customs (12.2 billion). FBR officials on September 2, 2020, before the National Assembly Standing Committee on Finance confessed that actual liability of income tax and sales tax refunds as on June 30, 2020 was Rs. 710 billion (sales tax Rs. 142 billion and income tax Rs. 568 billion). If the admitted refunds payable as on June 30, 2020 are deducted from FBR’s total tax collection, the net figure comes to Rs. 3287 billion (7.7% of GDP). In the first six months of the current fiscal year, according to a Press release, FBR paid refunds of Rs.102 billion (53 billion for the same period last year) but did not disclose the total quantum of refunds payable from as on December 31, 2020.

After the Second World War, the provision of advance income tax was provided in the then prevalent Income Tax Act, 1922 for the first time by inserting section 18A vide section 5 of the Indian Income Tax (Amendment) Act, 1944. Pakistan inherited this law on independence and retained it till 1979 when General Zia-ul-Haq repealed it, replacing with the Income Tax Ordinance, 1979. It survived till 2001 when another military ruler, General Pervez Musharraf, on the dictates of International Monetary Fund (IMF) replaced it with Income Tax Ordinance, 2001. In the repealed Income Tax Ordinance, 1979, advance tax was charged under section 53 that was retained with a number of amendments as section 147 of the Ordinance. It is a matter of great national shame that after independence, our successive governments retained a provision introduced by the colonial masters as a measure to combat inflation squeezing unprecedented money in circulation in British India.

It has been repeatedly mentioned in these columns about the negative impact on growth because of numerous withholding tax provisions in the Ordinance [interestingly, mostly placed under CHAPTER XII: TRANSITIONAL ADVANCE TAX PROVISIONS]. The purpose of this Chapter, as its title suggests, was to retain some advance tax provisions temporarily, but on the contrary at least 30 more were added! This is how our Revenuecracy hoodwink legislators who hardly understand tax codes, but readily pass whatever comes to them as Money Bill making illogical changes to tax codes. The advance collection of income tax through various withholding tax provisions and under 147 of the Ordinance give rise to accumulation of refunds that are not paid along with additional amount according to section 171 of the Ordinance that after amended from time to time, reads as under:

Additional payment for delayed refunds.– (1) Where a refund due to a taxpayer is not paid within three months of the date on which it becomes due, the Commissioner shall pay to the taxpayer a further amount by way of compensation at the rate of KIBOR plus 0.5 per cent per annum of the amount of the refund computed for the period commencing at the end of the three month period and ending on the date on which it was paid:
Provided that where there is reason to believe that a person has claimed the refund which is not admissible to him, the provision regarding the payment of such additional amount shall not apply till the investigation of the claim is completed and the claim is either accepted or rejected.

(2) For the purposes of this section, a refund shall be treated as having become due–

(a) in the case of a refund required to be made in consequence of an order on an appeal to the Commissioner (Appeals), an appeal to the Appellate Tribunal, a reference to the High Court or an appeal to the Supreme Court, on the date of receipt of such order by the Commissioner; or

(b) in the case of a refund required to be made as a consequence of a revision order under section 122A, on the date the order is made by the Commissioner; or

(c) in any other case, on the date the refund order is made.

Explanation.– For the removal of doubt, it is clarified that where a refund order is made on an application under subsection (1) of section 170, for the purpose of compensation, the refund becomes due from the date refund order is made and not from the date the assessment of income treated to have been made by the Commissioner under section 120.

The Supreme Court of Pakistan in a recent case Hamid Ashraf (late) through his legal heirs v Commissioner Inland Revenue, Lahore [(2020) 122 TAX 265 (S.C. Pak.)] held that “scheme of refund provided under the Income Tax Ordinance, 2001 overrides the deeming provision of section 120. Deemed assessment under section 120 is therefore not a substitute for a refund order. It appears, as if the return of tax or refund by the Exchequer to a taxpayer requires scrutiny by the Commissioner and cannot be deemed to be an amount outstanding in favour of the taxpayer. The taxpayer is free to apply for refund under section 170, immediately after filing of tax return or deemed assessment order. Section 170 provides a fast track mechanism for refund as it specifies time for the passing of a refund order and the remedy of appeal in case of failure to pass any such order”….In the present case, the applications for refund filed by the petitioner under section 170 were taken up by Assistant Commissioner Inland Revenue in the year 2010 and initially rejected. After remand of the matter by CIR (Appeals), DCIT passed refund order on 22.03.2013. The matter remained under litigation between the department and the taxpayer, and refund order was passed on 23.03.2013, rather than 15.02.2011, when the CIR (Appeals) simply remanded the matter to the DCIT to decide the same afresh. Therefore, the date of refund order passed by DCIT i.e. 22.03.2013 will be the date when the refund becomes due as per section 171(2)(c) [instead of section 171(2)(a)] as correctly noted by the High Court”.

Section 171(2)(c) simply says that “for the purposes of this section [171], a refund shall be treated as having become due in the case of a refund required to be made in consequence of an order on an appeal to the Commissioner (Appeals), an appeal to the Appellate Tribunal, a reference to the High Court or an appeal to the Supreme Court, on the date of receipt of such order by the Commissioner”.

The words used by the Legislature in section 171(2)(c) are “treated as having become due” that means a legal fiction is created. It says the moment order of appeal is received by the Commissioner, without passing of order refund will become due for the purpose of calculating delayed payment under section 171(1) of the Ordinance. The actual date of passing the order is irrelevant. If appellate order gives rise to refund (in above case it was mere remand) the relevant date is the day order of Commissioner (Appeals) is received by the Commissioner of Inland Revenue who passed the order personally or by delegation of powers to any officer as envisaged in section 210(1) of the Ordinance. All such orders passed by any authority under delegated powers by the Commissioner in terms of section 211(1) of the Ordinance are treated to be passed by him. This provision reads as under:

“Where, by virtue of an order under section 210, an Officer of Inland Revenue or by a special audit panel appointed under subsection (11) of section 177 exercises a power or performs a function of the Commissioner, such power or function shall be treated as having been exercised or performed by the Commissioner”.

[underlined by us for emphasis]

In section 211(1) again a legal fiction is created by Legislature that all orders passed under delegated authority would be construed to be passed by the Commissioner.

Even after the insertion of Explanation in section 171 of the Ordinance by Finance Act 2013 (Act No. XIII of 2013) with retrospective effect, plain reading of it vis-à-vis other related provisions provides as under:

Section 171(2)(c) of the Ordinance provides a legal fiction and does not override the term “when it becomes due” in section 171(1). It is cardinal principle of interpretation that a deeming provision has to be strictly construed for the purpose it is enacted. The deeming provision requires strict interpretation, and cannot be spilled over to other provisions in statute. It has to be interpreted strictly within the four corners of its object for which it is enacted—Elahi Cotton Mills Ltd v Federation of Pakistan (1997) 76 Tax 5 (S.C. Pak).

In terms of section 170(3) read with section 120(1) there is no need for making a refund order and therefore section 171(2)(c) of the Ordinance shall not apply. The opening part of subsection (2) of section 171 says that “For the purpose of this section, a refund shall be treated as having become due”. It does not limit the expression “refund due” as used in subsection (1) of section 171 but only provides certain situations where, by legal fiction in respect of time, the date for “refund due” has been determined different from the actual date of passing the order to safeguard the right of taxpayers.

Where refund is created as a result of an order under section 120 or where it is due in terms of section 147(10) or in terms of section 170(3), it is the legal obligation of Commissioner to issue refund suo motu. In case, he fails to do so within 90 days of refund becoming due then section 171 will come into play.

Provisions of section 170(4) of the Ordinance apply where a taxpayer files an application for refund e.g. in cases of a commercial importer prior to tax year 2020, where a statement under section 115(4) was filed and there were deductions other than those made under section 148. He was to file a refund application because there was nothing on record to make it obligatory for the Commissioner to take suo motu action under section 170(3). In such like cases, when an application for refund is filed then Commissioner must pass an order within 45 days and if he fails to do so, the taxpayer can file an appeal as provided in section 170(5)(b).

Where refund is created as a result of an order under section 120(1)(a) & (b) or becomes due in terms of section 147(10) then in terms of section 170(3), which is independent of section 170(4), it is the legal obligation of Commissioner to adjust the amount against any tax payable and if there is no outstanding liability then under section 170(3)(c) issue refund suo motu and there is no legal obligation for a taxpayer to file refund application as the plain language of section 170(3) reproduced below confirms:

“Where the Commissioner is satisfied that tax has been overpaid, the Commissioner shall–

(a) apply the excess in reduction of any other tax due from the taxpayer under this Ordinance;

(b) apply the balance of the excess, if any, in reduction of any outstanding liability of the taxpayer to pay other taxes; and

(c) refund the remainder, if any, to the taxpayer.

Section 147(10) clearly says: “A tax credit or part of a tax credit allowed under this section for a tax year that is not able to be credited under sub-section (3) of section 4 for the year shall be refunded to the taxpayer in accordance with section 170”.

In above cases, the Commissioner creates the refund after perusing all the record available to him and the law nowhere requires the taxpayers to apply for refund but casts legal obligation on the Commissioner to pay it if no demand against the taxpayers is outstanding. In case, he fails to do so within 90 days of refund becoming due then section 171 will come into play.

(To be continued tomorrow)

(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)).